NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business. Digerati
Technologies, Inc. (“we”, “our”, “Company” or “Digerati”) was incorporated in the
state of Nevada on May 24, 2004. Digerati is a diversified holding company that has no independent operations apart from its subsidiaries.
Through our operating subsidiaries in Texas and Florida, T3 Communications, Inc., and Shift8 Networks, Inc., dba, T3 Communications,
we provide 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 (SD WAN) solutions. 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™.
Principles of Consolidation. The
consolidated financial statements include the accounts of Digerati, and its subsidiaries, which are majority owned by Digerati
In accordance with ASC 810-10-05. All significant inter-company transactions and balances have been eliminated.
Cost Method
Investment. The Company holds a minority interest in Itellum. The Company has no influence over the operating and financial
policies of Itellum. The Company has no controlling interest, is not the primary beneficiary and does not have the ability to exert
significant influence. As a result, we accounted for this investment using the cost method of accounting.
Prepaid Acquisition
costs & debt financing costs. The Company entered into a definitive agreement to acquire a service provider
in South Florida of UCaaS and managed services, offering a portfolio of cloud-based solutions to the high-growth SMB market.
In addition, the Company entered into a Letter of Intent (LOI) for an acquisition. The Company expects closing on the two
acquisitions during the quarter ending October 31, 2020. During the year ending July 31, 2020, the Company advanced $127,000 towards
acquisition costs and $75,000 as financing costs. In addition, the Company capitalized $13,000 legal costs incurred during the
year as financing costs. As of July 31, 2020, these advances are reflected as prepaids in the Company’s balance sheet. As
of the date of this filing, the Company has advanced $240,000 as part of multiple extension fees, upon closing, these amounts
will be applied to the purchase price. In addition, the Company advanced $325,000 towards the financing costs.
Gain on settlement of debt.
During the year ended July 31, 2020 the Company recognized as other income $100,000 for a settlement with one of our vendors.
Reclassifications. Certain
amounts in the consolidated financial statements of the prior year have been reclassified to conform to the presentation of the
current year for comparative purposes.
Use of Estimates. In preparing
financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in
the balance sheet and revenue and expenses in the statement of operations. Actual results could differ from those estimates.
Beneficial conversion features.
The Company evaluates the conversion feature for whether it was beneficial as described in ASC 470-30. The intrinsic value of a
beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from
the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable.
This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method.
If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of
retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion
price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the
fair value of the shares of common stock at the commitment date to be received upon conversion.
Related parties. The Company
accounts for related party transactions in accordance with ASC 850 (“Related Party Disclosures”). A party is considered
to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled
by, or is under common control with the Company. Related parties also include principal owners of the Company, its management,
members of the immediate families of principal owners of the Company and its management and other parties with which the Company
may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly
influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting
parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from
fully pursuing its own separate interests is also a related party.
Concentration of Credit Risk. Financial
instruments that potentially subject Digerati to concentration of credit risk consist primarily of trade receivables. In the normal
course of business, Digerati provides credit terms to its customers. Accordingly, Digerati performs ongoing credit evaluations
of its customers and maintains allowances for possible losses, which, when realized, have been within the range of management’s
expectations. Digerati maintains cash in bank deposit accounts, which, at times, may exceed federally insured limits. Digerati
has not experienced any losses in such accounts and Digerati does not believe it is exposed to any significant credit risk on cash
and cash equivalents.
Revenue Recognition. On August
1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of
August 1, 2018. Results for reporting periods beginning after August 1, 2018 are presented under Topic 606. There was no impact
to the opening balance of accumulated deficit or revenues for the year ended July 31, 2019 as a result of applying Topic 606.
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-based
hosted revenues
Summary of disaggregated revenue is as follows (in thousands):
|
|
For the Years ended July 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cloud software and service revenue
|
|
$
|
6,212
|
|
|
$
|
5,847
|
|
Product revenue
|
|
|
67
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
6,279
|
|
|
$
|
6,040
|
|
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 July 31, 2020 and July 31, 2019, were $5,980 and $22,967, respectively.
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 July
31, 2020 and July 31, 2019, were $148,000 and $153,000, respectively.
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 July 31, 2020, and 2019, Digerati’s customer deposits balance was $131,000
and $132,000, respectively.
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 year ended July 31,
2020 and the year ended July 31, 2019, were $38,976 and $52,613, respectively.
Direct Costs - Cloud-based hosted Services
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.
Cash and cash equivalents.
The Company considers all bank deposits and highly liquid investments with original maturities of three months or less
to be cash and cash equivalents.
Allowance for Doubtful
Accounts.
Bad debt expense is recognized based on
management’s estimate of likely losses each year based on past experience and an estimate of current year uncollectible amounts.
As of July 31, 2020, and 2019, Digerati’s allowance for doubtful accounts balance was $124,000 and $115,000, respectively.
Property and equipment. Property
and equipment are recorded at cost. Additions are capitalized and maintenance and repairs are charged to expense as incurred. Gains
and losses on dispositions of equipment are reflected in operations. Depreciation is provided using the straight-line method over
the estimated useful lives of the assets, which are one (1) to seven (7) years.
Goodwill, Intangible Assets,
and Long-Lived Assets
Goodwill is carried at cost and is not
amortized. The Company tests goodwill for impairment on an annual basis at the end of each fiscal year, relying on a number of
factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace data.
Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests according
to specifications set forth in ASC 350. The Company completed an evaluation of goodwill at July 31, 2020 and determined that there
was no impairment.
The fair value of the Company’s reporting
unit is dependent upon the Company’s estimate of future cash flows and other factors. The Company’s estimates of future
cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future
cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from the Company’s market capitalization
plus a suitable control premium at date of the evaluation.
The financial and credit market volatility
directly impacts the Company’s fair value measurement through the Company’s weighted average cost of capital that the
Company uses to determine its discount rate and through the Company’s stock price that the Company uses to determine its
market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded.
The Company recognizes an acquired intangible
asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when it can be separated
or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination
with a related contract, asset or liability. Such intangibles are amortized over their useful lives. Impairment losses are recognized
if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows and its
carrying amount exceeds its fair value.
The Company reviews its long-lived assets,
including property and equipment, identifiable intangibles, and goodwill annually or whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of its long-lived assets,
the Company evaluates the probability that future undiscounted net cash flows will be less than the carrying amount of the assets.
Impairment of Long-Lived Assets.
Digerati reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that
the value of an asset may no longer be appropriate. Digerati assesses recoverability of the carrying value of the asset by estimating
the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less
than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying
value and fair value.
Business combinations. Each
investment in a business is being measured and determined whether the investment should be accounted for as a cost-basis investment,
an equity investment, a business combination, or a common control transaction. An investment in which the Company do not have a
controlling interest and which the Company is not the primary beneficiary but where the Company has the ability to exert significant
influence is accounted for under the equity method of accounting. For those investments that we account for in accordance ASC 805,
Business Combinations, the Company records the assets acquired and liabilities assumed at the management’s estimate of their
fair values on the date of the business combination. The assessment of the estimated fair value of each of these can have a material
effect on the reported results as intangible assets are amortized over various lives. Furthermore, according to ASC 805-50-30-5,
when accounting for a transfer of assets or exchange of shares between entities under common control, the entity that receives
the net assets or the equity interests shall initially measure the recognized assets and liabilities transferred at their carrying
amounts in the accounts of the transferring entity at the date of transfer.
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 is recorded as non-operating, non-cash income or expense
for each reporting period. For option-based derivative financial instruments, warrants and notes payable conversion options 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.
Notes payable
conversion options are recorded as debt discounts and are amortized as interest expense over the term of the related debt instrument.
Treasury Shares. As a result
of entering into various convertible debt instruments, warrants with fixed exercise price, and convertible notes with fixed conversion
price or with a conversion price floor, we reserved 9,000,000 treasury shares for consideration for future conversions and exercise
of warrants. The Company will evaluate the reserved treasury shares on a quarterly basis, and if necessary, reserve additional
treasury shares. As of July 31, 2020, we believe that the treasury share reserved are sufficient for any future conversions of
these instruments. As a result, these debt instruments and warrants are excluded from derivative consideration.
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 July 31, 2020 and 2019 of $606,000 and $927,000, respectively.
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 active markets
for identical
liabilities
|
|
|
Significant other
Observable
inputs
|
|
|
Significant
Unobservable
inputs
|
|
Description
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes derivative liability at July 31, 2019
|
|
$
|
927,171
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
927,171
|
|
Convertible promissory notes derivative liability at July 31, 2020
|
|
$
|
606,123
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
606,123
|
|
The fair market value
of all derivatives during the year ended July 31, 2020 was determined using the Black-Scholes option pricing model which used the
following assumptions:
Expected dividend yield
|
0.00%
|
Expected stock price volatility
|
83.28% - 268.02%
|
Risk-free interest rate
|
0.09% -2.67%
|
Expected term
|
0.01 - 1.00 years
|
Level 3 inputs.
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, 2018
|
|
$
|
632,268
|
|
Derivative from new convertible promissory notes recorded as debt discount
|
|
|
1,043,834
|
|
Derivative liability resolved to additional paid in capital due to debt conversion
|
|
|
(822,922
|
)
|
Derivative loss
|
|
|
73,991
|
|
Balance at July 31, 2019
|
|
$
|
927,171
|
|
Derivative from new convertible promissory notes recorded as debt discount
|
|
|
814,180
|
|
Derivative liability resolved to additional paid in capital due to debt conversion
|
|
|
(872,914
|
)
|
Derivative loss
|
|
|
(262,314
|
)
|
Balance at July 31, 2020
|
|
$
|
606,123
|
|
Income taxes. Digerati recognizes
deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities
using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. Digerati
provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely
than not.
Since January 1, 2007, Digerati accounts
for uncertain tax positions in accordance with the authoritative guidance issued by the Financial Accounting Standards Board on
income taxes which addresses how an entity should recognize, measure and present in the financial statements uncertain tax positions
that have been taken or are expected to be taken in a tax return. Pursuant to this guidance, Digerati recognizes a tax benefit
only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To
the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured
as the largest amount that is greater than 50% likely of being realized upon settlement. As of July 31, 2020, we have no liability
for unrecognized tax benefits.
Stock-based compensation.
In June 2018 FASB adopted the Accounting Standards Update No. 2018-07, Compensation – Stock Compensation
(Topic 718): Improvements to Non-employee Share-Based Payment Accounting. This update simplifies the accounting for non-employee
share-based payment transactions by expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment
transactions for acquiring goods and services from non-employees. The guidance is effective for annual periods beginning after
December 15, 2018, and interim periods within that reporting period. The Company adopted the updated standard as of May 1,
2018, adopting this guidance did not have a material effect on its consolidated financial statements. During FY 2020 and 2019,
the Company issued 21,811,100 common shares and 1,827,927 common shares, respectively to various employees as part of our profit
sharing-plan contribution and stock in lieu of cash. At the time of issuance during FY 2020 and 2019 we recognized stock-based
compensation expense of approximately $1,127,000 and $1,044,000, respectively equivalent to the market value of the shares issued
calculated based on the share’s closing price at the grant dates.
Basic and diluted net income (loss)
per share. The basic net loss per common share is computed by dividing the net loss by the weighted average number of common
shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted”
basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended July
31, 2020 and 2019, 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:
|
|
7/31/2020
|
|
|
7/31/2019
|
|
Options to purchase common stock
|
|
|
5,000,000
|
|
|
|
4,940,000
|
|
Warrants to purchase common stock
|
|
|
2,240,000
|
|
|
|
2,700,000
|
|
Convertible debt
|
|
|
37,304,080
|
|
|
|
13,113,643
|
|
Total:
|
|
|
44,544,080
|
|
|
|
20,753,643
|
|
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). For the year ended July 31, 2020 and 2019, the Company recognized a noncontrolling deficits of $47,000 and $128,000,
respectively.
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 February 2016, the FASB issued
ASU No. 2016-02, Leases (Topic 842). The amendments under this pronouncement will change the way all leases with a duration
of one year or more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance
sheet as a right-of-use asset and an associated financing lease liability or Operating lease liability. The right-of-use asset
represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability
represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on
certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that
contain provisions similar to capitalized leases, are amortized like capital leases are under current accounting, as amortization
expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis
over the life of the lease as lease expense in the statement of operations. This update is effective for annual reporting periods,
and interim periods within those reporting periods, beginning after December 15, 2018. In July 2018, the FASB issued ASU
No. 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provided
additional implementation guidance on the previously issued ASU. The Company
adopted the new guidance on August 1, 2019, using modified retrospective transition approach and recorded $316,411 as right-of-use
assets and operating lease liabilities on day 1.
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
Digerati’s consolidated financial
statements for the year ending July 31, 2020 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. Digerati has incurred net losses and accumulated a deficit
of approximately $88,697,000 and a working capital deficit of approximately $5,316,000 which raises substantial doubt about Digerati’s
ability to continue as a going concern.
Management Plans to Continue as a
Going Concern
Management believes that current available
resources will not be sufficient to fund the Company’s operations over the next 12 months. The Company’s ability to
continue to meet its obligations and to achieve its business objectives is dependent upon, among other things, raising additional
capital or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company
will seek to secure such additional funding from various possible sources, including the public equity market, private financings,
sales of assets, collaborative arrangements, and debt. 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 delay or reduce the scope of its operations, and the Company may not be able
to pay off its obligations, if and when they come due.
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 July 31, 2020 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.
NOTE 3 – INTANGIBLE ASSETS
During FY 2008, Digerati made a loan of
$150,000 to NetSapiens Inc. The note receivable had a maturity date of June 26, 2008 with interest at 8% per year. The note was
secured by NetSapiens’ proprietary Starter Platform License and SNAPsolution modules. On June 26, 2008 Digerati converted
the outstanding interest and principal balance into a lifetime and perpetual NetSapiens’ License. The License provides Digerati
with the ability to offer Hosted PBX (Private Branch eXchange), IP Centrex application, prepaid calling, call center, conferencing,
messaging and other innovative telephony functionality necessary to offer standard and/or custom services to enterprise markets.
The NetSapiens’ License, in the amount of $150,000, is being amortized equally over a period of 10 years. For the years ended
July 31, 2020 and 2019, amortization totaled approximately $0 and $0, respectively. As of July 31, 2020, the NetSapiens’
License is fully amortized.
On December 1, 2017,
Shift8 and Synergy Telecom, Inc., a Delaware corporation (“Synergy”), closed a transaction to acquire all the assets,
assumed all customers, and critical vendor arrangements from Synergy. The total purchase price was $425,000, 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, software licenses, and
goodwill based on their fair values as of December 1, 2017.
The following information summarizes the
allocation of the fair values assigned to the assets. The allocation of fair values is based on an extensive analysis and is subject
to changes in the future during the measurement period.
|
|
Synergy
|
|
|
Useful life
(years)
|
Customer relationship
|
|
$
|
40,000
|
|
|
5
|
License - software
|
|
|
105,000
|
|
|
3
|
Goodwill
|
|
|
280,000
|
|
|
-
|
|
|
|
|
|
|
|
Total Purchase price
|
|
$
|
425,000
|
|
|
|
For the years ended July 31, 2020 and 2019,
amortization expense for the acquired intangible was $25,504 and $60,500, respectively.
On May 2, 2018, the Company closed on the
Merger Agreement with T3 Communications, Inc. to increase its customer base and obtain higher efficiency of its existing infrastructure.
The total purchase price was $3,211,945
paid in cash at closing. The acquisition was accounted for under the purchase method of accounting, with the Company identified
as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed by the Company was allocated
to cash, customer contracts acquired, current assets, property plant and equipment and assumed payables based on their estimated
fair values as of May 2, 2018.
The following information summarizes the
allocation of the purchase price assigned to intangible assets. The allocation of fair values is based on an extensive analysis
and is subject to changes in the future during the measurement period.
|
|
T3
|
|
|
Useful life
(years)
|
Customer relationships
|
|
$
|
1,480,000
|
|
|
7
|
Marketing & Non-compete
|
|
|
800,000
|
|
|
5
|
Goodwill
|
|
|
530,353
|
|
|
-
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,810,353
|
|
|
|
For the years ended July 31, 2020 and 2019,
amortization expense for the acquired assets totaled approximately $371,000 and $371,000, respectively.
Intangible assets at July 31, 2020 and
2019 are summarized in the tables below:
July
31, 2020
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
NetSapiens - license, 10 years
|
|
$
|
150,000
|
|
|
$
|
(150,000
|
)
|
|
$
|
-
|
|
Customer relationships, 5 years
|
|
|
40,000
|
|
|
|
(20,672
|
)
|
|
|
19,328
|
|
Customer relationships, 7 years
|
|
|
1,480,000
|
|
|
|
(487,505
|
)
|
|
|
992,495
|
|
Marketing & Non-compete, 5 years
|
|
|
800,000
|
|
|
|
(360,000
|
)
|
|
|
440,000
|
|
Total Define-lived Assets
|
|
|
2,470,000
|
|
|
|
(1,018,177
|
)
|
|
|
1,451,823
|
|
Goodwill, Indefinite
|
|
|
810,353
|
|
|
|
-
|
|
|
|
810,353
|
|
Balance, July 31, 2020
|
|
$
|
3,280,353
|
|
|
$
|
(1,018,177
|
)
|
|
$
|
2,262,176
|
|
July
31, 2019
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
NetSapiens
- license, 10 years
|
|
$
|
150,000
|
|
|
$
|
(150,000
|
)
|
|
$
|
-
|
|
Customer
relationships, 5 years
|
|
|
40,000
|
|
|
|
(12,672
|
)
|
|
|
27,328
|
|
Customer
relationships, 7 years
|
|
|
1,480,000
|
|
|
|
(276,077
|
)
|
|
|
1,203,923
|
|
Marketing
& Non-compete, 5 years
|
|
|
800,000
|
|
|
|
(200,000
|
)
|
|
|
600,000
|
|
Total
Define-lived Assets
|
|
|
2,470,000
|
|
|
|
(638,749
|
)
|
|
|
1,831,251
|
|
Goodwill,
Indefinite
|
|
|
810,353
|
|
|
|
-
|
|
|
|
810,353
|
|
Balance,
July 31, 2019
|
|
$
|
3,280,353
|
|
|
$
|
(638,749
|
)
|
|
$
|
2,641,604
|
|
Total amortization expense for the periods
ended July 31, 2020 and 2019 was approximately $379,000 and $379,000, respectively.
NOTE 4 – PROPERTY AND EQUIPMENT
Following is a summary of Digerati’s
property and equipment at July 31, 2020 and 2019 (in thousands):
|
|
Useful lives
|
|
2020
|
|
|
2019
|
|
Telecom equipment & software
|
|
1-5 years
|
|
$
|
1,064
|
|
|
$
|
978
|
|
Less: accumulated depreciation
|
|
|
|
|
(633
|
)
|
|
|
(399
|
)
|
Net–property and equipment
|
|
|
|
$
|
431
|
|
|
$
|
579
|
|
The Company uses straight-line depreciation,
for the years ended July 31, 2020 and 2019, depreciation totaled approximately $234,000 and $289,000, respectively.
NOTE 5 – INCOME TAXES
Digerati files a consolidated tax return.
The current tax year is subject to examination by the Internal Revenue Service and certain state taxing authorities. As of July
31, 2020, Digerati had net operating loss carryforwards of approximately $8,157,234 to reduce future federal income tax liabilities;
the loss carryforwards will start to expire in 2020. Under the recently enacted Tax Cuts and Jobs Act (TCJA), the new effective
Corporate flat tax rate is 21% (effective for tax years beginning after December 31, 2017). Income tax benefit (provision) for
the years ended July 31, 2020 and 2019 are as follows:
The effective tax rate for Digerati is
reconciled to statutory rates as follows:
|
|
2020
|
|
|
2019
|
|
Expected Federal benefit (provision), at statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Change in valuation allowance
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Deferred tax assets are comprised of the
following as of July 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Net operating loss carryover
|
|
$
|
1,713,019
|
|
|
$
|
1,805,310
|
|
Valuation allowance
|
|
|
(1,713,019
|
)
|
|
|
(1,805,310
|
)
|
Total deferred tax asset, net
|
|
$
|
-
|
|
|
$
|
-
|
|
At July 31, 2020, realization of Digerati’s
deferred tax assets was not considered likely to be realized. The change in the valuation allowance for 2020 was resulted in a
decrease of approximately $92,291. Management has evaluated and concluded that there are no significant uncertain tax positions
requiring recognition in Digerati’s combined financial statements. The current year remains open to examination by the major
taxing jurisdictions in which Digerati is subject to tax. The Company files a calendar year return, and the net operating loss
was adjusted for the fiscal year ended July 31, 2020.
During the year ended July 31, 2020 the
Company issued 77,583,184 common shares, and under our initial assessment this will likely result in a change of control and the
net operation loss (NOL’s) became subject to the separate return limitation year. We will evaluate during the tax year and consider
the limitations.
We record unrecognized tax benefits as
liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluate on new
information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result
in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences
will be reflected as increases or decreases to income tax expense in the period in which new information is available.
NOTE 6 – STOCK-BASED COMPENSATION
In November 2015, Digerati adopted the
Digerati Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan authorizes the grant of up to 7.5
million stock options, restricted common shares, non-restricted common shares and other awards to employees, directors, and certain
other persons. The Plan is intended to permit Digerati to retain and attract qualified individuals who will contribute to the overall
success of Digerati. Digerati’s Board of Directors determines the terms of any grants under the Plan. Exercise prices of
all stock options and other awards vary based on the market price of the shares of common stock as of the date of grant. The stock
options, restricted common stock, non-restricted common stock and other awards vest based on the terms of the individual grant.
During the year ended July 31, 2019, we
issued:
|
●
|
635,156 common shares to various employees as part of the Company’s Non-Standardized profit-sharing
plan contribution. The Company recognized stock-based compensation expense of approximately $114,000 equivalent to the value of
the shares calculated based on the share’s closing price at the grant dates.
|
|
●
|
100,000 options to purchase common shares
to a member of the Board of Directors with an exercise price of $0.18 per share and a term of 5 years. The options vest equally
over a period of one year. At the time of issuance the options had a fair market value of $11,406.
|
|
●
|
1,725,000 options to purchase common shares
to members of the Management team with an exercise price of $0.19 per share and a term of 5 years. The options vest equally over
a period of one year. At the time of issuance the options had a fair market value of $217,263.
|
|
●
|
250,000 options to purchase common shares to an employee with an exercise price of $0.25 per share and a term of 5 years. The options vest equally over a period of two years. At the time of issuance, the options had a fair market value of $39,175.
|
|
●
|
1,192,770 common shares to members of the Management team for services in lieu of cash compensation.
The Company recognized stock-based compensation expense of approximately $198,000 equivalent to the value of the shares calculated
based on the share’s closing price at the grant dates.
|
|
●
|
1,350,000 shares of common stock to the Executive Officers, with a market value at time of issuance
of $256,500, the Stock Grant will vest upon the earlier of the Company achieving $15 million in annualized revenue or listing on
a primary stock exchange (e.g. NASDAQ or NYSE American) and will be subject to adjustment for any forward or reverse split of the
Company’s stock. The Company recognized approximately $85,500 in stock-based compensation expense related to this issuance during
the year ended July 31, 2019. Unamortized compensation cost totaled $171,000 at July 31, 2019.
|
During the year ended
July 31, 2019 we issued the following to non-employee professionals:
|
●
|
In November 2018, the Company issued an aggregate of 200,000 shares of common stock with a market
value at time of issuance of $69,600. The shares were issued for consulting services.
|
|
●
|
In February 2019, the Company issued an aggregate of 325,000 shares of common stock with a market
value at time of issuance of $78,000. The shares were issued for consulting services.
|
|
●
|
In February 2019, the Company issued an aggregate of 400,000 shares of common stock with a market
value at time of issuance of $100,000. The shares were issued for consulting services.
|
The fair market value of all options issued was determined
using the Black-Scholes option pricing model which used the following assumptions:
Expected dividend yield
|
0.00%
|
Expected stock price volatility
|
178.79% - 260.07%
|
Risk-free interest rate
|
1.84% - 2.73%
|
Expected term
|
1.0 - 2.0 years
|
During the year ended July 31, 2020, we
issued:
|
●
|
On August 26, 2019, the Company issued 60,000 options to purchase common shares to an employee with an exercise price of $0.12 per share and a term of 5 years. The options vest equally over a period of three years. At the time of issuance, the options had a fair market value of $7,158.
|
|
●
|
October 31, 2019, the Company issued 3,952,095 common shares to the Executive Officers for services
in lieu of cash compensation. The Company recognized stock-based compensation expense of approximately $276,646 equivalent to the
value of the shares calculated based on the share’s closing price at the grant dates.
|
|
●
|
On October 31, 2019, the Company issued 1,337,325 shares of common stock to the Executive Officers,
with a market value at time of issuance of $93,612 the stock was issued as payment for $26,612 of outstanding compensation expense
and released of accrued liability of $67,000.
|
|
●
|
On January 2, 2020, the Company issued 5,012,658 common shares to the Executive Officers for services
in lieu of cash compensation. The Company recognized stock-based compensation expense of approximately $198,000 equivalent to the
value of the shares calculated based on the share’s closing price at the grant dates.
|
|
●
|
On February 24, 2020, the Company issued 11,509,022 common shares to various employees as part
of the Company’s Non-Standardized profit-sharing plan contribution. The Company recognized stock-based compensation expense
of approximately $233,633 equivalent to the value of the shares calculated based on the share’s closing price at the grant
date.
|
During the year ended July 31, 2020 we
issued the following to non-employee professionals:
|
●
|
In December 2019, the Company issued 400,000 shares of common stock with a market value at time
of issuance of $15,240. The shares were issued for consulting services.
|
The fair market value of all options issued was determined
using the Black-Scholes option pricing model which used the following assumptions:
Expected dividend yield
|
0.00%
|
Expected stock price volatility
|
317.52%
|
Risk-free interest rate
|
1.47%
|
Expected term
|
3.0 year
|
Digerati recognized approximately $1,112,000
and $733,000 in stock-based compensation expense to employees during the years ended July 31, 2020 and 2019, respectively. Unamortized
compensation cost totaled $63,203 and $433,608 at July 31, 2020 and July 31, 2019, respectively.
A summary of the stock options as of July
31, 2020 and July 31, 2019 and the changes during the years ended July 31, 2020 and July 31,2019:
|
|
Options
|
|
|
Weighted-average
exercise price
|
|
|
Weighted-average
remaining contractual
term (years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2018
|
|
|
3,415,000
|
|
|
$
|
0.33
|
|
|
|
4.58
|
|
Granted
|
|
|
2,075,000
|
|
|
$
|
0.20
|
|
|
|
4.58
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited and cancelled
|
|
|
(550,000
|
)
|
|
$
|
0.36
|
|
|
|
3.39
|
|
Outstanding at July 31, 2019
|
|
|
4,940,000
|
|
|
$
|
0.27
|
|
|
|
3.65
|
|
Granted
|
|
|
60,000
|
|
|
$
|
0.12
|
|
|
|
4.07
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited and cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at July 31, 2020
|
|
|
5,000,000
|
|
|
$
|
0.27
|
|
|
|
2.66
|
|
Exercisable at July 31, 2020
|
|
|
4,717,699
|
|
|
$
|
0.26
|
|
|
|
2.62
|
|
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 5,000,000 and 4,940,000 stock options outstanding at July 31, 2020 and July 31, 2019 was $0 and $0, respectively.
The aggregate intrinsic value of 4,717,699 and 3,452,405 stock
options exercisable at July 31, 2020 and July 31, 2019 was $0 and $0, respectively.
NOTE 7 – WARRANTS
During the year ended July 31, 2019, the
Company issued the following warrants:
In August 2018,
Digerati secured $40,000 from an accredited investor under a private placement and issued 80,000 shares of its common stock at
a price of $0.50 per share and warrants to purchase an additional 15,000 shares of its common stock at an exercise price of $0.50
per share. We determined that the warrants issued in connection with the private placement were equity instruments and did not
represent derivative instruments. The Company adopted a sequencing policy and determined that the warrants with fixed exercise
price were excluded from derivative consideration.
In October 2018,
Digerati issued 200,000 warrants under an extension of payments to existing promissory notes, with a combined current principal
balance of $75,000, the warrants vested at time of issuance. The warrants have a term of 3 years, with an exercise price of $0.10.
Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance was approximately $31,000 and
was recognized as a discount on the promissory note, the company amortized the fair market value as interest expense over 3 months.
In January 2019,
Digerati cancelled 260,000 warrants with an exercise price of $0.15. Additionally, the Company issued 260,000 common shares to
replace these warrants, in conjunction with two promissory notes with a principal balance of $50,000, in addition at the time of
issuance we recognized a discount of $36,000 for the common stock issued in replacement of warrants.
In
February 2019, the Company received $1,500 for the exercise of 15,000 warrants, with an exercise price of $0.10 per warrant.
In
March 2019, the Company received $6,000 for the exercise of 60,000 warrants, with an exercise price of $0.10 per warrant.
In
April 2019, the Company secured $50,000 from accredited investors under a private placement and issued 50,000 shares of Series
A Convertible Preferred Stock at a conversion price of $0.30 per share and warrants to purchase an additional 100,000 shares of
its common stock at an exercise price of $0.20 per share. We determined that the warrants issued in connection with the private
placement were equity instruments and did not represent derivative instruments. The Company adopted a sequencing policy and determined
that the warrants with fixed exercise price were excluded from derivative consideration.
In
May 2019, the Company secured $175,000 from accredited investors under a private placement and issued 175,000 shares of Series
A Convertible Preferred Stock at a conversion price of $0.30 per share and warrants to purchase an additional 350,000 shares of
its common stock at an exercise price of $0.20 per share. We determined that the warrants issued in connection with the private
placement were equity instruments and did not represent derivative instruments. The Company adopted a sequencing policy and determined
that the warrants with fixed exercise price were excluded from derivative consideration.
The
fair market value of all warrants issued was determined using the Black-Scholes option pricing model which used the following
assumptions:
Expected dividend yield
|
|
0.00%
|
Expected stock price volatility
|
|
153.99% - 330.94%
|
Risk-free interest rate
|
|
2.00% -2.93%
|
Expected term
|
|
3.0 years
|
During
the year ended July 31, 2020, we issued the following warrants.
In
March 2020, the Company received $25,000 in professional services and issued 25,000 shares of Series A Convertible Preferred Stock
at an conversion price of $0.30 per share and warrants to purchase an additional 50,000 shares of its common stock at an exercise
price of $0.20 per share. We determined that the warrants issued in connection with the services received were equity instruments
and did not represent derivative instruments. The Company adopted a sequencing policy and determined that the warrants with fixed
exercise price were excluded from derivative consideration.
A
summary of the warrants as of July 31, 2020 and 2019 and the changes during the years ended July 31, 2020 and 2019 are presented
below:
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
|
Weighted-average
|
|
|
remaining contractual
|
|
|
|
Warrants
|
|
|
exercise price
|
|
|
term (years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2018
|
|
|
2,370,000
|
|
|
$
|
0.28
|
|
|
|
2.90
|
|
Granted
|
|
|
665,000
|
|
|
$
|
0.18
|
|
|
|
2.61
|
|
Exercised
|
|
|
(75,000
|
)
|
|
$
|
0.10
|
|
|
|
2.15
|
|
Forfeited and cancelled
|
|
|
(260,000
|
)
|
|
$
|
0.15
|
|
|
|
3.75
|
|
Outstanding at July 31, 2019
|
|
|
2,700,000
|
|
|
$
|
0.32
|
|
|
|
2.19
|
|
Granted
|
|
|
50,000
|
|
|
$
|
0.20
|
|
|
|
2.25
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(510,000
|
)
|
|
$
|
0.29
|
|
|
|
-
|
|
Outstanding at July 31, 2020
|
|
|
2,240,000
|
|
|
$
|
0.33
|
|
|
|
1.61
|
|
Exercisable at July 31, 2020
|
|
|
1,940,000
|
|
|
$
|
0.22
|
|
|
|
1.49
|
|
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 2,240,000 and 2,700,000 warrants outstanding
at July 31, 2020 and July 31, 2019 was $6,160 and $63,602, respectively.
The
aggregate intrinsic value of 1,940,000 and 2,400,000 warrants exercisable at July 31, 2020 and July 31, 2019 was $6,160 and $63,602,
respectively.
Warrant
expense for the years ended July 31, 2020 and 2019 was $0 and $64,000, respectively. Unamortized warrant expense totaled $0 and
$0 respectively as of July 31, 2020 and July 31, 2019.
In
January 2020, 300,000 warrants expired with an exercise price pf $0.136. These warrants were issued in January 2015.
In
July 2020, 210,000 warrants expired with an exercise price pf $0.50. These warrants were issued in July 2017.
In
December 2017, the Company issued 100,000 warrants to a consultant for services, the warrants vested at time of issuance. The
warrants have a term of 5 years, with an exercise price of $0.50. Under a Black-Scholes valuation the fair market value of the
warrants at time of issuance was approximately $49,000, the Company amortized the fair market value as warrant expense over 12
months. Additionally, the Company committed to issue 100,000 warrants if the Company’s stock price traded at $0.75 per share
for 10 consecutive days, to issue 100,000 warrants if the Company’s stock price traded at $1.00 per share for 10 consecutive
days, and to issue 100,000 warrants if the Company’s stock price traded at $1.25 per share for 10 consecutive days. Under
a Black-Scholes valuation the fair market value of the warrants at time of issuance was approximately $143,000, and the Company
amortized the expense during FY2018. The 300,000 commitment warrants have not vested and have not been issued since the requirements
were not achieved during the year ended July 31, 2020.
NOTE
8 – NON-STANDARDIZED PROFIT-SHARING PLAN
We
currently provide a Non-Standardized Profit-Sharing Plan, adopted September 15, 2006. Under the plan our employees qualify to
participate in the plan after one year of employment. Contributions under the plan are based on 25% of the annual base salary
of each eligible employee up to $54,000 per year. Contributions under the plan are fully vested upon funding.
During
the years ended July 31, 2020 and July 31, 2019, the Company issued 11,509,022 and 635,156 respectively, common shares to various
employees as part of the Company’s profit-sharing plan contribution. The Company recognized stock-based compensation expense
for July 31, 2020 and July 31, 2019 of $233,633 and $114,000, respectively, equivalent to the value of the shares calculated based
on the share’s closing price at the grant dates.
NOTE
9 – SIGNIFICANT CUSTOMERS
During
the years ended July 31, 2020 and 2019, the Company did not derive a significant amount of revenue from one single customer.
As
of the year ended July 31, 2020, the company derived 12% of total accounts receivable from one customer. During the year ended
July 31, 2019, the company did not derive a significant balance on accounts receivable from one single customer.
NOTE
10 – NOTES PAYABLE NON-CONVERTIBLE
On
April 30, 2018, T3 Communications, Inc., a Nevada corporation (“T3”), our majority owned subsidiary, entered into a
secured promissory note for $650,000 with an effective annual interest rate of 0% and a maturity date of May 14, 2018, provided,
however, the Maturity Date will automatically be extended by one (1) additional period of thirty (30) days, until June 14, 2018.
In addition, T3 entered into a Security Agreement, whereby T3 agreed to pledge one third of the outstanding shares of its Florida
operations, T3 Communications, Inc., the secured interest will continue until the principal balance is paid in full. Furthermore,
a late fee of $3,000 per calendar week was accessed beginning on May 15, 2018 and will continue until the principal balance is
paid in full. On May 6, 2020, the Company received an additional $50,000 from the lender and increased the principal of the promissory
note to $700,000. On October 14, 2020, the lender agreed to extend the maturity date until October 31, 2020, we are currently
paying a $3,250 per week late fee. As of July 31, 2020, and July 31, 2019, the outstanding principal balance were $700,000 and
$650,000, respectively.
On
April 30, 2018, T3 entered into a credit facility under a secured promissory note of $500,000, interest payment for the first
twenty-three months with a balloon payment on the twenty-fourth month and a maturity date of April 30, 2020. Collateralized by
T3’s accounts receivables and with an effective annual interest rate of prime plus 5.25%, adjusted quarterly on the first day
of each calendar quarter. However, the rate will never be less than 9.50% per annum. In the event of default, the interest rate
will be the maximum non-usurious rate of interest per annum permitted by whichever of applicable United States federal law or
Louisiana law permits the higher interest rate. T3 agreed to pay the lender a commitment fee of 1.00% upon payment of the first
interest payment under the credit facility and 1.00% on the first anniversary of the credit facility. In addition, T3 agreed to
pay a monitoring fee of 0.33% of the credit facility, payable in arrears monthly. T3 also agreed to pay an over-advance fee of
3.00% of the amount advanced in excess of the borrowing base or maximum amount of the credit facility, payable in arrears monthly.
As of July 31, 2020, the Lender agreed to waive the following financial covenants: 1) A consolidated debt service coverage ratio,
as of the last day of each fiscal quarter, of at least 1.25 to 1.00, 2) A fixed charge coverage ratio, as of the last day of each
fiscal quarter, of at least 1.25 to 1.00, and 3) A tangible net worth, at all times of at least $100,000. On April 10, 2020, the
Company increased the credit facility to $600,000 and the lender agreed to extend the maturity date until April 10, 2022. In addition,
the Company agreed to a revised effective annual interest rate of prime plus 5.75%, adjusted quarterly on the first day of each
calendar quarter. However, the rate will never be less than 11.00% per annum. During the year ended July 31, 2020, the Company
received an additional $100,000 from the lender. As of July 31, 2020, and July 31, 2019, the outstanding principal balance were
$600,000 and $500,000, respectively.
On
October 22, 2018, the Company issued a secured promissory note for $50,000, bearing interest at a rate of 8% per annum, with maturity
date of December 31, 2018. In February 2020, the maturity date was extended to December 31, 2020. In conjunction with the extension,
the Company issued 40,000 shares of common stock. At issuance, the fair market value of the shares was recorded as interest expense
of $800. The promissory note is secured by a Pledge and Escrow Agreement, whereby the Company agreed to pledge rights to a collateral
due under certain Agreement. The outstanding balance as of July 31, 2020 and July 31, 2019 was $50,000.
On
June 14, 2019, the Company, entered into a Stock Purchase Agreement (the “Agreement”) to acquire a 12% minority interest
in Itellum Comunicacions Costa Rica, S.R.L. In conjunction with this transaction, we entered into a non-recourse promissory note
for $17,500 with an effective annual interest rate of 8% and an initial maturity date of September 14, 2019. On February 15, 2020,
the maturity date was extended to July 31, 2020. In addition, the holder agreed to accept 200,000 shares of common stock as a
principal payment on the note for $10,000, at the time of issuance the Company recognized $5,400 as a gain on settlement of debt.
On August 1, 2020, the lender agreed to extend the maturity date to October 31, 2020. The outstanding balance as of July 31, 2020
and July 31, 2019, were $7,500 and $17,500, respectively.
On
February 26, 2020, the Company entered into a secured promissory note for $30,000 with an effective annual interest rate of 12%
and a maturity date of May 1, 2020. Subsequently, the note holder agreed to extend the maturity date until August 31, 2020. As
of the date of this filing, the Company is working with the lender to extend the maturity date. The proceeds from this note were
used to extend the closing date of the acquisition of Nexogy, the funds are for the benefit of owners of Nexogy, and the funds
will be credited to the purchase price at Closing of the acquisition. The Company included the prepaid amounts in other current
assets as of July 31, 2020. The promissory note is secured by the Company’s receivables. The outstanding balance as of July
31, 2020 and 2019, were $30,000 and $0, respectively.
On
April 22, 2020, the Company, entered into two unsecured promissory notes (the “Notes”) for $62,500 and $86,000 made
to the Company under the Paycheck Protection Program (the “PPP”). In addition, on May 4, 2020, the Company, entered
into a third unsecured promissory note (the “Note”) for $213,100 made to the Company under the Paycheck Protection
Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The loans to the Company was
made through The Bank of San Antonio (the “Lender”).
The
Notes provide for an interest rate of 1.00% per year and matures two years after the issuance date. Beginning on the seventh month
following the date of the Notes, the Company is required to make 18 monthly payments of principal and interest in the amount of
$8,316 and $11,933, respectively. The Notes may be used for payroll costs, costs related to certain group health care benefits
and insurance premiums, rent payments, utility payments, mortgage interest payments and interest payments on any other debt obligation
that were incurred before February 15, 2020. The Notes contain events of default and other conditions customary for a Note of
this type.
Under
the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted
under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment
of payroll costs and any payments of mortgage interest, rent, and utilities. The terms of any forgiveness may also be subject
to further requirements in any regulations and guidelines the SBA may adopt. While the Company currently believes that its use
of the Note proceeds will meet the conditions for forgiveness under the PPP, no assurance is provided that the Company will obtain
forgiveness of the Notes in whole or in part.
On
July 2, 2020, the Company entered into an unsecured promissory note for $15,000 with an effective annual interest rate of 10%
and a maturity date of October 31, 2020. As of July 31, 2020, and 2019, the principal balance outstanding, were $15,000 and $0,
respectively.
NOTE
11 – RELATED PARTY TRANSACTIONS
On
April 30, 2018, T3 entered into a convertible secured promissory note for $525,000 with an effective annual interest rate of 8%
and a maturity date of April 30, 2020. With a principal payment of $100,000 due on June 1, 2018 and a principal payment of $280,823
due on April 30, 2020. Payment are based on a 60-month repayment schedule. At any time while this Note is outstanding, but only
upon: (i) the occurrence of an Event of Default under the Note or the Pledge and Escrow Agreement; or (ii) mutual agreement between
the Borrower and the Holder, the Holder may convert all or any portion of the outstanding principal, accrued and unpaid interest,
Premium, if applicable, and any other sums due and payable hereunder (such total amount, the “Conversion Amount”)
into shares of Common Stock (the “Conversion Shares”) at a price equal to: (i) the Conversion Amount (the numerator);
divided by (ii) a conversion price of $1.50 per share of Common Stock, which price shall be indicated in the conversion
notice (the denominator) (the “Conversion Price”). The Holder shall submit a Conversion Notice indicating the Conversion
Amount, the number of Conversion Shares issuable upon such conversion, and where the Conversion Shares should be delivered. The
promissory note is secured by a Pledge and Escrow Agreement, whereby T3 agreed to pledge 51% of the securities owned in its Florida
operations, T3 Communications, Inc., until the principal payment is paid in full. In conjunction with the promissory note, the
Company issued 3-year warrants to purchase 75,000 shares of common stock at an exercise price of $0.50 per share. Under a Black-Scholes
valuation the relative fair market value of the warrants at time of issuance was $19,267 and was recognized as a discount on the
promissory note. The Company amortized as interest expense during the year ended July 31, 2020 and July 31, 2019, $7,297 and $6,395,
respectively. The total unamortized discount as of July 31, 2020 and July 31, 2019 were $0 and $7,297, respectively. In addition,
during the year ended July 31, 2020, the Company paid in full the total outstanding balance of $332,985. In May 2020, the Company
executed a Settlement Agreement and Mutual release, whereby the lender released the Company of any pledged collateral and any
other obligation under the promissory note. One of the note holders also serves as a Board Member of T3 Communications, Inc.,
a Florida Corporation, one of our operating subsidiaries.
On
May 1, 2018, T3 entered into a secured promissory note for $275,000 with an effective annual interest rate of 8.08% with an interest
and principal payment of $6,000 per month and shall continue perpetuity until the entire principal amount is paid in full. The
promissory note is guaranteed to the lender by 15% of the stock owned by T3 in its Florida operations, T3 Communications, Inc.,
the secured interest will continue until the principal balance is paid in full. In conjunction with the promissory note, the Company
issued 3-year warrants to purchase 100,000 shares of common stock at an exercise price of $0.50 per share. Under a Black-Scholes
valuation the relative fair market value of the warrants at time of issuance was approximately $26,543 and was recognized as a
discount on the promissory note. The company amortized as interest expense during the year ended July 31, 2020 and July 31, 2019,
$10,386 and $7,738, respectively. The total unamortized discount as of July 31, 2020 and July 31, 2019 were $6,300 and $16,686,
respectively. During the year ended July 31, 2020, the Company paid $57,098, of the principal balance. The total principal outstanding
as of July 31, 2020 and July 31, 2019 were $152,634 and $209,732, respectively. The note holder also serves as Board Member of
T3 Communications, Inc., a Florida Corporation, one of our operating subsidiaries.
On
February 27, 2020, the Company entered into an unsecured promissory note for $70,000 with an effective annual interest rate of
12% and a maturity date of May 1, 2020. Subsequently, the note holder agreed to extend the maturity date until August 31, 2020.
In addition, the Company agreed to pay the lender in services provided by the Company, and any unpaid principal and accrued interest
will be paid in cash. During the years ended July 31, 2020 and July 31, 2019, the Company provided VoIP Hosted and fiber services
of $161,264 and $82,128, respectively. The proceeds from
this note were used to extend the closing date of the Nexogy acquisition, the funds are an advance to the purchase price for the
benefit of Nexogy owners , the funds will be credited to the purchase price at Closing of the Acquisition. The Company included
the prepaid amounts in other current assets as of July 31, 2020. The total principal outstanding as of July 31, 2020 was $16,298.
On August 3, 2020, the promissory note was paid in full. The note holder also serves as a Board Member of T3 Communications, Inc.,
a Florida Corporation, one of our operating subsidiaries.
NOTE
12 – CONVERTIBLE NOTES PAYABLE
At
July 31, 2020 and 2019, convertible notes payable consisted of the following:
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July
31,
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CONVERTIBLE
NOTES PAYABLE NON-DERIVATIVE
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2020
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2019
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Two (2) Convertible Notes
payable for $250,000 each issued in March 2018, bearing interest at a rate of 12% per annum and a maturity date of September
15, 2018, subsequently extended until December 14, 2018. In conjunction with the notes, the Company issued
300,000 warrants, the warrants vested at time of issuance. The warrants had a term of 3 years, with an exercise price of $0.10.
Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance was approximately $126,538
and was recognized as a discount on the promissory notes. The company amortized $84,433 as a non-cash interest during the
years ended July 31, 2019. The total unamortized discount as of July 31, 2019 was $0. The Conversion Price shall be the greater
of: (i) the Variable Conversion Price or (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall
be equal to the average closing price for Digerati’s Common Stock (the “Shares”) for the ten (10) Trading
Day period immediately preceding the Conversion Date. “Trading Day” shall mean any day on which the Common Stock
is tradable for any period on the OTCQB, or on the principal securities exchange or other securities market on which the Common
Stock is then being traded. The “Fixed Conversion Price” shall mean $0.50. On December 27, 2018, the noteholders
agreed to extend the maturity date on the notes until September 14, 2019. In addition, as part of the amendment, the Company
agreed to modify the “Fixed Conversion Price” to $0.35. In November 2019, the Company issued 110,830 shares of
common stock for payment of $7,500 in accrued interest. On October 7, 2019, the holders agreed to extend the maturity date
until March 30, 2020. As part of the amendments, the Company agreed to issue 400,000 shares of common stock. Under a Black-Scholes
valuation the relative fair market value of the shares of common at time of issuance was approximately $40,000 and was recognized
as a discount on the promissory notes over the extended period. The Company amortized the total discount of $40,000 during
the year ended July 31, 2020. The total unamortized discount as of July 31, 2020 and July 31, 2019 were $0 and $0, respectively.
On April 30, 2020, the Company settled the total debt of $500,000 and accrued interest of $37,500 and issued 8,958,334 shares
of common stock and 268,750 shares of Convertible Series B preferred stock for the settlement. At the time of issuance, the
Company recognized a gain in settlement of debt $85,104.
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$
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$
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500,000
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Convertible
promissory notes for $272,000 issued on June 19, 2018, bearing interest at a rate of 10% per annum, with an initial maturity date
of April 10, 2019. In conjunction with the Notes, the Company issued 255,000 warrants under the promissory notes, the warrants
vested at time of issuance. The warrants have a term of 3 years, with an exercise price of $0.10. Under a Black-Scholes valuation
the relative fair market value of the warrants at time of issuance was approximately $118,400 and was recognized as a discount
on the promissory notes. The Company amortized $109,552 as a non-cash interest during the year ended July 31, 2019. On March 29,
2019, the Company entered into a First Amendment to the Promissory Notes, under the amendments the note holders agreed to extend
the maturity date until June 30, 2019. In addition, as part of the amendments, the Company agreed to issue 85,000 shares of common
stock. The shares were recorded as debt discount of $17,425 and amortized over the remaining term of the notes. The Company amortized
$17,425 as a non-cash interest during the years ended July 31, 2019. The holders may elect to convert up to 50% of the principal
amount outstanding on the Notes into Common Stock of Digerati at any time after 90 days of funding the Notes. The Conversion Price
shall be the greater of: (i) the Variable Conversion Price or (ii) the Fixed Conversion Price. The “Variable Conversion
Price” shall be equal to the average closing price for Digerati’s Common Stock (the “Shares”) for the
ten (10) Trading Day period immediately preceding the Conversion Date. “Trading Day” shall mean any day on which the
Common Stock is tradable for any period on the OTCQB, or on the principal securities exchange or other securities market on which
the Common Stock is then being traded. The “Fixed Conversion Price” shall mean $0.50. On June 30, 2019, the Company
entered into a Second Amendment to the Promissory Notes, under the amendments the note holders agreed to extend the maturity date
until November 30, 2019. In addition, as part of the amendments, the Company agreed to issue 85,000 shares of common stock. The
shares were recorded as debt discount of $14,450 and amortized over the remaining term of the notes. The Company amortized $11,560
and $2,890 as a non-cash interest during the year ended July 31, 2020 and July 31, 2019, respectively. The total unamortized discount
as July 31, 2020 and July 31, 2019 for the issuance of the second amendment shares were $0 and $11,560, respectively. In addition,
in November 2019, the Company issued 172,055 shares of common stock for payment of $6,882 in accrued interest On February 19,
2020, the Company issued 110,027 shares of common stock for payment of accrued interest and a fair market value of $4,401.
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Also, in November 2019 and February 2020, the holders agreed
to extend the maturity date of the notes until April 30, 2020. As part of the amendments, the Company agreed to issue 340,000
shares of common stock. The shares were recorded as debt discount of $10,090 and amortized during the note extension agreement.
On April 30, 2020, the Company and the debtholder agreed to settle $240,000 of the debt and $37,454 of accrued interest, as
a result the Company issued 4,624,220 shares of common stock and 138,727 shares of Convertible Series B Preferred Stock for
the settlement. At the time of issuance, the Company recognized a gain in settlement of debt $43,930. The gain on settlement
was generated from the difference between principal and accrued interest settled and fair value of the common stock on settlement
date. In June 2020, one of the note holders for $32,000 agreed to extend the maturity date until August 31, 2020.
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32,000
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272,000
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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 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 total unamortized discount
on the Note as of July 31, 2020 was $46,626. The total principal balance outstanding as of July 31, 2020 was $275,000.
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275,000
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-
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Total convertible notes payables non-derivative:
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307,000
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772,000
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CONVERTIBLE NOTES PAYABLE - DERIVATIVE
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On January 16, 2019, the Company entered into various Securities Purchase Agreements (the SPAs”) with four (4) different investors (each an “Investor”, and together the “Investors”) pursuant to which each Investor purchased a 10% unsecured convertible promissory note (each a “Note”, and together the “Notes”) from the Company. Three of the notes are in the aggregate principal amount of $140,000 each and a maturity date of October 16, 2019. One of the notes is in the aggregate principal amount of $57,750 and a maturity date of January 24, 2020. The purchase price of $140,000 of each of three Notes were paid in cash on January 16, 2019. After payment of transaction-related expenses of $51,000, net proceeds to the Company from the three Notes totaled $369,000. The purchase price of $57,750 Note was paid in cash on January 24, 2019. After payment of transaction-related expenses of $7,750, net proceeds to the Company from Note totaled $50,000. The Company recorded these discounts and cost of $58,750 as a discount to the Notes and fully amortized as interest expense during the period. In connection with the execution of the Notes, we issued 500,000 shares of our common stock to the Note holders, the shares were recorded with a relative fair value of $0 as the notes were fully discounted by derivative liability. The Company analyzed the Notes 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, at the time of issuance, the Company recognized derivative liability for the four (4) new convertible notes of $655,345, of which $419,000 was recorded as debt discount and will be amortized during the term of the Notes, and $236,345 was recorded as day 1 derivative loss. On July 12, 2019, the Company redeemed the full outstanding principal balance on two of the convertible notes for $280,000, at a redemption price of $382,726. The Company recognized the difference between the redemption price and principal balance paid as interest expense of $102,726. On July 12, 2019, the Company redeemed $70,000 of the principal outstanding on one of the convertible notes, at a redemption price of $91,000. The Company recognized the difference between the redemption price and principal balance paid as interest expense of $21,000. On July 19, 2019, the Company issued 156,202 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of the convertible notes. On July 25, 2019, the Company issued 312,500 shares of common stock. The shares were issued in conjunction with a conversion of $20,000 of the principal outstanding under a convertible debenture. On August 6, 2019, the Company entered into an Assignment Agreement whereby Jefferson Street Capital LLC (the “Assignor”) assigned a principal amount of $25,000, representing a portion of a Convertible Promissory Note dated January 24, 2019 to Armada Investment Fund LLC (the “Assignee”). The note is in the aggregate principal amount of $25,000 and a maturity date of January 24, 2020. During the year ended July 31, 2020, the Company issued 2,658,888 shares of common stock for the conversion of $73,250 of the principal outstanding and $14,796 in accrued interest and fees. The total unamortized discount on the Notes as of July 31, 2020 and July 31, 2019 were $0 and $29,765, respectively. The total principal balance outstanding as of July 31, 2020 and July 31, 2019, were $0 and $98,250. During the years ended July 31, 2020 and 2019, the Company amortized $29,765 and $389,235, respectively, of debt discount as interest expense. 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. (See below Variable Conversion terms No.1)
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-
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98,250
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On February 22, 2019, the Company entered into a variable convertible note for $57,750 with net proceeds of $50,000, maturity date of February 22, 2020 and effective interest rate of 10%. The Company recorded a discount of $7,750 and amortized as interest expense during the period of the note. 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, at the time of issuance, the Company recognized derivative liability for the convertible note of $79,729, of which $50,000 was recorded as debt discount and amortized during the term of the Note, and $29,729 was recorded as day 1 derivative loss. During the year ended July 31, 2020, the Company issued 3,430,700 shares of common stock for the conversion of $57,750 of the principal outstanding and $6,962 in accrued interest and fees. The total unamortized discount on the Notes as of July 31, 2020 and July 31, 2019 were $0 and $29,166, respectively. The total principal balance outstanding as of July 31, 2020 and July 31, 2019, were $0 and $57,750. During the years ended July 31, 2020 and 2019, the Company amortized $29,166 and $20,834, respectively, of debt discount as interest expense. 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. (See below variable conversion terms No.1)
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-
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57,750
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On April 20, 2019, the Company entered into a variable convertible note for $44,000, with net proceeds of $40,000, maturity date of January 19,2020 and effective interest rate of 10%. The Company recorded $4,000 as a discount and amortized as interest expense during the period of the note. In connection with the execution of the Note, we issued 50,000 shares of our common stock to the Note holder, the shares were recorded with a relative fair value of $0 as the notes were fully discounted by derivative liability. 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, at the time of issuance, the Company recognized derivative liability for the convertible note of $55,592, of which $40,000 was recorded as debt discount and will be amortized during the term of the Note, and $15,592 was recorded as day 1 derivative loss. During the year ended July 31, 2020, the Company issued 2,529,562 shares of common stock for the conversion of $44,000 of the principal outstanding and $5,854 in accrued interest and fees. The total unamortized discount on the Notes as of July 31, 2020 and July 31, 2019 were $0 and $26,668, respectively. The total principal balance outstanding as of July 31, 2020 and July 31, 2019, were $0 and $44,000. During the years ended July 31, 2020 and 2019, the Company amortized $26,668 and $13,332, respectively, of debt discount as interest expense. 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. (See below variable conversion terms No.1)
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-
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44,000
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|
|
In July 2019, the Company entered into multiple variable convertible notes with four (4) different investors. Three of the notes are in the aggregate principal amount of $146,625 each, 3% interest rate and a maturity date of April 11, 2020. After payment of transaction-related expenses of $57,375, net proceeds to the Company from the three Notes totaled $382,500. The Company also secured an additional variable convertible note in the aggregate principal amount of $140,000, interest rate of 10% and a maturity date of April 10, 2020. After payment of transaction-related expenses of $17,000, net proceeds to the Company from the Note totaled $123,000. The Company recorded these discounts and cost of $74,375 as a discount to the Notes and fully amortized as interest expense during the period. In connection with the execution of the Notes, we issued 450,000 shares of our common stock to the Note holders, the shares were recorded with a relative fair value of $0 as the notes were fully discounted by derivative liability. The Company analyzed the Notes 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, at the time of issuance, the Company recognized derivative liability for the four (4) new convertible notes of $959,180, of which $505,500 was recorded as debt discount and will be amortized during the term of the Notes, and $453,680 was recorded as day 1 derivative loss. On January 9, 2020, the Company issued 200,000 shares of common stock for the conversion of $1,328 of the principal outstanding and accrued interest of $2,212 under one of the convertible notes. On January 10, 2020, the Company assigned a convertible note with a $145,297 principal and accrued interest of $13,500 and a second convertible note with a $35,750 principal balance and accrued interest of $15,453 for $210,000. On January 22, 2020, the Company assigned two promissory notes with a $293,250 principal balance outstanding and accrued interest of $66,750. The total assignment was for $360,000. On July 30, 2020, the Company paid the total principal outstanding in one of the notes for $140,000, plus a redemption interest of $46,000. The total unamortized discount on the Notes as of July 31, 2020 and July 31, 2019 were $0 and $449,332, respectively. The total principal balance outstanding as of July 31, 2020 and July 31, 2019 were $0 and $579,875, respectively. During the years ended July 31, 2020 and 2019, the Company amortized $449,332 and $56,168, respectively, of debt discount as interest expense. 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. (See below variable conversion terms No.1)
|
|
|
-
|
|
|
|
579,875
|
|
On August 6, 2019, the Company entered into an Assignment Agreement whereby Jefferson Street Capital LLC assigned a principal amount of $25,000, representing a portion of a Convertible Promissory Note dated January 24, 2019 to Armada Investment Fund LLC. The note is in the aggregate principal amount of $25,000, bearing interest at a rate of 10% and a maturity date of January 24, 2020.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. During the year ended July 31, 2020, the Company issued 555,859 shares of common stock for the conversion of $25,000 principal balance and accrued interest and administrative fees of $1,579. The total unamortized discount on the Note as of July 31, 2020 was $0. The total principal balance outstanding as of July 31, 2020 was $0. 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. (See below variable conversion terms No.1)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On August 30, 2019, the Company entered into variable convertible note for $93,500, bearing interest at a rate of 10% per annum and a maturity date of May 30, 2020. On August 10, 2020, the noteholder agreed to extend the maturity date until October 31, 2020. After payment of transaction-related expenses of $8,500, net proceeds to the Company from the Note totaled $85,000. The Company recorded these discounts and cost of $8,500 as a discount to the Note and fully amortized as interest expense during the period. 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, at the time of issuance, the Company recognized derivative liability for the convertible note of $100,978, of which $85,000 was recorded as debt discount and will be amortized during the term of the Note, and $15,978 was recorded as day 1 derivative loss. The total unamortized discount on the Note as of July 31, 2020 was $0. The total principal balance outstanding as of July 31, 2020 was $93,500. The Company amortized $93,500 of debt discount as interest expense during the year ending July 31, 2020. 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. (See below variable conversion terms No.1)
|
|
|
93,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
In October 2019, the Company entered into two variable convertible notes are in the aggregate principal amount of $71,500, bearing interest at a rate of 8% and a maturity date of July 18, 2020. After payment of transaction-related expenses of $6,500, net proceeds to the Company from the notes totaled $65,000. The Company recorded these discounts and cost of $6,500 as a discount to the notes and fully amortized as interest expense during the period. The Company analyzed the notes 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, at the time of issuance, the Company recognized derivative liability for the convertible notes of $82,462 of which $65,000 was recorded as debt discount and will be amortized during the term of the notes, and $17,462 was recorded as day 1 derivative loss. On January 10, 2020, the Company entered into an Assignment Agreement whereby Armada Investment Fund LLC assigned the principal amount of $35,750 and accrued interest of $627, representing the balance outstanding on the Convertible Promissory Note dated October 2019 to Platinum Point Capital LLC. The total assignment for note was for $36,377. On July 28, 2020, the Company entered into an Assignment Agreement whereby Jefferson Street Capital LLC assigned the principal amount of $35,750 and accrued interest and penalty of $17,081, representing the balance outstanding on the Convertible Promissory Note dated October 2019 to Platinum Point Capital LLC. The total assignment for note was for $52,831. The total unamortized discount on the Notes as of July 31, 2020 was $0. The total principal balance outstanding as of July 31, 2020 was $0. The Company amortized $71,500 of debt discount as interest expense during the year ending July 31, 2020. 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. (See below variable conversion terms No.1)
|
|
|
-
|
|
|
|
-
|
|
On January 10, 2020, the Company entered into an Assignment Agreement whereby Armada Investment Fund LLC (the “Assignor”) assigned to Platinum Point Capital LLC (the “Assignee”) a principal amount of $145,297 and $35,750, representing the outstanding principal balance on the Convertible Promissory Notes dated July 11, 2019 and October 18, 2019, respectively, plus accrued interest of $28,953. The new notes are is in the aggregate principal amount of $210,000, annual interest rate of 3% and a maturity date of January 10, 2021. On January 22, 2020, the Company entered into an Assignment Agreement whereby BHP Capital NY Inc. (the “Assignor”) assigned to Platinum Point Capital LLC (the “Assignee”) a principal amount of $146,625, representing the outstanding principal balance on the Convertible Promissory Note dated July 11, 2019, plus accrued interest of $33,375. The new note is in the aggregate principal amount of $180,000, annual interest rate of 3% and a maturity date of January 22, 2021. On January 22, 2020, the Company entered into an Assignment Agreement whereby Jefferson Street Capital LLC (the “Assignor”) assigned to Platinum Point Capital LLC (the “Assignee”) a principal amount of $146,625, representing the outstanding principal balance on the Convertible Promissory Note dated July 11, 2019, plus accrued interest of $33,375. The new note is in the aggregate principal amount of $180,000, annual interest rate of 3% and a maturity date of January 22, 2021. The Company analyzed the notes 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, at the time of the assignment, the Company recognized derivative liability for the new convertible notes of $784,565, of which $570,000 was recorded as debt discount and amortized over the term of the notes, and $214,565 was recorded as day 1 derivative loss. During the year ended July 31, 2020, the Company issued 25,312,983 shares of common stock for the conversion of $230,000 of the principal outstanding and $12,000 in accrued interest and fees. The total unamortized discount on the Notes as of July 31, 2020 was $172,611, and the total principal balance outstanding as of July 31, 2020 was $340,000. The Company amortized $397,389 of debt discount as interest expense during the year ended July 31, 2020. 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. (See below variable conversion terms No.1)
|
|
|
340,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On February 13, 2020, the Company entered into a variable convertible note. The note is in the aggregate principal amount of $33,500, annual interest rate of 10% and a maturity date of February 13, 2021. After payment of transaction-related expenses of $3,500, net proceeds to the Company from the note totaled $30,000. The Company recorded these discounts and cost of $3,500 as a discount to the note and fully amortized as interest expense during the period. 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, at the time of issuance, the Company recognized derivative liability for the convertible note of $42,976, of which $30,000 was recorded as debt discount and will be amortized during the term of the Note, and $12,976 was recorded as day 1 derivative loss. The total unamortized discount on the Note as of July 31, 2020 was $15,000. The total principal balance outstanding as of July 31, 2020 was $33,500. The Company amortized $18,500 of debt discount as interest expense during the year ended July 31, 2020. 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. (See below variable conversion terms No.1)
|
|
|
33,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On April 28, 2020, the Company entered into a variable convertible note. The note is in the principal amount of $15,000, annual interest rate of 10% and a maturity date of April 28, 2021. 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, at the time of issuance, the Company recognized derivative liability for the convertible note of $26,629, of which $15,000 was recorded as debt discount and will be amortized during the term of the Note, and $11,629 was recorded as day 1 derivative loss. The total unamortized discount on the Note as of July 31, 2020 was $11,250. The total principal balance outstanding as of July 31, 2020 was $15,000. The Company amortized $3,750 of debt discount as interest expense during the year ended July 31, 2020. 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. (See below variable conversion terms No.1)
|
|
|
15,000
|
|
|
|
-
|
|
On July 28, 2020, the Company entered into an Assignment Agreement whereby one of the variable noteholders assigned a principal amount of $35,750 and accrued interest and penalties of $17,081. The new variable convertible note is for $52,831, annual interest rate of 10% and a maturity date of July 28, 2021. The Company analyzed the assignment of 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, at the time of issuance, the Company recognized derivative liability for the convertible note of $70,888, of which $49,180 was recorded as debt discount and will be amortized during the term of the Note, and $21,708 was recorded as day 1 derivative loss. The total unamortized discount on the Note as of July 31, 2020 was $49,180. The total principal balance outstanding as of July 31, 2020 was $52,831. 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. (See below variable conversion terms No.1)
|
|
|
52,831
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible debenture issued on July 31, 2018 in the principal amount of $220,000 for a purchase price of $198,000 and 0% percent stated interest rate. At issuance, the Company incurred $5,000 in legal and compliance fees, these fees were deducted from the proceeds at time of issuance. The Company recorded these discounts and cost of $22,000 as a discount to the debenture and amortized to interest expense. The Company analyzed the Debenture for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. Therefore, the Company recognized derivative liability of $189,171. In connection with the execution of the Debenture, we issued 130,000 shares of our common stock, the shares were recorded with a relative fair value of $3,627 and $192,798 was recorded as debt discount and amortized during the term of the note. During the year ending July 31, 2019, the Company issued 2,615,309 shares of common stock for the conversion of $170,000 of the principal outstanding under the convertible debenture. During the year ending July 31, 2020, the Company issued 1,248,335 shares of common stock for the conversion of $50,000 of the principal outstanding under the convertible debenture. During the years ended July 31, 2020 and 2019, the Company amortized $29,214 and $163,584, respectively of the debt discount as interest expense. The total unamortized discount as July 31, 2020 and July 31, 2019, were $0 and $29,214, respectively. The total principal outstanding balance as of July 31, 2020 and July 31, 2019 were $0 and $50,000, respectively.
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable - derivative:
|
|
$
|
534,831
|
|
|
$
|
829,875
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable derivative and non-derivative
|
|
|
841,831
|
|
|
|
1,601,875
|
|
Less: discount on convertible notes payable
|
|
|
(294,667
|
)
|
|
|
(575,681
|
)
|
Total convertible notes payable, net of discount
|
|
|
547,164
|
|
|
|
1,026,194
|
|
Less: current portion of convertible notes payable
|
|
|
(547,164
|
)
|
|
|
(1,005,408
|
)
|
Long-term portion of convertible notes payable
|
|
$
|
-
|
|
|
$
|
20,786
|
|
Variable
Conversion No.1: 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 (i) the lowest trading price of the Common Stock (as defined in the
Note) as reported on the National Quotations Bureau OTC Marketplace exchange upon which the Company’s shares are traded
during the twenty (20) consecutive Trading Day period immediately preceding the issuance date of each Note; or (ii) 60% multiplied
by the lowest traded price of the Common Stock during the twenty (20) consecutive Trading Day period immediately preceding the
Trading Day that the Company receives a notice of conversion (the “Variable Conversion Price”). The Variable Conversion
Price may further be adjusted in connection with the terms of the Notes.at a discount of 35% to the average of the three lowest
trading closing prices of the stock for ten days prior to conversion.
The total unamortized discount on the convertible notes as
of July 31, 2020 and 2019 were $294,667 and $575,681, respectively, and the total principal balance outstanding as of July
31, 2020 and 2019, were $841,831 and $1,601,875, respectively. During the years ended July 31, 2020 and 2019, the Company amortized
$1,228,000 and $1,466,000, respectively, of debt discount as interest expense.
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 July 31, 2020 and 2019 of $606,000 and $927,000, respectively.
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
|
|
|
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
Significant
|
|
|
|
|
|
|
liabilities
|
|
|
inputs
|
|
|
unobservable inputs
|
|
Description
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Convertible promissory notes derivative liability at July 31, 2019
|
|
$
|
927,171
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
927,171
|
|
Convertible promissory notes derivative liability at July 31, 2020
|
|
$
|
606,123
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
606,123
|
|
The
fair market value of all derivatives during the year ended July 31, 2020 was determined using the Black-Scholes option pricing
model which used the following assumptions:
Expected dividend yield
|
|
0.00%
|
Expected stock price volatility
|
|
83.28% - 268.02%
|
Risk-free interest rate
|
|
0.09% -2.67%
|
Expected term
|
|
0.01 - 1.00 years
|
Level
3 inputs.
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, 2018
|
|
$
|
632,268
|
|
Derivative from new convertible promissory notes recorded as debt discount
|
|
|
1,043,834
|
|
Derivative liability resolved to additional paid in capital due to debt conversion
|
|
|
(822,922
|
)
|
Derivative loss
|
|
|
73,991
|
|
Balance at July 31, 2019
|
|
$
|
927,171
|
|
Derivative from new convertible promissory notes recorded as debt discount
|
|
|
814,180
|
|
Derivative liability resolved to additional paid in capital due to debt conversion
|
|
|
(872,914
|
)
|
Derivative loss
|
|
|
(262,314
|
)
|
Balance at July 31, 2020
|
|
$
|
606,123
|
|
The
future principal payments for the Company’s convertible debt is as follows:
FY
|
|
Payments
|
|
2021
|
|
$
|
2,501,809
|
|
2022
|
|
|
251,957
|
|
2023
|
|
|
23,596
|
|
2024
|
|
|
-
|
|
Total principal payments
|
|
$
|
2,777,362
|
|
NOTE
13 – EQUIPMENT FINANCING
The
Company entered into three financing agreements for equipment purchased. Under the terms of these transactions, assets with a
cost of approximately $37,255, $60,408, and $103,509, were financed under three separate financing agreements as of the May 2018,
June 2018, and July 2019, respectively. The equipment financing is net of costs associated with the assets such as maintenance,
insurance and property taxes are for the account of the Company. The equipment financing agreements are for 36 months, with the
first payments starting June 20, 2018, July 20, 2018, and July 12, 2019, respectively and monthly principal and interest payments
of $1,176, $1,856, and $3,172, respectively. The interest rate under the financing agreements range from 6.50% to 8.50% per annum.
During the years ended July 31, 2020 and 2019, the Company made total principal payments of $65,465 and $32,943, respectively.
The
future payments under the equipment financing agreements are as follows:
Year
|
|
Amount
|
|
2021
|
|
|
70,233
|
|
2022
|
|
|
34,897
|
|
|
|
|
|
|
Total future payments:
|
|
$
|
105,130
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
5,635
|
|
|
|
|
|
|
Present value of net minimum equipment financing payments
|
|
$
|
99,495
|
|
|
|
|
|
|
Less current maturities
|
|
|
61,850
|
|
|
|
|
|
|
Long-term equipment financing obligation
|
|
$
|
37,645
|
|
|
|
|
|
|
Lease cost:
|
|
|
|
|
Amortization of ROU assets
|
|
$
|
65,465
|
|
Interest on lease liabilities
|
|
|
9,201
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cashflow from financing leases:
|
|
$
|
9,201
|
|
Financing cashflows from finance leases
|
|
|
65,465
|
|
|
|
|
|
|
Weighted-average remaining lease term - finance lease:
|
|
|
1.52 years
|
|
|
|
|
|
|
Weighted-average discount rate:
|
|
|
6.76
|
%
|
NOTE
14 – LEASES
Digerati
leases its corporate facilities, sales office and network facilities in Texas and Florida. The annual rent expense under the operating
leases was $160,574 and $141,546, for 2020 and 2019, respectively. Below is a list of our primary operating leases:
Location
|
|
Lease
Expiration Date
|
|
Annual
Rent
|
|
|
Business
Use
|
|
Approx. Sq.
Ft.
|
825 W. Bitters, Suite 104,
San Antonio, TX 78216
|
|
Jul-22
|
|
$
|
23,654
|
|
|
Executive offices
|
|
1,546
|
2401 First Street, Suite 300, Ft.
|
|
|
|
|
|
|
|
Lease of network facilities and
|
|
|
Myers, FL 34901
|
|
Nov-20
|
|
$
|
107,534
|
|
|
office space
|
|
6,800
|
7218 McNeail Dr, Austin, TX 78729
|
|
Apr-21
|
|
$
|
14,222
|
|
|
Lease of network facilities
|
|
25
|
6606 Lyndon B. Johnson, Fwy., FL1, Suite 125, Dallas, TX 75240
|
|
Apr-21
|
|
$
|
25,161
|
|
|
Lease of network facilities
|
|
25
|
9701 S. John Young Parkway,
Orlando, FL 32819
|
|
May-23
|
|
$
|
30,528
|
|
|
Lease of network facilities
|
|
540
|
Effective
August 1, 2019, the Company adopted ASC 842, “Leases” (“ASC 842”) on a modified retrospective basis. Accordingly,
information presented for periods prior to FY2019 have not been recast. In addition, the Company elected the optional practical
expedient permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment
for existing lease upon adoption. No impact was recorded to the income statement or beginning retained earnings for Topic 842.
The
leased properties have a remaining lease term of sixteen to forty-six months as of August 1, 2019. At the option of the Company,
it can elect to extend the term of the leases. As of the date of this filing, the Company is working on finalizing a new office
lease agreement. The new lease will commence on January 1, 2021, the initial term will of 5 years, at an annual base rent of $57,000.
The Company will have the option to renew the lease for an additional 5 years. The Company is working with the landlord on the
final buildout of the office space. From October 1, 2020 through December 31, 2020, the Company entered into a Sublease Agreement
with the current tenant, for a monthly rate of $4,791.
Beginning
August 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments,
including annual rent increases, over the lease term at commencement date. Operating leases in effect prior to August 1, 2019
were recognized at the present value of the remaining payments on the remaining lease term as of August 1, 2019. Because none
of our leases included an implicit rate of return, we used our incremental secured borrowing rate based on lease term information
available as of the adoption date or lease commencement date in determining the present value of lease payments. The incremental
borrowing rate on the leases is 8.0%.
The
Company has not entered into any sale and leaseback transactions during the year ended July 31, 2020.
The
impact of ASU No. 2016-02 (“Leases (Topic 842)” on our consolidated balance sheet beginning August 1, 2019 was through
the recognition of ROU assets and lease liabilities for operating leases. Amounts recognized on August 1, 2019 and July 31, 2020
for operating leases are as follows:
ROU Asset
|
August 1, 2019
|
|
$
|
316,411
|
|
Amortization
|
|
|
$
|
(140,314
|
)
|
ROU Asset
|
July 31, 2020
|
|
$
|
176,097
|
|
|
|
|
|
|
|
Lease Liability
|
August 1, 2019
|
|
$
|
316,411
|
|
Amortization
|
|
|
$
|
(140,314
|
)
|
Lease Liability
|
July 31, 2020
|
|
$
|
176,097
|
|
|
|
|
|
|
|
Lease Liability
|
Short term
|
|
$
|
99,443
|
|
Lease Liability
|
Long term
|
|
$
|
76,654
|
|
Lease Liability
|
Total:
|
|
$
|
176,097
|
|
|
|
|
|
|
|
Operating lease cost:
|
|
|
$
|
160,574
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease labilities
|
|
|
|
|
|
|
|
|
|
|
Operating cashflow from operating leases:
|
|
$
|
160,574
|
|
|
|
|
|
|
Weighted-average remain lease term-operating lease:
|
|
|
1.88 years
|
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
8
|
%
|
For
the year ended July 31, 2020 amortization of operating ROU assets was $140,314.
For
the year ended July 31, 2020 amortization of operating lease liabilities was $140,314.
The
future minimum lease payment under the operating leases are as follows:
Years Ending July 31,
|
|
Lease
Payments
|
|
2021
|
|
|
108,409
|
|
2022
|
|
|
57,057
|
|
2023
|
|
|
25,440
|
|
Total:
|
|
$
|
190,906
|
|
NOTE
15 – NONCONTROLLING INTEREST
On
May 1, 2018, T3 Communications, Inc. (“T3”), a Nevada Corporation, entered into a Stock Purchase Agreement (“SPA”),
whereby in an exchange for $250,000, T3 agreed to sell to the buyers 199,900 shares of common stock equivalent to 19.99% of the
issued and outstanding common share of T3 Communications, Inc. The $250,000 of the cash received under this transaction was recognized
as an adjustment to the carrying amount of the noncontrolling interest and as an increase in additional paid-in capital in T3.
At the option of the Company, and for a period of five years following the date of the SPA, the 199,900 shares of common stock
in T3 may be converted into Common Stock of Digerati at a ratio of 3.4 shares of DTGI Common stock for every one (1) share of
Shift8 at any time after the DTGI Common Stock has a current market price of $1.50 or more per share for 20 consecutive trading
days.
For
the years ending July 31, 2020 and 2019, the Company accounted for a noncontrolling interest of $47,000 and $128,000, respectively.
Additionally, one of the buyers serves as a Board Member of T3 Communications, Inc., a Florida Corporation, one of our operating
subsidiaries.
NOTE
16 – INVESTMENT IN ITELLUM
On
June 14, 2019, the Company, entered into a Stock Purchase Agreement (the “Agreement”) to acquire a 12% minority interest
in Itellum Comunicacions Costa Rica, S.R.L. The Company paid $82,500 upon execution of the agreement, issued 500,000 shares of
common stock with a market value of $85,000, and entered into a promissory note for $17,500 with an effective annual interest
rate of 8% and an initial maturity date of September 14, 2019, subsequentially the maturity date was extended until October 31,
2020. The outstanding balance as of July 31, 2020 was $7,500.
The
minority interest in Itellum was accounted for as a cost-basis investment, and based on the agreed cash and stock issued, the
Company accounted for an initial investment value of $185,000.
NOTE
17 – PREFERRED STOCK
CONVERTIBLE
SERIES A PREFERRED STOCK
In
March 2019, the Company’s Board of Directors designated and authorized the issuance up to 1,500,000 shares of the Series
A Preferred Stock. Each share of Series A Preferred Stock has a par value of $0.001 per share and a stated value equal to one
dollar ($1.00) (the “Stated Value”) and are entitled to a dividend at an annual rate of eight percent (8%) per share.
The Company had 225,000 shares of Series A Preferred Stock outstanding as of July 31, 2020. During the year ending July 31, 2020
the Company declared a dividend of $19,000.
The
terms of our Series A Preferred Stock allow for:
Voting
Rights. Unless otherwise required by the Nevada Revised Statutes, the shares of Series A Preferred Stock shall not be
entitled to vote on any matter presented at any annual or special meeting of stockholders of the Corporation, or through written
consent.
Optional
Conversion. Each holder of shares of Series A Preferred Stock may, at holder’s option and commencing on April 30,
2020, convert any or all such shares, on the terms and conditions set forth herein, into fully paid and non-assessable shares
of the Corporation’s Common Stock. The number of shares of Common Stock into which each share of Series A Preferred Stock may
be converted shall be determined by dividing the Original Issue Price of each share of Series A Preferred Stock, plus accrued
and unpaid dividends through the Conversion Date, to be converted by the Conversion Price (as defined below) in effect at the
time of conversion. 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) $0.40 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, in the
event of such up-listing, subject to adjustment as provided below.
Mandatory
Conversion. Each share of Series A Preferred Stock shall automatically convert into shares of Common Stock, as described
in paragraph 2a, at the then applicable Conversion Price, upon the earlier of (i) the closing of a public or private offering
(or series of offerings within a 90-day period) of Corporation equity or equity equivalent securities placed by a registered broker-dealer
resulting in minimum gross proceeds to the Corporation of $10 million, (ii) commencing on April 30, 2020, if the Common Stock
shall close (or the last trade shall be) at or above 150% of the Conversion Price per share for 20 out of 30 consecutive trading
days, and (iii) the uplisting of the Corporation’s Common Stock to a national securities exchange or the Nasdaq stock market
((i), (ii) and (iii) are collectively referred to as “Mandatory Conversion Event”). The Corporation will provide notice
to holder within 20 days of the occurrence of a Mandatory Conversion Event (failure of the Corporation to timely give such notice
does not void the mandatory conversion). Holder shall surrender to the Corporation, within 10 days of receiving such notice, the
certificate(s) representing the shares of Series A Preferred Stock to be converted into Common Stock. In the event holder does
not surrender such certificate(s) within 10 days of receiving such notice, the Corporation shall deem such certificate(s) cancelled
and void. As soon as practicable, after the certificate(s) are either surrendered by the holder or cancelled by the Corporation,
as the case may be, the Corporation will issue and deliver to holder a new certificate for the number of full shares of Common
Stock issuable upon such mandatory conversion in accordance with the provisions hereof and cash as provided in paragraph 2(c)
in respect of any fraction of a share of Common Stock otherwise issuable upon such mandatory conversion, unless fractional shares
are rounded up to the next whole share. Holder will be deemed a Common Stockholder of record as of the date of the occurrence
of a Mandatory Conversion Event.
CONVERTIBLE
SERIES B PREFERRED STOCK
In
April 2020, the Company’s Board of Directors designated and authorized the issuance up to 1,000,000 shares of the Series
B Preferred Stock. The Series B Preferred Stock is only issuable to the Company’s debt holders as of March 25, 2020 (“Existing
Debt Holders”) who may purchase shares of Series B Preferred Stock at the Stated Value by converting all or part of the
debt owed to them by the Corporation as of March 25, 2020. Each share of Series B Preferred Stock has a par value of $0.001 per
share and a stated value equal to one dollar ($1.00) (the “Stated Value”). In April 2020, the Company issued a total
of 407,477 shares of Series B Preferred Stock for settlement of debt of $370,000 on various promissory notes and $37,477 in accrued
interest. No dividends are payable on the Series B Preferred Stock.
The
terms of our Series B Preferred Stock allow for:
Voting
Rights. Except as otherwise provided by the Nevada Revised Statutes, other applicable law or as provided in this Certificate
of Designation, the Series B Preferred Stock shall have no voting rights. However, as long as any shares of Series B 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 B Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series B
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
B Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
Mandatory
Conversion. Upon (i) an up-listing of the Corporation’s Common Stock to Nasdaq or a US national securities exchange,
(ii)an underwriting involving the sale of $5,000,000 or more of the Corporation’s Common Stock or Common Stock Equivalents
(a “Material Underwriting”), (iii) the Corporation ceases to be a public corporation as the result of a going private
transaction, (iv) the Corporation, directly or indirectly, effects any sale, lease, exclusive license, assignment, transfer, conveyance
or other disposition of all or substantially all of its assets in one or a series of related transactions (including a transaction
involving the Corporation’s spin-off of its operating subsidiary, T3 Communications, Inc.), (v) any, direct or indirect,
purchase offer, tender offer or exchange offer (whether by the Corporation or another Person) is completed pursuant to which holders
of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted
by the holders of 50% or more of the outstanding Common Stock, (vi) the Corporation, directly or indirectly, in one or more related
transactions, effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (vii)
the Corporation, directly or indirectly, in one or more related transactions, consummates a stock or share purchase agreement
or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement)
with another Person, other than an officer or director of the Company, whereby such other Person acquires more than 50% of the
outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making
or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or
other business combination) , all shares of Series B Preferred Stock shall be automatically converted, without any further action
by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation
or its transfer agent, into the number of fully paid and nonassessable shares of Common Stock in an amount equal, following conversion
,to 18% of the Corporation’s issued and outstanding shares of Common Stock . Each of (i)-(vii) above shall be hereafter
referred to as a “Conversion Event” and the date of a Conversion Event shall be hereafter referred to as a “Conversion
Date”. Upon any such mandatory conversion and the issuance of Conversion Shares further thereto, the shares of Series B
Preferred Stock shall be deemed cancelled and of no further force or effect. A mandatory conversion is the only means by which
Series B Preferred Stock is convertible as the shares of Series B Preferred Stock are not convertible at the option of the Holder.
For purposes of the foregoing Conversion Events, conversion will be deemed to have taken place immediately prior to the Conversion
Event. By way of example, if the Corporation engages in a Material Underwriting, the Series B Preferred Stock will be treated
as having been converted immediately prior to the issuance of the securities in the Material Underwriting.
Redemption.
At any time on or after the second anniversary of the date of issuance of shares of Series B Preferred Stock to the Holder,
the Corporation, in its sole discretion ,may elect, by delivering written notice to the Holder no less than 10 days or more than
20 prior to the redemption date set forth in such notice (the “Redemption Date”), to redeem all or any portion of
the Series B Preferred Stock held by such Holder at a price per share (the “Redemption Price”) equal to 120% of the
Stated Value per share being redeemed . The Corporation shall, unless otherwise prevented by law, redeem from such holder on the
Redemption Date the number of shares of Series B Preferred Stock identified in such notice of redemption. During the period ended
July 31, 2020, 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. The Company
will evaluate the convertible shares at each reporting balance sheet date and determine if a re-classification is required.
CONVERTIBLE
SERIES C PREFERRED STOCK
In
July 2020, the Company’s Board of Directors designated and authorized the issuance up to 1,000,000 shares of the Series
C Preferred Stock. Each share of Series C Preferred Stock has a par value of $0.001 per share and a stated value equal to ten
dollars ($10.00) (the “Stated Value”). As of July 31, 2020, the Company has not issued any shares of Series C Preferred
Stock.
The
terms of our Series C Preferred Stock allow for:
Designation,
Amount and Par Value; Eligible Recipients. The series of preferred stock shall be designated as its Series C
Convertible Preferred Stock (the “Series C Preferred Stock”) and the number of shares so designated shall be up
to one million (1,000,000) (which shall not be subject to increase without the written consent of the holders of a majority
of the outstanding Series C Preferred Stock (each, a “Holder” and collectively, the “Holders”).
Series C Preferred Stock shall only be issuable to the Company’s officers and directors as of July 1, 2020 who may from
time to time purchase shares of Series C Preferred Stock at the Stated Value by converting all or part of the compensation
owed to them by the Corporation. Each share of Series C Preferred Stock shall have a par value of $0.001 per share and a
stated value equal to Ten Dollars ($10.00) (the “Stated Value”).
Dividends.
No dividends are payable on the shares of Series C Preferred Stock.
Voting
Rights. Except as otherwise provided by the Nevada Revised Statutes, other applicable law or as provided in this Certificate
of Designation, the Series C Preferred Stock shall have no voting rights. However, as long as any shares of Series C 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 C Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series C
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
C Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
Automatic
Conversion. Upon (i) an up-listing of the Corporation’s Common Stock to Nasdaq or a US national securities exchange,
(ii) a financing or offering involving the sale of $5,000,000 or more of the Corporation’s Common Stock or Common Stock
Equivalents (a “Material Financing”), (iii) the Corporation ceases to be a public corporation as the result of a
going private transaction, (iv) the Corporation, directly or indirectly, effects any sale, lease, exclusive license,
assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related
transactions (including a transaction involving the Corporation’s spin-off of its Nevada subsidiary, T3 Communications,
Inc.), (v) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Corporation or another
Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for
other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (vi)
the Corporation, directly or indirectly, in one or more related transactions, effects any reclassification, reorganization or
recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property, or (vii) the Corporation, directly or indirectly, in one
or more related transactions, consummates a stock or share purchase agreement or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person, other than an
officer or director of the Company, whereby such other Person acquires more than 50% of the outstanding shares of Common
Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated
or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business
combination), all issued shares of Series C Preferred Stock shall be automatically converted, without any further action by
the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or
its transfer agent, into the number of fully paid and nonassessable shares of Common Stock in an amount equal, following
conversion, to 22% of the Corporation’s issued and outstanding shares of Common Stock. Each of (i)-(vii) above shall be
hereafter referred to as a “Conversion Event” and the date of a Conversion Event shall be hereafter referred to
as a “Conversion Date”. Upon any such mandatory conversion and the issuance of Conversion Shares further thereto,
the shares of Series C Preferred Stock shall be deemed cancelled and of no further force or effect. A mandatory conversion is
the only means by which Series C Preferred Stock is convertible as the shares of Series C Preferred Stock are not convertible
at the option of the Holder. For purposes of the foregoing Conversion Events, conversion will be deemed to have taken place
immediately prior to the Conversion Event. By way of example, if the Corporation engages in a Material Financing, the Series
C Preferred Stock will be treated as having been converted immediately prior to the issuance of the securities in the
Material Underwriting.
Redemption.
At any time on or after the second anniversary of the date of issuance of shares of Series C Preferred Stock to the Holder,
the Corporation, in its sole discretion ,may elect, by delivering written notice to the Holder no less than 10 days or more
than 20 prior to the redemption date set forth in such notice (the “Redemption Date”), to redeem all or any
portion of the Series C Preferred Stock held by such Holder at a price per share (the “Redemption Price”) equal
to 120% of the Stated Value per share being redeemed . The Corporation shall, unless otherwise prevented by law, redeem from
such holder on the Redemption Date the number of shares of Series C Preferred Stock identified in such notice of
redemption.
SERIES
F SUPER VOTING PREFERRED STOCK
In
July 2020, the Company’s Board of Directors designated and authorized the issuance up to 100 shares of the Series F Super
Voting Preferred Stock. Each share of Series F Super Voting Preferred Stock has a par value of $0.001 per share and a stated value
equal to one cent ($0.01) (the “Stated Value”). As of July 31, 2020, the Company has 100 shares outstanding of the
Series F Super Voting Preferred Stock.
The
terms of our Series F Super Voting Preferred Stock allow for:
Designation,
Amount and Par Value; Eligible Recipients. The series of preferred stock shall be designated as its Series F
Preferred Stock (the “Series F Preferred Stock”) and the number of shares so designated shall be up to one
hundred (100) (which shall not be subject to increase without the written consent of the holders of a majority of the
outstanding Series F Preferred Stock (each, a “Holder” and collectively, the “Holders”). Series F
Preferred Stock shall only be issuable to members of the Corporation’s Board of Directors, as joint tenants, who may
purchase shares of Series F Preferred Stock at the Stated Value per share. Each share of Series F Preferred Stock shall have
a par value of $0.001 per share and a stated value equal to one cent ($0.01) (the “Stated Value”).
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.
Holder
of the Series F Preferred Stock shall be entitled to vote on all matters subject to a vote or written consent of the holders of
the Corporation’s Common Stock, and on all such matters, the shares of Series F Preferred Stock shall be entitled to that
number of votes equal to the number of votes that all issued and outstanding shares of Common Stock and all other securities of
the Corporation are entitled to, as of any such date of determination, on a fully diluted basis, plus one million (1,000,000)
votes, it being the intention that the Holders of the Series F Preferred Stock shall have effective voting control of the Corporation.
The Holders of the Series F Preferred Stock shall vote together with the holders of Common Stock as a single class on all matters
requiring approval of the holders of the Corporation’s Common Stock and separately on matters not requiring the approval
of holders of the Corporation’s Common Stock.
Conversion.
No conversion rights apply to the Series F Preferred Stock.
Redemption.
At any time while share of Series F Preferred Stock are issued and outstanding, the Corporation, in its sole discretion, may
elect to redeem the shares of Series F Preferred Stock.
NOTE
18 – EQUITY
During
the year ended July 31, 2019, the Company issued the following shares of common stock that are not disclosed in other footnotes:
On
September 28, 2018, the Company issued an aggregate of 21,672 shares of common stock with a market value at time of issuance of
$5,794. The shares were issued to settle accounts payables of $5,287 to a professional, the Company recognized a loss of $507
upon issuance of the shares.
On
November 5, 2018, the Company issued an aggregate of 16,883 shares of common stock with a market value at time of issuance of
$5,875. The shares were issued to settle accounts payables of $5,287 to a professional, the Company recognized a loss of $588
upon issuance of the shares.
On
November 14, 2018, the Company secured $75,000 from an accredited investor under a Securities Purchase Agreement and issued 258,621
shares of its common stock at a price of $0.29.
On
November 29, 2018, the Company issued an aggregate of 39,444 shares of common stock with a market value at time of issuance of
$11,833. The shares were issued to settle accounts payables of $10,545 to a professional, the Company recognized a loss of $1,288
upon issuance of the shares.
On
February 5, 2019, the Company issued an aggregate of 60,715 shares of common stock with a market value at time of issuance of
$13,357. The shares were issued to settle accounts payables of $10,382 to a professional, the Company recognized a loss of $2,975
upon issuance of the shares.
On
February 8, 2019, the Company secured $150,000 from an accredited investor under a Securities Purchase Agreement and issued 600,000
shares of its common stock at a price of $0.25.
On
February 8, 2019, the Company issued an aggregate of 400,000 shares of common stock with a market value at time of issuance of
$100,000 and recognized the total fair market value as stock-based compensation expense at the time of issuance. The shares were
issued for consulting services.
During
the year ending July 31, 2020, the Company issued the following shares of common stock that are not disclosed in other footnotes:
In
November 2019, the Company issued 86,667 shares of common stock in conjunction to the conversion of 25,000 shares of the Series
A Convertible Preferred stock and $1,189 in accrued dividends.
On
July 13, 2020, the Company issued 2,073,925 shares of common stock for cash proceeds of $51,629, net of administration fees of
$2,500.
On
July 29, 2020, the Company issued 1,819,700 shares of common stock for cash proceeds of $42,337, net of administration fees of
$2,500.
NOTE
19 – SUBSEQUENT EVENTS
Equity
Issuance
On
August 1, 2020, the Company issued 2,000,000 common shares for professional services. The Company recognized as stock-based compensation
expense of approximately $58,000 equivalent to the value of the shares calculated based on the share’s closing price at
the time of issuance.
On
August 4, 2020, the Company issued 5,000,000 shares of common stock for the conversion of $75,000 of the principal outstanding
and accrued interest of $1,500 under one of the convertible notes.
On
August 7, 2020, the Company issued 7,608,820 common shares to various employees as part of the Company’s Non-Standardized
profit-sharing plan contribution. The Company recognized stock-based compensation expense of approximately $247,287 equivalent
to the value of the shares calculated based on the share’s closing price at the grant date.
On
August 14, 2020, the Company issued 5,000,000 shares of common stock for the conversion of $80,000 of the principal outstanding
under one of the convertible notes.
On
October 13, 2020, the Company entered into a $330,000 promissory note, in conjunction with the promissory note, we issued 1,000,000
shares of common stock. At the time of issuance, the Company recognized the relative fair market value of the shares of $36,244
as debt discount, and it will be amortized to interest expense during the term of the promissory note.
Convertible
Promissory Notes
On
October 13, 2020, the Company entered into a convertible promissory note with an aggregate principal amount of $330,000, annual
interest rate of 8% and a maturity date of October 31, 2021. After payment of transaction-related expenses and legal fees of $32,000,
net proceeds to the Company from the Note totaled $298,000. The Company recorded these discounts and cost of $32,000 as a discount
to the note and will amortize over the term of the note. In connection with the execution
of the note, we 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 $36,244 as debt discount, 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.
On
October 15, 2020, the Company entered into a convertible promissory note with an aggregate principal amount of $27,500, annual
interest rate of 8% and a maturity date of October 31, 2021. On July 2, 2020, the Company received a $15,000 advance on this note.
The Company accounted for the advance as a current note payable as of July 31, 2020. On August 12, 2020, the Company received
an additional advance of $10,000. After payment of transaction-related expenses and legal fees of $2,500, net proceeds to the
Company from the Note totaled $25,000. The Company recorded these discounts and cost of $2,500 as a discount to the note and will
amortize over the term of the 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.
Other
Terms October 2020 Convertible Notes
Notes
shall bear interest at a rate of eight percent (8%) per annum (the “Interest Rate”), which interest shall be paid
by the Company to the Investor in shares of Common Stock at any time the Investor sends a notice of conversion to the Company.
The Investor is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest
of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock
shall equal (1) $0.05; provided however that in the event the Borrower fails to close on the acquisition of Nexogy Inc.,
for any reason, or none at all, by February 11, 2021, the Conversion Price shall equal (2) the Variable Conversion Price (as defined
herein). The “Variable Conversion Price” shall mean eighty-five percent (85%) multiplied by the Market Price (as defined
herein) (representing a discount rate of fifteen percent (15%)). “Market Price” means the lowest Trading Price (as
defined below) for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to
the Conversion Date. “Trading Price” means, for any security as of any date, the lesser of: (i) the lowest trade price
on the OTC Pink, OTCQB or applicable trading market as reported by a reliable reporting service (“Reporting Service”)
designated by the Holder or, if the OTC Pink is not the principal trading market for such security, the trading price of such
security on the principal securities exchange or trading market where such security is listed or traded or, if no trading price
of such security is available in any of the foregoing manners, the average of the trading prices of any market makers for such
security that are listed in the “pink sheets” by the National Quotation Bureau, Inc., or (ii) the closing bid price
on the OTC Pink, OTCQB or applicable trading market as reported by a Reporting Service designated by the Holder or, if the OTC
Pink is not the principal trading market for such security, the closing bid price of such security on the principal securities
exchange or trading market where such security is listed or traded or, if no closing bid price of such security is available in
any of the foregoing manners, the average of the closing bid prices of any market makers for such security that are listed in
the “pink sheets” by the National Quotation Bureau, Inc.
At
any time, the Company shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the
Holder of the Note, to prepay up to fifty percent (50%) of the outstanding Note (principal and accrued interest), in full by
making a payment to the Holder of an amount in cash equal to one hundred twenty (120%) multiplied by the sum of: (w) the then
outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note
plus (y) Default Interest, if any. Subject to the terms of this Note, the Company may prepay the amounts outstanding, less
any amounts paid under the Company’s right to prepay up to the fifty percent (50%), hereunder at any time, subject to
the consent of the Holder. Such consent by the Holder may be withheld for any reason in its discretion, or for no reason at
all.
Pay-off
of Convertible Notes
On
October 15, 2020, the Company paid in full the Convertible Note with Platinum Point Capital LLC with a principal balance outstanding
of $52,831and accrued interest and penalty of $13,639.
On
October 15, 2020, the Company paid in full the Convertible Note with Platinum Point Capital LLC with a principal balance outstanding
of $50,000 and accrued interest and penalty of $22,530.