NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim consolidated
financial statements of Digerati Technologies, Inc. (“we;” “us,” “our,” or the “Company”)
have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the United
States Securities and Exchange Commission. In the opinion of management, these interim financial statements contain all adjustments, consisting
of normal recurring adjustments necessary for a fair presentation of financial position and the results of operations for the interim
periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the
full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosure contained in the audited
consolidated financial statements for the year ended July 31, 2021 contained in the Company’s Form 10-K filed on October 26, 2021
have been omitted.
Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share is
computed by dividing loss attributable to common stockholders by the weighted average number of shares of Common Stock outstanding during
the period. Basic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average
number of shares of Common Stock outstanding during the respective period presented in the Company’s accompanying condensed consolidated
financial statements. Fully-diluted earnings (loss) per share is computed similarly to basic income (loss) per share except that the denominator
is increased to include the number of Common Stock equivalents (primarily outstanding options and warrants).
|
|
Three months ended
October 31,
|
|
(in thousands, except per share data)
|
|
2021
|
|
|
2020
|
|
NUMERATOR:
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
2,419
|
|
|
$
|
(726
|
)
|
|
|
|
|
|
|
|
|
|
DENOMINATOR:
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
|
|
|
138,719,017
|
|
|
|
119,914,246
|
|
INCOME (LOSS) PER COMMON SHARE - BASIC
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
|
|
Three months ended
October 31,
|
|
(in thousands, except per share data)
|
|
2021
|
|
|
2020
|
|
NUMERATOR:
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
2,419
|
|
|
$
|
(726
|
)
|
Less: adjustments to net income
|
|
$
|
(4,331
|
)
|
|
$
|
-
|
|
NET INCOME (LOSS) - DILUTED SHARES OUTSTANDING CALCULATION
|
|
$
|
(1,912
|
)
|
|
$
|
(726
|
)
|
|
|
|
|
|
|
|
|
|
DENOMINATOR:
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
|
|
|
138,719,017
|
|
|
|
119,914,246
|
|
Warrants and Options to purchase common stock
|
|
|
100,731,026
|
|
|
|
-
|
|
Convertible Debt - Derivative
|
|
|
11,273,568
|
|
|
|
-
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED
|
|
|
250,723,611
|
|
|
|
119,914,246
|
|
LOSS PER COMMON SHARE - DILUTED
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
The Company excluded the following securities from the calculation
of basic and diluted net loss per share as the effect would have been antidilutive
|
|
Three months ended
October 31,
|
|
|
|
2021
|
|
|
2020
|
|
Convertible Preferred Shares
|
|
|
56,405,216
|
|
|
|
-
|
|
Convertible Debt
|
|
|
11,966,667
|
|
|
|
-
|
|
Total
|
|
|
68,371,883
|
|
|
|
-
|
|
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, for convertible notes with fixed conversion price, notes with variable conversion feature with a floor and warrants
with a conversion price floor. The Company will evaluate the reserved treasury shares on a quarterly basis, and if necessary, reserve
additional treasury shares. As of October 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.
Customers and Suppliers
We rely on various suppliers to provide services
in connection with our VOIP and UCaaS offerings. Our customers include businesses in various industries including Healthcare, Banking,
Financial Services, Legal, Real Estate, and Construction. We are not dependent upon any single supplier or customer.
During the three months ended October 31, 2021,
and 2020, the Company did not derive a significant amount of revenue from one single customer.
As of the three months ended October 31, 2021,
and 2020, the Company did not derive a significant number of accounts receivable from one single customer.
Sources of revenue:
Cloud-based hosted Services. The Company recognizes
cloud-based hosted services revenue, mainly from subscription services for its cloud telephony applications that includes hosted IP/PBX
services, SIP trunking, call center applications, auto attendant, voice, and web conferencing, call recording, messaging, voicemail to
email conversion, integrated mobility applications that are device and location agnostic, and other customized applications. Other services
include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN (Software-defined
Wide Area Network), fiber, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster recovery services.
The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract
with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the
transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied.
Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
Service Revenue
Service revenue from
subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over the contractual subscription
term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription services
being rendered are recorded as a deferred revenue. Usage fees, either bundled or not bundled, are recognized when the Company has a right
to invoice. Professional services for configuration, system integration, optimization, customer training and/or education are primarily
billed on a fixed-fee basis and are performed by the Company directly. Alternatively, customers may choose to perform these services themselves
or engage their own third-party service providers. Professional services revenue is recognized over time, generally as services are activated
for the customer.
Product
Revenue
The
Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is generally
upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical experience.
Disaggregation of Cloud software
and service revenue
Summary of disaggregated revenue is as follows (in thousands):
|
|
For the
Three Months ended
October 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Cloud software and service revenue
|
|
$
|
3,703
|
|
|
$
|
1,549
|
|
Product revenue
|
|
|
74
|
|
|
|
3
|
|
Total operating revenues
|
|
$
|
3,777
|
|
|
$
|
1,552
|
|
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 October 31, 2021, and July 31, 2021, were $16,107 and $17,661, 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 October
31, 2021, and July 31, 2021, were $2,994 and $19,984, 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 October 31, 2021, and July 31, 2021, Digerati’s customer deposits balance was $0 and $0, 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 three months ended October 31, 2021, and October
31, 2020, were $323,704 and $18,190, respectively.
Direct Costs - Cloud software and service
We incur bandwidth and colocation charges in connection
with our UCaaS or cloud communication services. The bandwidth charges are incurred as part of the connectivity between our customers to
allow them access to our various services. We also incur costs from underlying providers for fiber, Internet broadband, and telecommunication
circuits in connection with our data and connectivity solutions.
Derivative financial instruments.
Digerati does not use derivative instruments to
hedge exposures to cash flow, market, or foreign currency risks. However, Digerati analyzes its convertible instruments and free-standing
instruments such as warrants for derivative liability accounting.
For derivative financial
instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued
at each reporting date. Any changes in fair value are recorded as non-operating, non-cash income or expense for each reporting period.
For derivative notes payable conversion options and warrants Digerati uses the Black-Scholes option-pricing model to value the derivative
instruments.
The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument is probable within the next 12 months from the balance sheet date.
Fair Value of Financial Instruments.
Fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is used which requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value
hierarchy based on the three levels of inputs that may be used to measure fair value are as follows:
Level 1 – Quoted
prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other
than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs
that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires
significant judgment or estimation.
For certain of our financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due
to the short maturity of these instruments. The carrying value of our long-term debt approximates its fair value based on the quoted market
prices for the same or similar issues or the current rates offered to us for debt of the same remaining maturities.
Our derivative liabilities as of October 31, 2021
and July 31, 2021 are approximately $12,340,000 and $16,773,000, 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
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
liabilities
|
|
|
inputs
|
|
|
inputs
|
|
Description
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes derivative liability at July 31, 2021
|
|
$
|
16,773,383
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
16,773,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes derivative liability at October 31, 2021
|
|
$
|
12,339,503
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
12,339,503
|
|
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 three months ended October 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
|
|
|
81.43% - 239.82%
|
|
Risk-free interest rate
|
|
|
0.05% - 1.55%
|
|
Expected term
|
|
|
0.21 - 9.05 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, 2020
|
|
$
|
606,123
|
|
Derivative from new convertible promissory notes 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
|
|
Derivative liability resolved to additional paid in capital due to debt conversion
|
|
|
-
|
|
Derivative gain
|
|
|
(4,433,880
|
)
|
Balance at October 31, 2021
|
|
$
|
12,339,503
|
|
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 three months ending October 31, 2021 and
2020, the Company accounted for a noncontrolling interest of $158,000 and $35,000, 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 August 2020, the FASB issued “ASU 2020-06,
Debt with Conversion and Other Options (Subtopic 47020) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40)” which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate
the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition
or a fully retrospective method of transition is permissible for the adoption of this standard. Update No. 2020-06 is effective for fiscal
years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than
the fiscal year beginning after December 15, 2020. The Company is currently evaluating the potential on its financial statements.
NOTE 2 – GOING CONCERN
Financial Condition
The Company’s consolidated financial statements
for the three months ending October 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 $102,956,000, a working capital deficit of approximately $21,069,000 and total liabilities
of $30,475,000, which includes $12,340,000 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 October 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 2022 certain members of our executive management team have taken a significant
portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to
adopt best practices from our recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue;
we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams, we have also secured
numerous agent agreements through our recent acquisitions that we anticipate will accelerate revenue growth. In addition, we will continue
to focus on selling a greater number of comprehensive services to our existing customer base. Further, in an effort to increase our revenues,
we will continue to evaluate the acquisition of various assets with emphasis in VoIP Services and Cloud Communication Services. As a result,
during the due diligence process we anticipate incurring significant legal and professional fees.
We have been successful in raising debt and equity
capital in the past and as described in Notes 6,7 and 8. We have financing efforts in place to continue to raise cash through debt and
equity offerings. Although we have successfully completed financings and reduced expenses in the past, we cannot assure you that our plans
to address these matters in the future will be successful.
On November 17, 2020, the Company and T3 Communications,
Inc (“T3 Nevada”), a majority owned subsidiary entered into a credit agreement (the “Credit Agreement”) with Post
Road Administrative LLC and its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post Road”). Pursuant
to the Credit Agreement, Post Road provided T3 Nevada with a secured loan of up to $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 October 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 October 31, 2021, and July 31, 2021:
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
October 31, 2021
|
|
Value
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
NetSapiens - license, 10 years
|
|
$
|
150,000
|
|
|
$
|
(150,000
|
)
|
|
$
|
-
|
|
Customer relationships, 5 years
|
|
|
40,000
|
|
|
|
(30,672
|
)
|
|
|
9,328
|
|
Customer relationships, 7 years
|
|
|
1,480,000
|
|
|
|
(751,791
|
)
|
|
|
728,209
|
|
Customer relationships 7 years
|
|
|
5,310,000
|
|
|
|
(815,714
|
)
|
|
|
4,494,286
|
|
Trademarks, 7 years
|
|
|
2,870,000
|
|
|
|
(410,000
|
)
|
|
|
2,460,000
|
|
Non-compete, 2 & 3 years
|
|
|
291,000
|
|
|
|
(130,000
|
)
|
|
|
161,000
|
|
Marketing & Non-compete, 5 years
|
|
|
800,000
|
|
|
|
(560,000
|
)
|
|
|
240,000
|
|
Total Define-lived Assets
|
|
|
10,941,000
|
|
|
|
(2,848,177
|
)
|
|
|
8,092,823
|
|
Goodwill, Indefinite
|
|
|
3,931,298
|
|
|
|
-
|
|
|
|
3,931,298
|
|
Balance, October 31, 2021
|
|
$
|
14,872,298
|
|
|
$
|
(2,848,177
|
)
|
|
$
|
12,024,121
|
|
|
|
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
|
|
Total amortization expense for the three months
ended October 31, 2021, and 2020 was $433,785 and $94,857, respectively.
NOTE 4 – STOCK-BASED COMPENSATION
In November 2015, the Company adopted the Digerati
Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan authorizes the grant of up to 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 the Company to retain and attract qualified individuals who will contribute to the overall success of the Company.
The Company’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 three months ended October 31, 2021,
we did not issue any new stock options.
During the three months ended October 31, 2020,
we issued:
|
●
|
7,608,820
common shares to various employees as part of the Company’s Non-Standardized profit-sharing plan contribution. The Company recognized
stock-based compensation expense of $247,287 equivalent to the value of the shares calculated based on the share’s closing price
at the grant dates.
|
|
●
|
250,000
common shares to a former member of the Management team for services in lieu of cash compensation. The Company recognized stock-based
compensation expense of approximately $17,500 equivalent to the value of the shares calculated based on the share’s closing price
at the grant dates.
|
During the three months ended October 31, 2020
Digerati recognized $247,287 in stock compensation expense to employees as part of the Company’s Non-Standardized profit-sharing
plan contribution and other stock compensation to employees.
The Company recognized approximately $23,394 and
$20,227 in stock-based compensation expense for stock options to employees for the three months ended October 31, 2021 and 2020, respectively.
Unamortized compensation stock option cost totaled $172,441 and $42,976 at October 31, 2021 and October 31, 2020, respectively.
A summary of the stock options as of October 31,
2021, and July 31, 2021, and the changes during the three months ended October 31, 2021, are presented below:
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
term (years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2021
|
|
|
9,230,000
|
|
|
$
|
0.17
|
|
|
|
2.93
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited and cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at October 31, 2021
|
|
|
9,230,000
|
|
|
$
|
0.17
|
|
|
|
2.67
|
|
Exercisable at October 31, 2021
|
|
|
6,449,641
|
|
|
$
|
0.22
|
|
|
|
2.02
|
|
The aggregate intrinsic value (the difference
between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number
of in-the-money options) of the 9,230,000 and 9,230,000 stock options outstanding at October 31, 2021, and July 31, 2021, was $250,387
and $392,891, respectively.
The aggregate intrinsic value of 6,449,641 and
6,091,863 stock options exercisable at October 31, 2021, and July 31, 2021, was $78,868 and $91,978, respectively.
NOTE 5 – WARRANTS
During the three months ended October 31, 2021
and 2020, the Company did not issue any warrants.
A summary of the warrants as of October 31, 2021,
and July 31, 2021, and the changes during the three months ended October 31, 2021, are presented below:
|
|
Warrants
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
term (years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2021
|
|
|
109,506,179
|
|
|
$
|
0.01
|
|
|
|
9.17
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited and cancelled
|
|
|
(215,000
|
)
|
|
$
|
0.13
|
|
|
|
-
|
|
Outstanding at October 31, 2021
|
|
|
109,291,179
|
|
|
$
|
0.01
|
|
|
|
8.93
|
|
Exercisable at October 31, 2021
|
|
|
82,065,885
|
|
|
$
|
0.01
|
|
|
|
8.92
|
|
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 109,291,179 and 109,506,179 warrants outstanding at October 31, 2021 and July 31, 2021 was $10,719,483
and $14,795,002, respectively.
The aggregate intrinsic value of 82,065,885 and 82,280,885 warrants
exercisable at October 31, 2021 and July 31, 2021 was $8,045,801 and $11,108,930, respectively.
Warrant expense for the three months ended October
31, 2021 and 2020 was $0 and $0, respectively. Unamortized warrant expense totaled $0 and $0 respectively as of October 31, 2021 and July
31, 2021.
For three months ended October
31, 2021, 215,000 warrants expired with an average exercise price of $0.13.
NOTE 6 – NOTES PAYABLE
NON-CONVERTIBLE
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 October 31, 2021, and July
31, 2021, was $50,000.
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 as interest expense 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 three months ended October 31, 2021,
the Company amortized $776,521 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 October 31, 2021, and July 31, 2021, were $4,578,801 and $5,355,322, respectively.
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 $520,389, respectively as of October 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 $173,463 respectively as of October 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):
|
1.
|
Maximum Allowed - Senior Leverage Ratio of 4.30 to 1.00
|
|
|
|
|
2.
|
Minimum Allowed - EBITDA of $851,813
|
|
|
|
|
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 October 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 7 – RELATED PARTY
TRANSACTIONS
During the three months ended October 31, 2021
and 2020, the Company provided VoIP Hosted and fiber services to a Company owned by one of the T3 Communications, Inc., Board Member’s
for $46,150 and $39,769, respectively.
In November 2020, as a result of the of the acquisition
of ActiveServe’s asset, the two sellers became related parties as they continued to be involved as consultants to manage the customer
relationship, the Company will pay on an annual basis $90,000 to each the consultants. As of October 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 three months ended October 31, 2021, the Company paid $134,131 of the principal balance outstanding. The total
principal outstanding on the notes as of October 31, 2021, and July 31, 2021, were $1,000,160 and $1,134,291, respectively. Subsequently,
on November 29, 2021, the Company paid $39,000 for the total balance that was held in escrow.
NOTE 8 – CONVERTIBLE NOTES PAYABLE
At October 31, 2021, and July 31, 2021, convertible
notes payable consisted of the following:
|
|
October 31,
|
|
|
July 31,
|
|
|
|
2021
|
|
|
2021
|
|
CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE
|
|
|
|
|
|
|
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, subsequently the maturity date was extended until December 15, 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. The Company amortized $17,620 as interest expense during the three months ended October 31, 2021. The total unamortized discount on the Note as of October 31, 2021 and July 31, 2021, were $0 and $17,620, respectively. The total principal balance outstanding as of October 31, 2021 and July 31, 2021 was $165,000. (See below variable conversion terms No.1)
|
|
|
165,000
|
|
|
|
165,000
|
|
|
|
|
|
|
|
|
|
|
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 $17,184 as interest
expense during the three months ended October 31, 2021. The total unamortized discount on the Note as of October 31, 2021 and July
31, 2021, were $17,184 and $34,368, respectively. The total principal balance outstanding as of October 31, 2021 and July 31,
2021was $250,000.
|
|
|
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 $40,050 as interest expense during the three months ended October 31, 2021. The total unamortized discount on the Note as of October 31, 2021 and July 31, 2021, were $66,749 and $106,799, respectively. The total principal balance outstanding as of October 31, 2021 and July 31, 2021, was $250,000.
|
|
|
250,000
|
|
|
|
250,000
|
|
On August 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of August 31, 2022. In connection with the execution of the note, the Company issued 150,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $13,635 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date.The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized as interest expense during the three months ended October 31, 2021, $2,272. The total unamortized discount on the Note as of October 31, 2021, was $11,363. The total principal balance outstanding as of October 31, 2021, was $75,000.
|
|
|
75,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On September 29, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of September 29, 2022. In connection with the execution of the note, the Company issued 150,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $10,788 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $899 as interest expense during the three months ended October 31, 2021. The total unamortized discount on the Note as of October 31, 2021, was $9,889. The total principal balance outstanding as of October 31, 2021, was $75,000.
|
|
|
75,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On October 22, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $150,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of October 22, 2022. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $13,965 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized as interest expense during the three months ended October 31, 2021, $0. The total unamortized discount on the Note as of October 31, 2021, was $13,965. The total principal balance outstanding as of October 31, 2021, was $150,000.
|
|
|
150,000
|
|
|
|
-
|
|
Total convertible notes payables non-derivative:
|
|
$
|
965,000
|
|
|
$
|
665,000
|
|
CONVERTIBLE
NOTES PAYABLE - DERIVATIVE
On July 27, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $275,000, annual interest rate of 8% and a maturity date of March 27, 2021. After payment of transaction-related expenses and closing fees of $35,000, net proceeds to the Company from the Note totaled $240,000. The Company recorded these discounts and cost of $35,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $11,626 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in this Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.05 (five) cents or (b). 75% of the lowest traded price in the prior fifteen trading days immediately preceding the Notice of Conversion. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. The Company recognized $61,678 of derivative liability and directly amortized all associated debt discount of $61,678 as interest expense. Additionally, on July 31, 2021, the holder agreed to extend the maturity date until January 31, 2022. The total principal balance outstanding as of October 31, 2021, and July 31, 2021, was $355,000.
|
|
|
355,000
|
|
|
|
355,000
|
|
|
|
|
|
|
|
|
|
|
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 October 31, 2021, and July 31, 2021, were $13,920 and $27,840, respectively. The Company amortized $13,920 of debt discount as interest expense during the three months ended October 31, 2021. The total principal balance outstanding as of October 31, 2021, and July 31, 2021, was $80,235.
|
|
|
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 October 31, 2021, and July 31, 2021, were $58,328 and $102,083, respectively. The Company amortized $43,755 of debt discount as interest expense during the three months ended October 31, 2021. The total principal balance outstanding as of October 31, 2021, and July 31, 2021, was $175,000.
|
|
|
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 October 31, 2021, and July 31, 2021, were $20,383 and $50,945, respectively. The Company amortized $30,562 of debt discount as interest expense during the three months ended October 31, 2021. The total principal balance outstanding as of October 31, 2021 and July 31, 2021, was $113,000.
|
|
|
113,000
|
|
|
|
113,000
|
|
Total convertible notes payable - derivative:
|
|
$
|
723,235
|
|
|
$
|
723,235
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable derivative and non-derivative
|
|
|
1,688,235
|
|
|
|
1,388,235
|
|
Less: discount on convertible notes payable
|
|
|
(211,781
|
)
|
|
|
(339,654
|
)
|
Total convertible notes payable, net of discount
|
|
|
1,476,454
|
|
|
|
1,048,581
|
|
Less: current portion of convertible notes payable
|
|
|
(1,476,454
|
)
|
|
|
(1,048,581
|
)
|
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 October 31, 2021, and July 31, 2021, were $211,781 and $339,654, respectively. The total principal balance outstanding as
of October 31, 2021, and July 31, 2021, were $1,688,235 and $1,388,235, respectively. During the three months ended October 31, 2021 and
October 31, 2020, the Company amortized $127,872 and $188,692, respectively, of debt discount as interest expense.
NOTE 9 - LEASES
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. See
table below:
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
|
|
The Company has not entered into any sale and
leaseback transactions during the three months ended October 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.
Amounts recognized on July 31, 2021, and October
31, 2021, for operating leases are as follows:
ROU Asset
|
|
July 31, 2021
|
|
$
|
934,260
|
|
Amortization
|
|
|
|
$
|
(112,191
|
)
|
Addition - Asset
|
|
|
|
$
|
-
|
|
ROU Asset
|
|
October 31, 2021
|
|
$
|
822,069
|
|
|
|
|
|
|
|
|
Lease Liability
|
|
July 31, 2021
|
|
$
|
934,260
|
|
Amortization
|
|
|
|
$
|
(112,191
|
)
|
Addition - Liability
|
|
|
|
$
|
-
|
|
Lease Liability
|
|
October 31, 2021
|
|
$
|
822,069
|
|
|
|
|
|
|
|
|
Lease Liability
|
|
Short term
|
|
$
|
477,748
|
|
Lease Liability
|
|
Long term
|
|
$
|
344,321
|
|
Lease Liability
|
|
Total:
|
|
$
|
822,069
|
|
Operating lease cost:
|
|
$
|
123,403
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease labilities
|
|
|
|
|
|
|
|
|
|
Operating cashflow from operating leases:
|
|
$
|
123,403
|
|
|
|
|
|
|
Weighted-average remain lease term-operating lease:
|
|
|
2.8 years
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
5.0
|
%
|
For the period ended October 31, 2021, the amortization
of operating ROU assets was $112,191.
For the period ended October 31, 2021, the amortization
of operating lease liabilities was $112,191.
The future minimum lease payment under the operating
leases are as follows:
|
|
Lease
|
|
Period Ending July, 31
|
|
Payments
|
|
2022 (remaining 9 Months)
|
|
$
|
481,967
|
|
2023
|
|
|
242,181
|
|
2024
|
|
|
142,912
|
|
2025
|
|
|
101,512
|
|
2026
|
|
|
35,896
|
|
Total:
|
|
$
|
1,004,469
|
|
NOTE 10 – PREFERED
STOCK
CONVERTIBLE SERIES
A PREFERRED STOCK
In March 2019, the Company’s
Board of Directors designated and authorized the issuance up to 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 the Convertible Series
A Preferred Stock outstanding as of October 31, 2021. During the three months ending October 31, 2021, the Company declared a dividend
of $5,000 and had $43,000 as accumulated dividends as of October 31, 2021.
The “Conversion
Price” at which shares of Common Stock shall be issuable upon conversion of any shares of Series A Preferred Stock shall initially
be the greater of (i) $0.30 per share, (ii) a 30% discount to the offering price of the Common Stock (or Common Stock equivalent) in a
$10 million or greater equity financing that closes concurrently with an up-listing of the Company Common Stock on the NYSE American or
Nasdaq, in the event of such up-listing, and (iii) a 30% discount to the average closing price per share of the Common Stock for the 5
consecutive trading days commencing upon the date the Common Stock is up-listed on either the NYSE American or Nasdaq in which there is
no concurrent $10 million equity financing.
During the three months ended October 31, 2021,
the Company evaluated Series A Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during
the period and determined that the convertible shares were classified as equity instruments.
CONVERTIBLE SERIES B PREFERRED
STOCK
In April 2020, the Company’s
Board of Directors designated and authorized the issuance up to 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
shares of Convertible Series B Preferred Stock outstanding as of October 31, 2021. 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.
During the three months ended October 31, 2021,
the Company evaluated Series B Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during
the period and determined that the convertible shares were classified as equity instruments.
CONVERTIBLE SERIES
C PREFERRED STOCK
In July 2020, the Company’s
Board of Directors designated and authorized the issuance up to 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.:
|
●
|
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
shares of Convertible Series C Preferred Stock outstanding as of October 31, 2021. 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:
|
●
|
Arthur
L. Smith - 34 shares of Series F Super Voting Preferred Stock
|
|
|
|
|
●
|
Antonio
Estrada - 33 shares of Series F Super Voting Preferred Stock
|
|
|
|
|
●
|
Craig
Clement - 33 shares of Series F Super Voting Preferred Stock
|
The Company had 100 shares
outstanding of the Series F Super Voting Preferred Stock as of October 31, 2021. 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 11 – EQUITY
During the three months ended
October 31, 2021, the Company issued the following shares of common stock:
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.
On October 22, 2021, the Company
entered into a $150,000 promissory note, with a maturity date of October 22, 2022, and annual interest rate of 8%. In conjunction with
the promissory note, we issued 300,000 shares of common stock. At the time of issuance, the Company recognized the relative fair market
value of the shares of $13,965 as debt discount, and it will be amortized to interest expense during the term of the promissory note.