NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business.
Digerati
Technologies, Inc., a Nevada corporation (including our subsidiaries, “we,” “us,” “Company” or “Digerati”),
through its operating subsidiaries in Texas and Florida, Shift8 Networks, Inc., dba, T3 Communications (“T3”), T3 Communications,
Inc. (“T3”) and Nexogy Inc., provides cloud services specializing in Unified Communications as a Service (“UCaaS”)
solutions for the business market. Our product line includes a portfolio of Internet-based telephony products and services delivered
through our cloud application platform and session-based communication network and network services including Internet broadband, fiber,
mobile broadband, and cloud WAN solutions (SD WAN). Our services are designed to provide enterprise-class, carrier-grade services to
the small-to-medium-sized business (“SMB”) at cost-effective monthly rates. Our UCaaS or cloud communication services include
fully hosted IP/PBX, mobile applications, Voice over Internet Protocol (“VoIP”) transport, SIP trunking, and customized VoIP
services all delivered Only in the Cloud™.
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.
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 $100,000 in cash, issued 500,000 shares of common stock with a market value
of $85,000. As result, the Company holds a minority interest in Itellum for an investment of $185,000. 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.
Gain
on settlement of debt.
During
the year ended July 31, 2021, the Company recognized a settlement of $197,000 for an obligation satisfied with our vendors, in addition,
the Company recognized a gain on settlement of deb for that forgiveness by the U.S Small Business Administration of three promissory
notes with a total principal of $361,600 and accrued interest of $3,616. During the year ended July 31, 2020 the Company recognized as
other income $100,000 for a settlement with one of our vendors.
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,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Cloud software and service revenue
|
|
$
|
12,153
|
|
|
$
|
6,212
|
|
|
Product revenue
|
|
|
263
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
12,416
|
|
|
$
|
6,279
|
|
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, 2021 and July 31, 2020, were $17,661 and $5,980, 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, 2021 and
July 31, 2020, were $19,984 and $147,748, 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, 2021, and July 31, 2020, Digerati’s customer
deposits balance was $0 and $131,507, 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, 2021 and the year ended July 31, 2020, were $871,561 and $38,976, 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, 2021, and 2020, Digerati’s allowance for doubtful accounts balance was $29,000
and $124,000, 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, 2021 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 does 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.
Treasury
Shares.
As
a result of entering into various convertible debt instruments which contained a variable conversion feature with no floor, warrants
with fixed exercise price, and convertible notes with fixed conversion price or with a conversion price floor, we reserved 25,000,000
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, 2021, 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.
Derivative
financial instruments.
Digerati
does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, Digerati analyzes its
convertible instruments and free-standing instruments such as warrants for derivative liability accounting.
For
derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at each reporting date. Any changes in fair value are recorded as non-operating, non-cash income or expense for
each reporting period. For derivative notes payable conversion options and warrants Digerati uses the Black-Scholes option-pricing model
to value the derivative instruments.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed
at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current
based on whether or not net-cash settlement of the derivative instrument is probable within the next 12 months from the balance sheet
date.
Fair
Value of Financial Instruments.
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
A fair value hierarchy is used which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The fair value hierarchy based on the three levels of inputs that may be used to measure fair value
are as follows:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level
3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values
are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which
the determination of fair value requires significant judgment or estimation.
For
certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses,
the carrying amounts approximate fair value due to the short maturity of these instruments. The carrying value of our long-term debt
approximates its fair value based on the quoted market prices for the same or similar issues or the current rates offered to us for debt
of the same remaining maturities.
Our
derivative liabilities as of July 31, 2021 and 2020 of $16,773,000 and $606,000, 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
|
|
|
Significant
other
observable
|
|
|
Significant
unobservable
|
|
|
|
|
|
|
|
liabilities
|
|
|
inputs
|
|
|
inputs
|
|
|
Description
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes derivative liability at July 31, 2020
|
|
$
|
606,123
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
606,123
|
|
|
Convertible promissory notes derivative liability at July 31, 2021
|
|
$
|
16,773,383
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
16,773,383
|
|
The fair market value of all derivatives during the year ended July
31, 2021 was determined using the Black-Scholes option pricing model which used the following assumptions:
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
Expected stock price volatility
|
|
|
125.60% - 283.01
|
%
|
|
Risk-free interest rate
|
|
|
0.05% - 1.65
|
%
|
|
Expected term
|
|
|
0.03 - 10.00 years
|
|
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
|
|
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, 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 gain
|
|
|
(262,314
|
)
|
|
Balance at July 31, 2020
|
|
$
|
606,123
|
|
|
Derivative from new convertible promissory notes and warrants recorded as debt discount
|
|
|
6,820,108
|
|
|
Derivative liability resolved to additional paid in capital due to debt conversion
|
|
|
(588,097
|
)
|
|
Derivative loss
|
|
|
9,935,249
|
|
|
Balance at July 31, 2021
|
|
$
|
16,773,383
|
|
Income
taxes.
Digerati
recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis 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, 2021, 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 2021 and 2020, the Company issued 7,858,820 common
shares and 21,811,100 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 2021 and 2020 we recognized stock-based compensation expense of $264,712 and $801,891, 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, 2021 and 2020, 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:
|
|
|
7/31/2021
|
|
|
7/31/2020
|
|
|
Options to purchase common stock
|
|
|
9,230,000
|
|
|
|
5,000,000
|
|
|
Warrants to purchase common stock
|
|
|
109,506,179
|
|
|
|
2,240,000
|
|
|
Convertible debt
|
|
|
20,506,684
|
|
|
|
37,304,080
|
|
|
Convertible Series A Preferred stock
|
|
|
750,000
|
|
|
|
750,000
|
|
|
Convertible Series B Preferred stock
|
|
|
24,936,847
|
|
|
|
18,238,246
|
|
|
Convertible Series C Preferred stock
|
|
|
30,478,369
|
|
|
|
-
|
|
|
Total:
|
|
|
195,408,079
|
|
|
|
63,532,326
|
|
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).
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 everyone (1) share of T3 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, 2021 and 2020, the Company accounted for a noncontrolling interest of $332,000 and $47,000, respectively. Additionally,
one of the buyers serves as a Board Member of T3 Communications, Inc., a Florida Corporation, one of our operating subsidiaries.
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. Effective August 1, 2019, the Company
adopted ASC 842, “Leases” (“ASC 842”) on a modified retrospective basis and recorded $316,411 as
right-of-use assets and operating lease liabilities on day 1. 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. In addition, the Company
evaluated the network facilities lease agreements and elected to apply ASC 842-10-15-37 to account for the lease and non-lease
components together as a single component for this asset class. No impact was recorded to the income statement or beginning retained
earnings for Topic 842.
In
August 2020, the FASB issued “ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40)” which simplifies the accounting for convertible instruments. The guidance removes
certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. Either
a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard.
Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. The Company is currently evaluating the
potential on its financial statements.
NOTE 2 – GOING CONCERN
Financial Condition
The Company’s consolidated financial statements
for the year ending July 31, 2021, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities in the normal course of business. Since the Company’s inception in 1993, the Company has incurred net losses and accumulated
a deficit of approximately $105,380,000, a working capital deficit of approximately $24,228,000 and total liabilities of $33,375,000,
which includes $16,773,000 in derivative liabilities, 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 available
resources as of July 31, 2021, will not be sufficient to fund the Company’s operations and corporate expenses over the next 12 months.
The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things,
raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating
sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts
funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company
raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience
dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible
senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through
debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners,
the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able
to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may
be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay
off its obligations, if and when they come due.
We are currently taking initiatives
to reduce our overall cash deficiencies on a monthly basis. During fiscal 2021 certain members of our executive management team have taken
a significant portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business,
we intend to adopt best practices from our recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring
revenue; we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams, we have also
secured numerous agent agreements through our recent acquisitions that we anticipate will accelerate revenue growth. In addition, we will
continue to focus on selling a greater number of comprehensive services to our existing customer base. Further, in an effort to increase
our revenues, we will continue to evaluate the acquisition of various assets with emphasis in VoIP Services and Cloud Communication Services.
As a result, during the due diligence process we anticipate incurring significant legal and professional fees.
We have been successful in
raising debt and equity capital in the past and as described in Notes 10, 11,12, 17 and 18. We have financing efforts in place to continue
to raise cash through debt and equity offerings. Although we have successfully completed financings and reduced expenses in the past,
we cannot assure you that our plans to address these matters in the future will be successful.
On November 17, 2020, the
Company and T3 Communications, Inc (“T3 Nevada”), a majority owned subsidiary entered into a credit agreement (the “Credit
Agreement”) with Post Road Administrative LLC and its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post
Road”). Pursuant to the Credit Agreement, Post Road provided T3 Nevada with a secured loan of up to $20,000,000, with initial loans
of $10,500,000 pursuant to the issuance of a Term Loan A Note and $3,500,000 pursuant to the issuance of a Term Loan B Note, each funded
on November 17, 2020.
The Company used $14,000,000
of the credit facility for the payment of approximately $9.452 million for the purchase price for the merger of Nexogy, $1.190 million
for the purchase price and transaction fees of certain assets of ActiveServe, Inc., $1.487 million for the payment in full of outstanding
debts owed and accrued interest to three creditors, including the secured creditor Thermo Communication, Inc., the payment of approximately
$464,000 paid to Post Road, and recognized as deferred financing cost, and will be amortized over the terms of the notes. In addition,
the Company expensed $430,000 in legal fees associated to the acquisitions and financing.
The Company can draw additional
loans in increments of $1,000,000, before the 18 month anniversary of the initial funding date. The current Credit Agreement will allow
the Company to continue acquiring UCaaS service providers that meet the Company’s acquisition criteria. Management anticipates that
future acquisitions will provide additional operating revenues to the Company as it continues to execute on its consolidation strategy.
There can be no guarantee that the planned acquisitions will close or that they will produce the anticipated revenues on the schedule
anticipated by management.
The Company will continue
to work with various funding sources to secure additional debt and equity financings. However, Digerati cannot offer any assurance that
it will be successful in executing the aforementioned plans to continue as a going concern.
Digerati’s consolidated
financial statements as of July 31, 2021 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
Below are summarized changes in intangible assets
at July 31, 2021, and July 31, 2020:
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
July 31, 2021
|
|
Value
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NetSapiens - license, 10 years
|
|
$
|
150,000
|
|
|
$
|
(150,000
|
)
|
|
$
|
-
|
|
|
Customer relationships, 5 years
|
|
|
40,000
|
|
|
|
(28,672
|
)
|
|
|
11,328
|
|
|
Customer relationships, 7 years
|
|
|
1,480,000
|
|
|
|
(698,934
|
)
|
|
|
781,066
|
|
|
Customer relationships 7 years
|
|
|
5,310,000
|
|
|
|
(611,786
|
)
|
|
|
4,698,214
|
|
|
Trademarks, 7 years
|
|
|
2,870,000
|
|
|
|
(307,500
|
)
|
|
|
2,562,500
|
|
|
Non-compete, 2 & 3 years
|
|
|
291,000
|
|
|
|
(97,500
|
)
|
|
|
193,500
|
|
|
Marketing & Non-compete, 5 years
|
|
|
800,000
|
|
|
|
(520,000
|
)
|
|
|
280,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Define-lived Assets
|
|
|
10,941,000
|
|
|
|
(2,414,392
|
)
|
|
|
8,526,608
|
|
|
Goodwill, Indefinite
|
|
|
3,931,298
|
|
|
|
-
|
|
|
|
3,931,298
|
|
|
Balance, July 31, 2021
|
|
$
|
14,872,298
|
|
|
$
|
(2,414,392
|
)
|
|
$
|
12,457,906
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
July 31, 2020
|
|
Value
|
|
|
Amortization
|
|
|
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
|
|
Total amortization expense for the year ended
July 31, 2021, and 2020 was $1,396,214 and $379,429, respectively.
NOTE 4 - PROPERTY AND EQUIPMENT
Following is a summary of Digerati’s property
and equipment at July 31, 2021 and 2020 (in thousands):
|
|
|
Useful lives
|
|
2021
|
|
|
2020
|
|
|
Telecom equipment & software
|
|
1-7 years
|
|
$
|
1,345
|
|
|
$
|
1,064
|
|
|
Less: accumulated depreciation
|
|
|
|
|
(816
|
)
|
|
|
(633
|
)
|
|
Net–property and equipment
|
|
|
|
$
|
529
|
|
|
$
|
431
|
|
The Company uses straight-line depreciation, for
the years ended July 31, 2021 and 2020, depreciation totaled approximately $311,000 and $234,000, 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, 2021,
Digerati had net operating loss carryforwards of approximately $15,441,777 to reduce future federal income tax liabilities; net loss from
2018 and on will be carryforward indefinitely, the net loss carryforwards prior to 2018 will start to expire in 2021. Under the 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, 2021 and 2020 are as follows:
The effective tax rate for Digerati is reconciled to statutory rates as follows:
|
|
|
|
|
2021
|
|
|
2020
|
|
|
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, 2021 and 2020:
|
|
|
2021
|
|
|
2020
|
|
|
Net operating loss carryover
|
|
$
|
3,242,773
|
|
|
$
|
1,713,019
|
|
|
Valuation allowance
|
|
|
(3,242,773
|
)
|
|
|
(1,713,019
|
)
|
|
Total deferred tax asset, net
|
|
$
|
-
|
|
|
$
|
-
|
|
At July 31, 2021, realization of Digerati’s
deferred tax assets was not considered likely to be realized. The change in the valuation allowance for 2021 was resulted in an increase
of approximately $1,529,754. 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, 2021.
The federal
and state NOLs may be subject to certain limitations under Section 382 of the Internal Revenue Code, which could significantly restrict
the Company’s ability to use the NOLs to offset taxable income in subsequent years. During the year ended July 31, 2021 the
Company issued 37,214,449 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, 2020, we 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.
|
|
|
●
|
21,811,100
shares of common stock to various employees for services in lieu of cash compensation and as part of the Company’s Non-Standardized
profit-sharing plan. The Company recognized stock-based compensation expense of $801,891 equivalent to the fair market value of the shares
at issuance.
|
During the year ended July 31, 2020 we issued
the following to non-employee professionals:
|
|
●
|
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
|
|
During the year ended July 31, 2021, we issued:
|
|
●
|
7,858,820 shares of common stock to various employees for services in lieu of cash compensation and as part of the Company’s
Non-Standardized profit-sharing plan. The Company recognized stock-based compensation expense of $264,712 equivalent to the value of the
shares calculated based on the share’s closing price at the grant dates.
|
|
|
●
|
4,230,000 options to purchase common shares to various employees with an exercise price ranging from $0.042
to $0.1475 per share and a term of 5 years. At issuance, 200,000 of the options vested, 400,000 of the options will vest equally over
a period of two years, and 3,630,000 of the options will vest equally over a period of three years. At issuance the stock options had
a fair market value of $267,343.
|
The fair market value of all options issued during the year
ended July 31, 2021, were determined using the Black-Scholes option pricing model which used the following assumptions:
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
Expected stock price volatility
|
|
|
197.71% - 198.82
|
%
|
|
Risk-free interest rate
|
|
|
0.22% - 0.34
|
%
|
|
Expected term
|
|
|
2.0 - 3.0 years.
|
|
Digerati recognized approximately $399,500 and
$1,112,000 in stock-based compensation expense to employees during the years ended July 31, 2021 and 2020, respectively. Unamortized compensation
cost totaled $195,835 and $63,203 at July 31, 2021 and July 31, 2020, respectively.
A summary of the stock options as of July 31,
2021 and July 31, 2020 and the changes during the years ended July 31, 2021 and July 31,2020:
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-average
remaining
|
|
|
|
|
|
|
|
average
|
|
|
contractual
|
|
|
|
|
Options
|
|
|
exercise price
|
|
|
term (years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Granted
|
|
|
4,230,000
|
|
|
$
|
0.05
|
|
|
|
4.39
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited and cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at July 31, 2021
|
|
|
9,230,000
|
|
|
$
|
0.17
|
|
|
|
2.93
|
|
|
Exercisable at July 31, 2021
|
|
|
6,091,863
|
|
|
$
|
0.23
|
|
|
|
2.18
|
|
The aggregate intrinsic value (the difference between the Company’s
closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) of
the 9,230,000 and 5,000,000 stock options outstanding at July 31, 2021 and July 31, 2020 was $392,891 and $0, respectively.
The aggregate intrinsic value of 6,091,863 and of 4,717,699 stock options
exercisable at July 31, 2021 and July 31, 2020 was $91,978 and $0, respectively.
NOTE 7 – WARRANTS
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.
During the year ended July 31, 2021, we issued
the following warrants.
On November 17, 2020, the Company issued 107,701,179 Warrants to Post
Road Special Opportunity Fund II LP (the “Warrant”) to purchase, initially, twenty-five percent (25%) of the Company’s
total shares (the “Warrant”), calculated on a fully-diluted basis as of the date of issuance (the “Warrant Shares”)
and subject to a reduction to fifteen percent (15%) as described below.
The number of Warrant Shares is adjustable to
allow the holder to maintain, subject to certain share issuances that are exceptions, the right to purchase twenty-five percent (25%)
of the Company’s total shares, calculated on a fully-diluted basis. The Warrant has an exercise price of $0.01 per share and the
Warrant expires on November 17, 2030. Seventy-five percent (75%) of the Warrant Shares are immediately fully vested and not subject to
forfeiture at any time for any reason. The remaining twenty-five percent (25%) of the Warrant Shares are subject to forfeiture based on
the Company achieving certain performance targets which, if achieved, would result in twenty percent (20%) warrant coverage. If the minority
shareholders of T3 Nevada convert their T3 Nevada shares into shares of the Company’s common stock, par value $0.001 per share (the
“Common Stock”), the Warrant Shares percentage shall also be lowered such that when combined with the achievement of the performance
targets, the warrant coverage could be reduced to fifteen percent (15%).
In connection with the issuance of the Warrant,
the three executives of the Company, Art Smith, Antonio Estrada, and Craig Clement entered into a Tag-Along Agreement (the “Tag-Along
Agreement”) whereby they agreed that the holder of the Warrant or Warrant Share will have the right to participate or “tag-along”
in any agreements to sell any shares of their Common Stock that such executives enter into. The Company also agreed, in connection with
the issuance of the Warrant and pursuant to a Board Observer Agreement (the “Board Observer Agreement”), to grant Post Road
the right to appoint a representative to each of the boards of directors of the Company and each of its subsidiaries, to attend all board
meeting in a non-voting observer capacity. In addition, at issuance the Company recognized $6,462,050 in Derivative liability associated
with these warrants.
A summary of the warrants as of July 31, 2021
and 2020 and the changes during the years ended July 31, 2021 and 2020 are presented below:
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-average
remaining
|
|
|
|
|
|
|
|
average
|
|
|
contractual
|
|
|
|
|
Warrants
|
|
|
exercise price
|
|
|
term (years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2019
|
|
|
2,700,000
|
|
|
$
|
0.32
|
|
|
|
2.19
|
|
|
Granted
|
|
|
50,000
|
|
|
$
|
0.20
|
|
|
|
2.25
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited and cancelled
|
|
|
(210,000
|
)
|
|
$
|
0.29
|
|
|
|
-
|
|
|
Outstanding at July 31, 2020
|
|
|
2,540,000
|
|
|
$
|
0.33
|
|
|
|
1.61
|
|
|
Granted
|
|
|
107,701,179
|
|
|
$
|
0.01
|
|
|
|
9.50
|
|
|
Exercised
|
|
|
(330,000
|
)
|
|
$
|
0.10
|
|
|
|
-
|
|
|
Expired
|
|
|
(405,000
|
)
|
|
$
|
0.50
|
|
|
|
-
|
|
|
Outstanding at July 31, 2021
|
|
|
109,506,179
|
|
|
$
|
0.01
|
|
|
|
9.17
|
|
|
Exercisable at July 31, 2021
|
|
|
82,280,885
|
|
|
$
|
0.01
|
|
|
|
9.15
|
|
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 109,506,179 and 2,540,000 warrants outstanding at July 31, 2021 and July 31, 2020 was $14,795,002 and
$6,160, respectively.
The aggregate intrinsic value of 82,280,885 and 2,240,000 warrants
exercisable at July 31, 2021 and July 31, 2020 was $11,108,930 and $6,160, respectively.
Warrant expense for the years
ended July 31, 2021 and 2020 was $0 and $0, respectively. Unamortized warrant expense totaled $0 and $0 respectively as of July 31, 2021
and July 31, 2020.
During Fiscal 2021, 405,000
warrants expired with an exercise price of $0.50. In addition, during Fiscal 2021, 330,000 warrants were exercised at an exercise price
of $0.10.
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, 2021 and July
31, 2020, the Company issued 7,608,820 and 11,509,022 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, 2021 and July 31, 2020 of $247,287
and $233,633, 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, 2021 and 2020,
the Company did not derive a significant amount of revenue from one single customer.
As of the year ended July 31, 2021, the company
did not derive a significant accounts receivable from one customer. During the year ended July 31, 2020, the company derived 12% of total
accounts receivable from one 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 an initial maturity date of May 14, 2018. The lender subsequentially continued to extend the
maturity date on the note. On October 14, 2020, the lender agreed to extend the maturity date until October 31, 2020, the Company continued
to pay $3,250 per week in late fees. In conjunction with the note, T3 entered into a Security Agreement, whereby T3 agreed to pledge one
third of the outstanding shares of its Florida operations, T3 Communications, Inc. On November 17, 2020, the Company paid the total principal
balance outstanding of $700,000. As of July 31, 2021, and July 31, 2020, the outstanding principal balance were $0 and $700,000, 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. The note was collateralized by T3’s accounts receivables. 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. On November 17, 2020, the Company paid the total principal balance outstanding of $600,000 and $11,115 in
accrued interest and fees. As of July 31, 2021, and July 31, 2020, the outstanding principal balance were $0 and $600,000, 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 until December 31, 2020. In March 2021, the maturity date was extended until July 31, 2021. Subsequentially,
the lender agreed to extend the maturity until December 31, 2021. 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, 2021, and July
31, 2020, 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. On August 1, 2020, the lender agreed to extend the maturity date to October 31, 2020. On November 1, 2020, the lender agreed to
extend the maturity date to January 31, 2021. On January 31, 2021, the lender agreed to extend the maturity date to April 30, 2021. On
May 7, 2021, the Company paid the total principal balance outstanding of $7,500 and $1,136 in accrued interest. The outstanding balance
as of July 31, 2021, and July 31, 2020, were $0 and $7,500, 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. The promissory note was secured by the Company’s receivables.
On November 17, 2020, the Company paid the total principal balance outstanding of $30,000 and $2,604 in accrued interest. The outstanding
balance as of July 31, 2021, and July 31, 2020, were $0 and $30,000, 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 were made through The Bank of San Antonio (the “Lender”).
The Notes had an effective annual interest rate of 1% and a maturity date of two years after the issuance date. On April 15, 2021, the
SBA informed the Company that the total outstanding balance of $62,500 and accrued interest of $608 were forgiven. As a result, the Company
recognized a gain on settlement of debt of $63,108. In addition, on April 15, 2021, the SBA informed the Company that the total outstanding
balance of $86,000 and accrued interest of $836 were forgiven. At the time of the forgiveness, the Company recognized a gain on settlement
of debt of $86,836. Subsequently, on May 13, 2021, the SBA informed the Company that the total outstanding balance of $213,100 and accrued
interest of $2,172 were forgiven. Subsequentially, on May 13, 2021, the Company recognized a gain on settlement of debt of $215,272. As
of July 31, 2021, the principal balance on the various notes were $0, $0, and $0, respectively. As of July 31, 2020, the principal balance
on the various notes were $62,500, $86,000, and $213,100, respectively.
Credit Agreement and Notes
On November 17, 2020, T3 Communications, Inc.,
a Nevada corporation (“T3 Nevada”), a majority owned subsidiary of Digerati Technologies, Inc. (the “Company”)
and the Company’s other subsidiaries entered into a credit agreement (the “Credit Agreement”) with Post Road. The Company
is a party to certain sections of the Credit Agreement. Pursuant to the Credit Agreement, Post Road will provide T3 Nevada with a secured
loan of up to $20,000,000 (the “Loan”), with initial loans of $10,500,000 pursuant to the issuance of a Term Loan A Note and
$3,500,000 pursuant to the issuance of a Term Loan B Note, each funded on November 17, 2020, and an additional $6,000,000 on loans, in
increments of $1,000,000 as requested by T3 Nevada before the 18 month anniversary of the initial funding date to be lent pursuant to
the issuance of a Delayed Draw Term Note. After payment of transaction-related expenses and closing fees of $964,000, net proceeds to
the Company from the Note totaled $13,036,000. The Company recorded these discounts and cost of $964,000 as a discount to the Notes and
will be amortized over the term of the notes.
The Company used $14,000,000 of the credit facility
for the payment of approximately $9.452 million for the purchase price for the merger of Nexogy, $1.190 million for the purchase price
and transaction fees of certain assets of ActiveServe, Inc., $1.487 million for the payment in full of outstanding debts owed and accrued
interest to three creditors, including the secured creditor Thermo Communication, Inc., the payment of approximately $464,000 paid to
Post Road, and recognized as deferred financing cost, and will be amortized over the terms of the notes. In addition, the Company expensed
$430,000 in legal fees associated to the acquisitions and financing.
During the year ended July 31, 2021, the Company
amortized $2,070,728 of the total debt discount as interest expense for the Term Loan A Note and the Term Loan B Note. The total debt
discount outstanding on the notes as of July 31, 2021, was $5,355,322.
The Term Loan A and Delayed Draw Term Notes have
maturity dates of November 17, 2024, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%). Term Loan
A is non-amortized (interest only payments) through the maturity date and contains an option for the Company to pay interest in kind (PIK)
for up to five percent (5%) of the interest rate in year one, four percent (4%) in year two and three percent (3%) in year three. The
principal balance and accrued PIK interest outstanding on the note were $10,500,000 and $382,270, respectively as of July 31, 2021.
Term Loan B has a maturity date of December 31,
2021, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%). Term Loan B is non-amortized (interest only
payments) through the maturity date and contains an option for the Company to pay interest in kind (PIK) for up to five percent (5%) of
the interest rate in year one, four percent (4%) in year two and three percent (3%) in year three. The principal balance and accrued PIK
interest outstanding on the note were $3,500,000 and $127,423, respectively as of July 31, 2021.
The Credit Agreement contains customary representations,
warranties, and indemnification provisions. The Credit Agreement also contains affirmative and negative covenants with respect to operation
of the business and properties of the loan parties as well as financial performance. Below are key covenants requirements, (measured quarterly
on June 30, 2021):
|
|
1.
|
Maximum Allowed - Senior Leverage Ratio of 4.44 to 1.00
|
|
|
2.
|
Minimum Allowed - EBITDA of $814,285
|
|
|
3.
|
Minimum Allowed - Liquidity of $1,500,000
|
|
|
4.
|
Maximum Allowed - Capital Expenditures of $94,798
|
|
|
5.
|
Minimum Allowed - Fixed Charge Coverage Ratio of 1.5 to 1.00
|
As of July 31, 2021, the Company is complying
with the financial covenants mentioned above.
T3 Nevada’s obligations under the Credit
Agreement are secured by a first-priority security interest in all of the assets of T3 Nevada and guaranteed by the other subsidiaries
of the Company pursuant to the Guaranty and Collateral Agreement, dated November 17, 2020, by and among T3 Nevada, the Company’s
other subsidiaries, and Post Road Administrative LLC (the “Guaranty and Collateral Agreement”). In addition, T3 Nevada’s
obligations under the Credit Agreement are, pursuant to a Pledge Agreement (the “Pledge Agreement”), secured by a pledge of
a first priority security interest in T3 Nevada’s 100% equity ownership of each of T3 Nevada’s operating companies.
NOTE 11 – RELATED PARTY
TRANSACTIONS
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. 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, 2021, and July 31, 2020, $6,300 and $10,386,
respectively. The total unamortized discount as of July 31, 2021, and July 31, 2020, were $0 and $6,300, respectively. The note holder
also serves as Board Member of T3 Communications, Inc., a Florida Corporation, one of our operating subsidiaries. During the year ended
July 31, 2021, the Company paid the total principal balance outstanding of $152,634. The total principal outstanding as of July 31, 2021,
and July 31, 2020, were $0 and $152,634, respectively.
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. On August 3, 2020, the promissory note was paid in full. The
total principal outstanding as of July 31, 2021, and July 31, 2020, were $0 and $16,298, respectively. The note holder also serves as
a Board Member of T3 Communications, Inc., a Florida Corporation, one of our operating subsidiaries. In addition, during the year ended
July 31, 2021, and July 31, 2020, the Company provided VoIP Hosted and fiber services to a Company owned by note holder for $175,606 and
$161,264, respectively.
In November 2020, as a result of the of the acquisition
of ActiveServe’s asset (see note 15), the two sellers became related parties as they continued to be involved as consultants to
manage the customer relationship, the Company will pay on an annual basis $90,000 to each the consultants. As of July 31, 2021, there’s
no balance outstanding under the consulting agreements. In addition, part of the Purchase Price is payable in 8 equal quarterly
payments to the sellers. During the year ended July 31, 2021, the Company made two of the quarterly principal payments for a total of
$269,709, and a payment of $11,000 towards the Holdback amount, the total principal outstanding on the notes as of July 31, 2021, was
$1,134,291.
On November 17, 2020,
Digerati’s Board of Directors approved the issuance of the following shares of Series F Super Voting Preferred Stock to officer:
|
|
●
|
Arthur
L. Smith - 34 shares of Series F Super Voting Preferred Stock
|
|
|
●
|
Antonio
Estrada - 33 shares of Series F Super Voting Preferred Stock
|
|
|
●
|
Craig
Clement - 33 shares of Series F Super Voting Preferred Stock
|
NOTE 12
– CONVERTIBLE NOTES PAYABLE
|
At July 31, 2021, and July 31, 2020,
convertible notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
On July 11, 2018, the Company entered into a promissory note for $32,000, annual interest rate of 10% and a maturity date of April 10, 2019. The holder agreed to extend the note multiple times and extended the Maturity date until February 15, 2021. On February 12, 2021, the promissory note was settled under a debt exchange agreement in which the holder received payment in full for the outstanding balance of $32,000 and $3,929.50 in accrued interest. On March 11, 2021, the Company issued a total of 17,965 shares of Series B Preferred Stock for settlement of debt of $16,000 on a promissory note and $1,965 in accrued interest. In addition, the Company issued a total of 598,825 shares of Common Stock for settlement of debt of $16,000 on a promissory note and $1,965 in accrued interest. The total principal balance outstanding as of July 31, 2021 and 2020, were $0, and $32,000, respectively.
|
|
$
|
-
|
|
|
$
|
32,000
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 13, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $330,000, annual interest rate of 8% and a maturity date of October 13, 2021. After payment of transaction-related expenses and closing fees of $32,000, net proceeds to the Company from the Note totaled $298,000. The Company recorded $32,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 1,000,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $45,003 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $134,423 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a fix conversion price at issuance, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. On April 16, 2021, the Company paid $165,000 of the principal outstanding, $13,381 of the accrued interest and $35,676 in redemption premium. The Company amortized as interest expense during the year ended July 31, 2021, $193,806. The total unamortized discount on the Note as of July 31, 2021, was $17,620. The total principal balance outstanding as of July 31, 2021 was $165,000. (See below variable conversion terms No.1)
|
|
|
165,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 15, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $27,500, annual interest rate of 8% and a maturity date of October 15, 2021. The Company recorded $6,075 as a discount to the Note and amortized 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. On January 31, 2021, the holder agreed to roll over to a new consolidated note the principal balance outstanding of $27,500 and $982 of accrued interest. The Company amortized as interest expense $6,075 during the year ended July 31, 2021. The total unamortized discount on the Note as of July 31, 2021, was $0. The total principal balance outstanding as of July 31, 2021 was $0. (See new consolidated note dated January 31, 2021, for $80,235) (See below variable conversion terms No.1)
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|
|
-
|
|
|
|
-
|
|
|
On January 27, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, annual interest rate of 8% and a maturity date of January 27, 2022. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $24,368 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $44,368 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.05 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized as interest expense during the year ended July 31, 2021, $34,368. The total unamortized discount on the Note as of July 31, 2021, was $34,368. The total principal balance outstanding as of July 31, 2021was $250,000.
|
|
|
250,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 14, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, annual interest rate of 8% and a maturity date of April 14, 2022. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $63,433 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $96,766 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized as interest expense during the year ended July 31, 2021, $53,400. The total unamortized discount on the Note as of July 31, 2021, was $106,799. The total principal balance outstanding as of July 31, 2021, was $250,000.
|
|
|
250,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payables non-derivative:
|
|
$
|
665,000
|
|
|
$
|
32,000
|
|
|
|
|
|
|
|
|
|
|
|
|
CONVERTIBLE NOTES PAYABLE - DERIVATIVE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.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 amortized during the term of the Note, and $15,978 was recorded as day 1 derivative loss. During the year ended July 31, 2021, the Company issued 5,000,000 shares of common stock for the conversion of $80,000 of the principal balance outstanding. The total unamortized discount on the Note as of July 31, 2021, and July 31, 2020, was $0. The Company amortized $0 and $93,500 of debt discount as interest expense during the years ended July 31, 2021 and July 31, 2020, respectively. On January 31, 2021, the holder agreed to roll over to a new consolidated note the principal balance outstanding of $13,500 and $9,300 of accrued interest. The total principal balance outstanding as of July 31, 2021, and July 31, 2020, were $0 and $93,500, respectively. (See new consolidated note dated January 31, 2021, for $80,235) (See below variable conversion terms No.2)
|
|
|
-
|
|
|
|
93,500
|
|
|
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 were 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, 2021, the Company issued 11,371,125 shares of common stock for the conversion of $211,769 of the principal outstanding. In addition, during the year ended July 31, 2021, the Company paid $101,203 of the outstanding principal and $37,797 in accrued interest and fees. The total unamortized discount on the Notes as of July 31, 2021, and July 31, 2020, were $0 and $172,611, respectively. The Company amortized $397,389 and $172,611 of debt discount as interest expense during the year ended July 31, 2020, and the year ended July 31, 2021, respectively. On January 31, 2021, the holder agreed to roll over to a new consolidated note the principal balance outstanding of $27,028 and $1,925 of accrued interest. The total principal balance outstanding as of July 31, 2021, and July 31, 2020, were $0 and $340,000, respectively. (See new consolidated note dated January 31, 2021, for $80,235) (See below variable conversion terms No.2)
|
|
|
-
|
|
|
|
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. 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 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, 2021, and July 31, 2020, were $0 and $15,000, respectively. During the year ended July 31, 2021, the Company issued 1,465,920 shares of common stock for the conversion of $33,500 of the principal outstanding and $3,148 of accrued interest. The total principal balance outstanding as of July 31, 2021, and July 31, 2020, were $0 and $33,500, respectively. The Company amortized $15,000 and $15,000 of debt discount as interest expense during the year ended July 31, 2021, and the year ended July 31, 2020, respectively. (See below variable conversion terms No.2)
|
|
|
-
|
|
|
|
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, 2021, and July 31, 2020, were $0 and $11,250. During the year ended July 31, 2021, the Company issued 644,040 shares of common stock for the conversion of $15,000 of the principal outstanding and $1,101 of accrued interest. The total principal balance outstanding as of July 31, 2021, and July 31, 2020, were $0 and $15,000, respectively. The Company amortized $11,250 and $3,750 of debt discount as interest expense during the year ended July 31, 2021, and the year ended July 31, 2020, respectively. (See below variable conversion terms No.2)
|
|
|
-
|
|
|
|
15,000
|
|
|
On July 27, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $275,000, annual interest rate of 8% and a maturity date of March 27, 2021. After payment of transaction-related expenses and closing fees of $35,000, net proceeds to the Company from the Note totaled $240,000. The Company recorded these discounts and cost of $35,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $11,626 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in this Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.05 (five) cents or (b). 75% of the lowest traded price in the prior fifteen trading days immediately preceding the Notice of Conversion. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. The Company recognized $61,678 of derivative liability and directly amortized all associated debt discount of $61,678 as interest expense. The Company amortized $108,304 and $0 of debt discount as interest expense during the year ended July 31, 2021, and the year ended July 31, 2020, respectively. On January 28, 2021, the holder agreed to extend the maturity date until August 1, 2021. In conjunction with the “first amendment”, the Company agreed to add to the outstanding balance $50,000 as consideration for the extension of the maturity date and recognized $50,000 as interest expense. Additionally, on July 31, 2021, the holder agreed to extend the maturity date until January 31, 2022. In conjunction with the “second amendment” and as consideration for the extension of the maturity date, the Company agreed to add to the outstanding balance $30,000 and issued 400,0000 shares of common stock with a fair market value of $58,760. As part of the “second amendment”, the Company recognized $88,760 as interest expense. The total principal balance outstanding as of July 31, 2021, and July 31, 2020, were $355,000 and $275,000, respectively
|
|
|
355,000
|
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
|
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 amortized $49,180 and $0 of debt discount as interest expense during the year ended July 31, 2021, and the year ended July 31, 2020, respectively. The total unamortized discount on the Note as of July 31, 2021, and July 31, 2020, were $0 and $49,180, respectively. During the year ended July 31, 2021, the Company issued 2,195,680 shares of common stock for the conversion of $52,831 of the principal outstanding and $2,061 of accrued interest. The total principal balance outstanding as of July 31, 2021, and July 31, 2020, were $0 and $52,831, respectively. (See below variable conversion terms No.2)
|
|
|
-
|
|
|
|
52,831
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $80,235, annual interest rate of 8% and a maturity date of February 17, 2022. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or seventy-five percent (75%) of the lowest daily volume weighted average price (“VWAP”) over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $61,819, of which $61,819 was recorded as debt discount and amortized over the term of the note. The total unamortized discount on the Note as of July 31, 2021, and July 31, 2020, were $27,840 and $0, respectively. The Company amortized $33,979 and $0 of debt discount as interest expense during the year ended July 31, 2021, and the year ended July 31, 2020, respectively. The total principal balance outstanding as of July 31, 2021, was $80,235.
|
|
|
80,235
|
|
|
|
-
|
|
|
On February 17, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $175,000, annual interest rate of 8% and a maturity date of February 17, 2022. After payment of transaction-related expenses and closing fees of $5,000, net proceeds to the Company from the Note totaled $170,000. Additionally, the Company recorded $5,000 as a discount to the Note and amortized over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or seventy-five percent (75%) of the lowest daily volume weighted average price (“VWAP”) over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $346,091, of which $170,000 was recorded as debt discount and amortized over the term of the note, and $176,091 was recorded as day 1 derivative loss. The total unamortized discount on the Note as of July 31, 2021, and July 31, 2020, were $102,083 and $0, respectively. The Company amortized $72,917 and $0 of debt discount as interest expense during the year ended July 31, 2021, and the year ended July 31, 2020, respectively. The total principal balance outstanding as of July 31, 2021, was $175,000.
|
|
|
175,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 15, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $113,000, annual interest rate of 8% and a maturity date of January 15, 2022. After payment of transaction-related expenses and closing fees of $13,000, net proceeds to the Company from the Note totaled $100,000. Additionally, the Company recorded $13,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 100,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $14,138 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.15 (fifteen) cents or (b). seventy-five percent (75%) of the lowest traded price in the prior fifteen (15) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”). The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $64,561, of which $42,822 was recorded as debt discount and amortized over the term of the note. The total unamortized discount on the Note as of July 31, 2021, and July 31, 2020, were $50,945 and $0, respectively. The Company amortized $40,754 and $0 of debt discount as interest expense during the year ended July 31, 2021, and the year ended July 31, 2020, respectively. The total principal balance outstanding as of July 31, 2021, was $113,000.
|
|
|
113,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable - derivative:
|
|
$
|
723,235
|
|
|
$
|
809,831
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable derivative and non-derivative
|
|
|
1,388,235
|
|
|
|
841,831
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: discount on convertible notes payable
|
|
|
(339,654
|
)
|
|
|
(294,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable, net of discount
|
|
|
1,048,581
|
|
|
|
547,164
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion of convertible notes payable
|
|
|
(1,048,581
|
)
|
|
|
(547,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
Additional terms No.1: The
Holder shall have the right at any time on or after six (6) months from the Issue Date to convert any portion of the outstanding and unpaid
principal balance into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal (1) $0.05 (five) cents
provided however that in the event the Borrower fails to complete the acquisition of Nexogy, Inc., the Conversion Price shall equal (2)
the Variable Conversion Price (as defined herein) (subject to equitable adjustments for stock splits, stock dividends or rights offerings
by the Borrower relating to the Borrower’s securities or the securities of any subsidiary of the Borrower, combinations, recapitalization,
reclassifications, extraordinary distributions and similar events). 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 for the Common Stock during the ten (10) Trading Day period ending on the latest complete
Trading Day prior to the Conversion Date.
Variable Conversion No.2: The notes
are immediately convertible into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common
Stock equal to the lesser of (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, 2021, and July 31, 2020, were $339,654 and $294,667, respectively. The total principal balance outstanding as of
July 31, 2021, and July 31, 2020, were $1,358,235 and $841,831, respectively. During the years ended July 31, 2021, and July 31, 2020,
the Company amortized $797,144 and $1,228,000, respectively, of debt discount as interest expense.
The future principal payments for the Company’s
convertible debt are as follows:
|
Year
|
|
Amount
|
|
|
|
|
|
|
|
2022
|
|
$
|
1,388,235
|
|
|
2023
|
|
|
-
|
|
|
2024
|
|
|
-
|
|
|
Total future payments:
|
|
$
|
1,388,235
|
|
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, 2021 and 2020, the Company made total
principal payments of $62,717 and $65,465, respectively.
The future payments under
the equipment financing agreements are as follows:
|
Year
|
|
Amount
|
|
|
2022
|
|
|
38,070
|
|
|
|
|
|
|
|
|
Total future payments:
|
|
$
|
38,070
|
|
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
1,292
|
|
|
|
|
|
|
|
|
Present value of net minimum equipment financing payments
|
|
$
|
36,778
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
36,778
|
|
|
|
|
|
|
|
|
Long-term equipment financing obligation
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Lease cost:
|
|
|
|
|
|
Amortization of ROU assets
|
|
$
|
62,717
|
|
|
Interest on lease liabilities
|
|
|
4,343
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cashflow from equipment financing:
|
|
$
|
4,343
|
|
|
Financing cashflow from equipment financing:
|
|
|
62,717
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term - equipment financing:
|
|
|
1.00 years
|
|
|
|
|
|
|
|
|
Weighted-average discount rate:
|
|
|
6.51
|
%
|
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 were $379,556 and $160,574, for
2021 and 2020, respectively. Below is a list of our primary operating leases:
|
Location
|
|
Annual
Rent
|
|
|
Lease
Expiration
Date
|
|
Business Use
|
|
Approx. Sq.
Ft.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
825 W. Bitters, Suite 104, San Antonio, TX 78216
|
|
$
|
26,529
|
|
|
Jul-22
|
|
Executive offices
|
|
|
1,546
|
|
|
1610 Royal Palm Avenue, Suite 300, Fort Myers, FL 33901
|
|
$
|
82,102
|
|
|
Dec-25
|
|
Office space and network facilities
|
|
|
6,800
|
|
|
2121 Ponce de Leon Blvd., Suite 200, Coral Gables FL 33134
|
|
$
|
164,475
|
|
|
Jul-22
|
|
Office space & wireless internet network
|
|
|
4,623
|
|
|
7218 McNeil Dr., FL-1, Austin, TX 78729
|
|
$
|
21,000
|
|
|
Mar-24
|
|
Network facilities
|
|
|
25
|
|
|
6606 Lyndon B. Johnson, Fwy., FL1, Suite 125, Dallas, TX 75240
|
|
$
|
14,200
|
|
|
May-22
|
|
Network facilities
|
|
|
25
|
|
|
9701 S. John Young Parkway, Orlando, FL 32819
|
|
$
|
30,528
|
|
|
May-23
|
|
Network facilities
|
|
|
540
|
|
|
50 NE 9th St, Miami, FL 3313
|
|
$
|
49,560
|
|
|
May-23
|
|
Network facilities
|
|
|
25
|
|
|
350 NW 215 St., Miami Gardens, FL 33169
|
|
$
|
23,403
|
|
|
May-22
|
|
Wireless internet network
|
|
|
100
|
|
|
8333 NW 53rd St, Doral, FL 33166
|
|
$
|
13,612
|
|
|
Jul-25
|
|
Wireless internet network
|
|
|
100
|
|
|
100 SE 2nd Street, Miami, FL 33131
|
|
$
|
36,024
|
|
|
Jan-24
|
|
Wireless internet network
|
|
|
100
|
|
|
9055 SW 73rd Ct, Miami, FL 33156
|
|
$
|
8,674
|
|
|
Dec-23
|
|
Wireless internet network
|
|
|
100
|
|
|
9517 Fontainebleau Blvd., Miami, FL 33172
|
|
$
|
11,860
|
|
|
Aug-24
|
|
Wireless internet network
|
|
|
100
|
|
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. 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. 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 5.0%.
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.
The Company has not entered into any sale and
leaseback transactions during the year ended July 31, 2021.
On January 1, 2021, the Company entered into a
new office lease, with a monthly base lease payment and applicable shared expenses of $4,750 and $2,140, respectively. The base rent will
increase on an annual basis by 2% of the base lease payment. The lease expires on January 1, 2026, and at the option of the Company, the
lease can be extended for one (1) five (5) year term with a base rent at the prevailing market rate at the time of the renewal.
In November 2020, as part of the acquisition of
Nexogy, Inc., the Company assumed an office lease in Coral Gable Florida, two network facilities and five wireless internet network leases.
These leases are identified in the table above. The leases’ expiration dates range from May 2022 to July 2025, and at the option
of the Company, the leases can be extended for various periods ranging from one to five years, with a base rent at the prevailing market
rate at the time of the renewal.
Information related to our operating leases is
as follows:
|
ROU Asset
|
|
July 31, 2020
|
|
$
|
176,097
|
|
|
Amortization
|
|
|
|
$
|
(327,864
|
)
|
|
Addition - Asset
|
|
|
|
$
|
1,086,027
|
|
|
ROU Asset
|
|
July 31, 2021
|
|
$
|
934,260
|
|
|
|
|
|
|
|
|
|
|
Lease Liability
|
|
July 31, 2020
|
|
$
|
176,097
|
|
|
Amortization
|
|
|
|
$
|
(327,864
|
)
|
|
Addition - Liability
|
|
|
|
$
|
1,086,027
|
|
|
Lease Liability
|
|
July 31, 2021
|
|
$
|
934,260
|
|
|
|
|
|
|
|
|
|
|
Lease Liability
|
|
Short term
|
|
$
|
503,443
|
|
|
Lease Liability
|
|
Long term
|
|
$
|
430,817
|
|
|
Lease Liability
|
|
Total:
|
|
$
|
934,260
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost:
|
|
|
|
$
|
379,556
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease labilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cashflow from operating leases:
|
|
|
|
$
|
379,556
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remain lease
term-operating lease:
|
|
|
|
|
2.9 years
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
|
5.0
|
%
|
The future minimum lease payment under the operating
leases are as follows:
|
|
|
Lease
|
|
|
12 Months ending July 31,
|
|
Payments
|
|
|
2022
|
|
$
|
481,967
|
|
|
2023
|
|
|
242,181
|
|
|
2024
|
|
|
142,912
|
|
|
2025
|
|
|
101,512
|
|
|
2026
|
|
|
35,896
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
1,004,468
|
|
NOTE 15 – BUSINESS
ACQUISITIONS
Acquisitions
Nexogy Merger
On November 17, 2020, T3 Nevada’s wholly
owned subsidiary, Nexogy Acquisition, Inc., merged with and into Nexogy, Inc. (“Nexogy”) resulting in Nexogy becoming a wholly
owned subsidiary of T3 Nevada (the “Merger”). Nexogy is a leading provider in South Florida of Unified Communications as a
Service and managed services, offering a portfolio of cloud-based solutions to the high-growth SMB market.
The purchase price for Nexogy was $9 million in
cash, plus an additional $452,000 in initial excess Net Working Capital, with $900,000 of the $9 million being placed in an indemnity
escrow account and $50,000 of the $9 million being placed in a working capital escrow account. In addition, at the closing of the Merger,
T3 Nevada paid a number of Nexogy’s liabilities which were included in the $9 million purchase price.
ActivePBX Asset Purchase
On November 17, 2020, our indirect, wholly owned
subsidiary, T3 Communications, Inc., a Florida corporation (“T3 Florida”), executed and closed on an Asset Purchase Agreement
(the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation (“Seller”). Pursuant to the Purchase
Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software
and other licenses and miscellaneous assets used in connection with the operation of Seller’s telecommunications business known
as ActivePBX (collectively, the “Purchased Assets”).
The aggregate purchase price for the Purchased
Assets was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase Price”). $1,190,000 of the
Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover
part of potential future indemnification obligations of Seller to T3 Florida due to Seller’s breaches, if any,
of any representations and warranties made to T3 Florida by Seller under the Purchase Agreement, and $40,000 of such amount
being credited to T3 Florida against a payment in that amount made by T3 Florida to Seller pursuant to the Second Amendment to Letter
of Intent between Seller and T3 Florida dated as of October 15, 2020.
Part of the Purchase Price is payable in
8 equal quarterly payments of $136,250, subject to T3 Florida achieving quarterly post-purchase recurring
revenues under monthly contracts or subscriptions from the acquired customer base, excluding charges for taxes, regulatory fees,
additional set-up fees, equipment purchases or lease, and consulting fees. To the extent that a quarterly revenue threshold is not reached,
the amount of the corresponding quarterly payment shall be reduced on a proportional basis. T3 Florida’s $1,190,000 payment obligation
is represented by a promissory note of T3 Florida in the form included as an exhibit to the Purchase Agreement. The note, in turn, is
subject to the Subordination Agreement, included as an Exhibit to the Purchase Agreement, among Seller, the Company’s parent, T3
Nevada, and Post Road Administrative, LLC, in its capacity as administrative agent for the Post Road lenders. $275,000 of the
Purchase Price (the “Customer Renewal Value”) represents an incentive earn-out to be paid with respect to Seller’s
customer accounts which are transferred to T3 Florida at closing, that are renewed, expanded and/or revised with T3 Florida for a minimum
term of twelve months with an auto-renewal for 12 months.
In connection with the Purchase Agreement, we
entered into Consulting Agreements and a Non-Compete Agreement with each of Alex Gonzalez and Jose Gonzalez, the Chief Executive Officer
and Chief Technology Officer of Seller.
The total purchase price for Nexogy and ActivePBX
were $9,452,000 and $2,555,000, respectively. The acquisitions were accounted for under the purchase method of accounting, with Digerati
identified as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed by Digerati was allocated
to customer contracts acquired and intangible assets based on their estimated fair values as of November 17, 2020. Allocation of the purchase
price is based on the final assessment by management.
The following information summarizes the allocation
of the fair values assigned to the assets at the purchase date.
|
|
|
Nexogy
|
|
|
ActivePBX
|
|
|
Total
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
358
|
|
|
$
|
-
|
|
|
$
|
358
|
|
|
Accounts receivables
|
|
|
278
|
|
|
|
78
|
|
|
|
356
|
|
|
Intangible Assets and Goodwill
|
|
|
9,036
|
|
|
|
2,555
|
|
|
|
11,591
|
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other Assets
|
|
|
48
|
|
|
|
2
|
|
|
|
50
|
|
|
Right-to-use Asset
|
|
|
646
|
|
|
|
-
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets
|
|
$
|
10,366
|
|
|
$
|
2,635
|
|
|
$
|
13,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Liabilities assumed
|
|
|
(268
|
)
|
|
|
(80
|
)
|
|
|
(348
|
)
|
|
Less: Operating lease liability
|
|
|
(646
|
)
|
|
|
-
|
|
|
|
(646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Purchase price
|
|
$
|
9,452
|
|
|
$
|
2,555
|
|
|
$
|
12,007
|
|
The following table summarizes the estimated cost
of intangible assets related to the acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
Useful life
|
|
|
|
|
Nexogy
|
|
|
ActivePBX
|
|
|
Total
|
|
|
(years)
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
$
|
3,700
|
|
|
$
|
1,610
|
|
|
$
|
5,310
|
|
|
|
7
|
|
|
Trade Names & Trademarks
|
|
|
2,600
|
|
|
|
270
|
|
|
|
2,870
|
|
|
|
7
|
|
|
Non-compete Agreement
|
|
|
200
|
|
|
|
90
|
|
|
|
290
|
|
|
|
2-3
|
|
|
Goodwill
|
|
|
2,536
|
|
|
|
585
|
|
|
|
3,121
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,036
|
|
|
$
|
2,555
|
|
|
$
|
11,591
|
|
|
|
|
|
The Company incurred approximately $460,000 in
costs associated with the acquisitions. These included legal, regulatory, and accounting. The Company incurred and expensed these costs
of $158,000 and $302,000, during the year ended July 31, 2020, and year ended July 31, 2021, respectively.
Pro-forma
The following schedule contains unaudited proforma
consolidated results of operations for both acquisitions for the Years ended July 31, 2021, and 2020 as if the acquisition occurred on
August 1, 2019. The unaudited pro-forma results of operations are presented for informational purposes only and are not indicative of
the results of operations that would have been achieved if the acquisition had taken place on August 1, 2019, or of results that may occur
in the future.
|
|
|
Year ended July 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Reported
|
|
|
Pro-forma
|
|
|
Reported
|
|
|
Pro-forma
|
|
|
Revenue
|
|
$
|
12,416
|
|
|
$
|
14,914
|
|
|
$
|
6,279
|
|
|
$
|
14,575
|
|
|
Income (loss) from operations
|
|
|
(2,398
|
)
|
|
|
(1,881
|
)
|
|
|
(2,112
|
)
|
|
|
(2,085
|
)
|
|
Net income (loss)
|
|
$
|
(17,015
|
)
|
|
$
|
(16,570
|
)
|
|
$
|
(3,424
|
)
|
|
$
|
(3,573
|
)
|
|
Earnings (loss) per common share-Basic and Diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
NOTE 16 –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, 2021 and 2020. During the years ended July 31, 2021 and 2020, the Company declared a dividend of $20,000,
and $19,000, respectively.
The “Conversion
Price” at which shares of Common Stock shall be issuable upon conversion of any shares of Series A Preferred Stock shall initially
be the greater of (i) $0.30 per share, (ii) a 30% discount to the offering price of the Common Stock (or Common Stock equivalent) in a
$10 million or greater equity financing that closes concurrently with an up-listing of the Company Common Stock on the NYSE American or
Nasdaq, in the event of such up-listing, and (iii) a 30% discount to the average closing price per share of the Common Stock for the 5
consecutive trading days commencing upon the date the Common Stock is up-listed on either the NYSE American or Nasdaq in which there is
no concurrent $10 million equity financing.
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. In March 2021, the Company issued a total of 17,965 shares
of Series B Preferred Stock for settlement of debt of $16,000 on a promissory note and $1,965 in accrued interest.
The Company had 425,442
and 407,477 shares of Convertible Series B Preferred Stock outstanding as of July 31, 2021 and July 31, 2020, respectively. No dividends
are payable on the Convertible Series B Preferred Stock.
The terms of our Series B Preferred Stock allow
for:
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.
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”).
On February 25, 2021, Digerati’s Board
of Directors approved the issuance of the following shares of Series C Convertible Preferred Stock to officers:
|
|
●
|
Arthur L. Smith – 28,928 shares of Series C Convertible
Preferred Stock
|
|
|
●
|
Antonio Estrada – 19,399 shares of Series C Convertible
Preferred Stock
|
|
|
●
|
Craig Clement – 7,073 shares of Series C Convertible
Preferred Stock
|
The Series C Convertible
Preferred Stock were issued for accrued compensation to the management team of $554,000.
The Company had 55,400
and 0 shares of Convertible Series C Preferred Stock outstanding as of July 31, 2021 and July 31, 2020, respectively. No dividends are
payable on the Convertible Series C Preferred Stock.
The terms of our Series C Preferred Stock allow
for:
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.
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”).
On November 17, 2020, Digerati’s Board
of Directors approved the issuance of the following shares of Series F Super Voting Preferred Stock to officers:
|
|
●
|
Arthur L. Smith - 34 shares of Series F Super Voting Preferred
Stock
|
|
|
●
|
Antonio Estrada - 33 shares of Series F Super Voting Preferred
Stock
|
|
|
●
|
Craig Clement - 33 shares of Series F Super Voting Preferred
Stock
|
The Company had 100 and
0 shares of the Series F Super Voting Preferred Stock outstanding as of July 31, 2021 and July 31, 2020, respectively. No dividends are
payable on the Series F Super Voting Preferred Stock.
The terms of our Series F Super Voting Preferred
Stock allow for:
Voting Rights. As long as any
shares of Series F Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the Holders of a
majority of the then outstanding shares of the Series F Preferred Stock, (a) alter or change adversely the powers, preferences or
rights given to the Series F Preferred Stock or alter or amend this Certificate of Designation, (b) amend its certificate of
incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (c) increase the number of
authorized shares of Series F Preferred Stock, (d) sell or otherwise dispose of any assets of the Corporation not in the ordinary
course of business, (e) sell or otherwise effect or undergo any change of control of the corporation, (f) effect a reverse split of
its Common Stock, or (g) enter into any agreement with respect to any of the foregoing.
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.
NOTE 17 – EQUITY
During the year ended July
31, 2021 and July 31, 2020, we issued 21,275,629 and 49,718,880 shares of common stock for debt conversion and settlement of $428,375
and $808,573, respectively.
During the year ended July
31, 2021 and July 31, 2020, we issued 4,250,000 and 400,000 shares of common stock for professional services with a fair market value
of $222,950 and $15,240, respectively.
During the year ended July
31, 2021, we issued 1,000,000 shares of common stock for settlement of accounts payable with a fair market value of $60,500.
During
the year ended July 31, 2021 and July 31, 2020, we issued 7,858,820 and 21,811,100, shares to various employees as part of the Company’s
Non-Standardized profit-sharing plan contribution and shares issued in lieu of cash compensation with a fair market value of $264,712
and $801,891, respectively.
During the year ended July
31, 2021 and July 31, 2020, we issued 2,100,000 and 500,000 shares in conjunction with various promissory notes with a fair market value
of $146,942 and $11,626, respectively.
During the year ended July
31, 2021 and July 31, 2020, we issued 400,000 and 780,000 shares in conjunction with various extension agreements for promissory notes
with a fair market value of $58,760 and $50,890, respectively.
During the year ended July
31, 2021, we received $33,000 in proceeds from the exercise of 330,000 warrants, with an exercise price of $0.10 per warrant, as a result
we issued 330,000 shares of common stock.
During the year ended July
31, 2021, we issued 4,230,000 options to purchase common shares to various employees with an exercise price ranging from $0.042 to $0.1475
per share and a term of 5 years. At issuance, 200,000 of the options vested, 400,000 of the options will vest equally over a period of
two years, and 3,630,000 of the options will vest equally over a period of three years. At issuance the stock options had a fair market
value of $267,343.
During
the year ended July 31, 2021, we issued 55,400 shares of the Series C Convertible Preferred Stock to various members of the Management
team. The Series C Convertible Preferred Stock were issued for settlement of accrued compensation to the management team of $554,010.
There was no gain or loss recorded on the transaction.
During the year ended July
31, 2021 and July 31, 2020, we issued 17,965 and 407,477 shares of Series B Preferred Stock for payment of debt of $17,965 and $407,477,
respectively.
During the year ended July
31, 2020, the Company issued 392,912 shares of common stock for payment of $18,783 in accrued interest on debt.
During the year ended July
31, 2020, we received proceeds of $98,966, net of administration fee of $5,000 from the issuance of 3,893,625 shares.
During the year ended July
31, 2020, we issued 86,667 shares of common stock in conjunction with the conversion of 25,000 shares of the Series A Convertible Preferred
stock and $1,189 in accrued dividends.
During the year ended July
31, 2020, the Company received $25,000 in professional services and issued 25,000 shares of Series A Convertible Preferred Stock at a
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.
NOTE 18 – SUBSEQUENT EVENTS
Promissory Notes & Equity Issuance
On August 31, 2021, the Company
entered into a $75,000 promissory note, with a maturity date of August 31, 2022, and annual interest rate of 8%. In conjunction with the
promissory note, we issued 150,000 shares of common stock. At the time of issuance, the Company recognized the relative fair market value
of the shares of $13,635 as debt discount, and it will be amortized to interest expense during the term of the promissory note.
On September 29, 2021, the
Company entered into a $75,000 promissory note, with a maturity date of September 29, 2022, and annual interest rate of 8%. In conjunction
with the promissory note, we issued 150,000 shares of common stock. At the time of issuance, the Company recognized the relative fair
market value of the shares of $10,788 as debt discount, and it will be amortized to interest expense during the term of the promissory
note.
Promissory Note Extension
On September 6, 2021, the
holder of a promissory note for $50,000, originally secured on October 22, 2018 and a maturity date of July 31, 2021, agreed to extend
the maturity date until December 31, 2021, all other terms remained the same.
Lawsuit Settlement
On September 21, 2021, T3
Communications, Inc.(“T3”), a subsidiary of the Company, entered into a settlement agreement with Carolina
Financial Securities, LLC (“CFS”). Under the settlement agreement the parties agreed to resolve all issues and claims
related to the lawsuit. Pursuant to the settlement agreement, T3 agreed to pay CFS a total of $300,000, payable as follows: $100,000 by
October 15, 2021, and $200,000 payable in 15 monthly installments of $13,333.33 beginning November 15, 2021. As of July 31, 2021, the
Company accounted for the settlement amount in accrued expenses. Subsequently, on October 15, 2021, the Company submitted a payment of
$100,000.