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 dilutive Common Stock equivalents using the treasury stock method for options and warrants and the if-converted method for convertible debt.
| |
Three months ended April 30, | | |
Nine months ended April 30, | |
(in thousands, except per share data) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
NUMERATOR: | |
| | |
| | |
| | |
| |
NET INCOME (LOSS) | |
$ | 3,902 | | |
$ | (12,803 | ) | |
$ | (4,726 | ) | |
$ | (15,484 | ) |
| |
| | | |
| | | |
| | | |
| | |
DENOMINATOR: | |
| | | |
| | | |
| | | |
| | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | |
| 139,751,107 | | |
| 136,719,871 | | |
| 139,285,833 | | |
| 126,524,312 | |
INCOME (LOSS) PER COMMON SHARE - BASIC | |
$ | 0.03 | | |
$ | (0.09 | ) | |
$ | (0.03 | ) | |
$ | (0.12 | ) |
| |
Three months ended April 30, | | |
Nine months ended April 30, | |
(in
thousands, except per share data) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
NUMERATOR: | |
| | |
| | |
| | |
| |
NET INCOME (LOSS) | |
$ | 3,902 | | |
$ | (12,803 | ) | |
$ | (4,726 | ) | |
$ | (15,484 | ) |
Less: adjustments to net income | |
$ | (6,759 | ) | |
$ | - | | |
$ | - | | |
$ | - | |
NET INCOME (LOSS) - DILUTED SHARES OUTSTANDING CALCULATION | |
$ | (2,857 | ) | |
$ | (12,803 | ) | |
$ | (4,726 | ) | |
$ | (15,484 | ) |
| |
| | | |
| | | |
| | | |
| | |
DENOMINATOR: | |
| | | |
| | | |
| | | |
| | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | |
| 139,751,107 | | |
| 136,719,871 | | |
| 139,285,833 | | |
| 126,524,312 | |
Warrants and Options to purchase common stock | |
| 100,352,766 | | |
| - | | |
| - | | |
| - | |
Convertible Debt | |
| 14,063,920 | | |
| - | | |
| - | | |
| - | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED | |
| 254,167,793 | | |
| 136,719,871 | | |
| 139,285,833 | | |
| 126,524,312 | |
LOSS PER COMMON SHARE - DILUTED | |
$ | (0.01 | ) | |
$ | (0.09 | ) | |
$ | (0.03 | ) | |
$ | (0.12 | ) |
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
April 30, | | |
Nine months ended
April 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Convertible Preferred Shares | |
| 56,745,216 | | |
| 55,437,949 | | |
| 56,745,216 | | |
| 55,437,949 | |
Convertible Debt | |
| 12,633,333 | | |
| 21,021,795 | | |
| 12,633,333 | | |
| 21,021,795 | |
Total | |
| 69,378,549 | | |
| 76,459,744 | | |
| 69,378,549 | | |
| 76,459,744 | |
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 28,000,000 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 April 30, 2022, we believe that the treasury shares 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 nine months ended April 30, 2022, and
2021, the Company did not derive revenues of 10% or more from any single customer.
As of April 30, 2022, and 2021, the Company did
not have outstanding accounts receivable of 10% or more from any 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 derived from cloud-based hosted services 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 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 April 30, | | |
For the Nine Months
ended April 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Cloud software and service revenue | |
$ | 8,092 | | |
$ | 3,666 | | |
$ | 15,677 | | |
$ | 8,440 | |
Product revenue | |
| 71 | | |
| 85 | | |
| 282 | | |
| 189 | |
Total operating revenues | |
$ | 8,163 | | |
$ | 3,751 | | |
$ | 15,959 | | |
$ | 8,629 | |
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 April 30,
2022, and July 31, 2021, were $7,486 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 April 30,
2022, and July 31, 2021, were $1,279,974 and $19,984, respectively.
Customer deposits
The Company in some instances requires
customers to make deposits for the last month of services, equipment, installation charges and training. As equipment is installed
and training takes places the deposits are then applied to revenue. The deposit for the last month of services is applied to any
outstanding balances if services are cancelled. If the customer’s account is paid in full, the Company will refund the full
deposit in the month following service termination. As of April 30, 2022, and July 31, 2021, Digerati’s customer deposits
balance was $860,341 and $0, respectively. The customer deposit balance is included as part of deferred income on the consolidated
balance sheet.
Costs to Obtain a Customer Contract
Direct incremental costs of obtaining a
contract, consisting of sales commissions, are deferred, and amortized over the estimated life of the customer, which currently
averages 36 months. The Company calculates the estimated life of the customer on an annual basis. The Company classifies deferred
commissions as prepaid expenses or other noncurrent assets based on the timing of when it expects to recognize the expense. As of
April 30, 2022, the Company had $744,000 in deferred commissions/contract costs. Sales commissions expensed for the nine months
ended April 30, 2022, and April 30, 2021, were $1,463,989 and $576,476, respectively. The cost to obtain customer contract balance
is included as part of prepaid expenses on the consolidated balance sheet.
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.
Contingencies
The Company acts as a collection agent for various government authorities,
including but not limited to the Federal Communications Commissions (“FCC”), state authorities such as the California Public
Utilities Commission (“PUC”), and other state and local taxes including the California Utility User Tax (“UUT”).
The Company performed a review of the regulatory classification of its services and its federal and state regulatory and transactional
tax obligations and determined the Company understated its remittances. As of April 30, 2022, the Company’s outstanding aggregate
tax remittance liability, including penalties and interest, was $4,839,000, and is included as accrued taxes and penalties on the accompanying
consolidated balance sheets. This was a liability assumed as part of the acquisition of Next Level Internet, Inc. (“Next Level”
or “NLI”).
Derivative financial instruments.
Digerati does not use derivative instruments to
hedge exposures to cash flow, market, or foreign currency risks. However, Digerati evaluates 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.
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 April 30, 2022,
and July 31, 2021, are approximately $8,922,100 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. | |
Description | |
Fair Value | | |
Quoted
prices in
active
markets for
identical
liabilities
(Level 1) | | |
Significant
other
observable
inputs
(Level 2) | | |
Significant
unobservable
inputs
(Level
3) | |
| |
| | |
| | |
| | |
| |
Convertible promissory notes derivative liability at July 31, 2021 | |
$ | 16,773,383 | | |
| - | | |
| - | | |
$ | 16,773,383 | |
| |
| | | |
| | | |
| | | |
| | |
Convertible promissory notes derivative liability at April 30, 2022 | |
$ | 8,922,100 | | |
| - | | |
| - | | |
$ | 8,922,100 | |
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 nine months ended April 30, 2022, was determined using the Black-Scholes option pricing model which used the following assumptions:
Expected dividend yield | |
| 0.00% | |
Expected stock price volatility | |
| 63.32% - 250.19% | |
Risk-free interest rate | |
| 0.03% - 2.89% | |
Expected term | |
| 0.05 – 9.50 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 from new convertible promissory notes recorded as debt discount | |
| 60,292 | |
Derivative liability resolved to additional paid in capital due to payoff of convertible debt | |
| (76,134 | ) |
Derivative gain | |
| (7,835,441 | ) |
Balance at April 30, 2022 | |
$ | 8,922,100 | |
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.
On May 1, 2018, T3 Communications, Inc. (“T3 Nevada”), a Nevada corporation, entered into a Stock Purchase Agreement (“SPA”), whereby in an exchange for $250,000, T3 Nevada agreed to sell to the buyers 199,900 shares of common stock equivalent to 19.99% of the issued and outstanding common shares of T3 Nevada. 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 Nevada. 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 Nevada 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 Nevada 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 nine months ending April 30, 2022, and
2021, the Company accounted for a noncontrolling interest of $1,306,000 and $223,000, 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 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 impact of this ASU on its financial
statements.
NOTE 2 – GOING CONCERN
Financial Condition
The Company’s consolidated financial statements
for the nine months ending April 30, 2022 have been prepared on a going concern basis, which contemplates the realization of assets and
the settlement of liabilities in the normal course of business. Since the Company’s inception in 1993, the Company has incurred
net losses and accumulated a deficit of approximately $110,092,000, a working capital deficit of approximately $25,034,000 and total liabilities
of $65,654,000, which includes $8,922,000 in derivative liabilities, which raise 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 April 30, 2022 will not be sufficient to fund the Company’s operations and corporate expenses over the next 12 months. The Company’s
ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional
capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient
revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts
funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company
raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience
dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible
senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through
debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners,
the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able
to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may
be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay
off its obligations, if and when they come due.
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; and 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 Nevada (the Company’s
majority owned subsidiary), T3 Nevada’s subsidiaries (T3 Nevada and its subsidiaries, collectively, “the T3 Nevada Parties”)
entered into a credit agreement (the “Credit Agreement”) with Post Road Administrative LLC (the “Agent”) 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 various creditors, 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.
On December 20, 2021, the T3 Nevada Parties and
Post Road entered into an amendment to the Credit Agreement (the “Amendment”) in connection with which T3 Nevada issued an
Amended and Restated Term Loan A Note (the “A&R Term Loan A Note”) in replacement of the Term Loan A Note. Under the First
Amendment, the Term Loan B Note principal of $3,500,000, accrued interest of $187,442, and amendment fee of $1,418,744 were recapitalized
under the revised A&R Term Loan A Note).
Pursuant to the First Amendment, the proceeds
of $6,000,000 were used to fund the acquisition of Skynet Telecom LLC’s assets and for general corporate and working capital purposes
as well as professional fees and other fees and expenses with respect to the transactions contemplated by the Amendment. Under the first
amendment, total new balance of the revised Term Loan A was $22,168,515.
On February 4, 2022, the T3 Nevada Parties and
Post Road agreed that Post Road would provide T3 Nevada with a secured loan of $10,000,000 pursuant to a Term Loan C Note. The proceeds
of $10,000,000 were used to fund the acquisition of Next Level and for general corporate and working capital purposes as well as professional
fees and other fees and expenses with respect to the transactions contemplated by the Amendment.
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 April 30, 2022, do not include any adjustments that might result from the inability to implement or execute Digerati’s plans
to improve our ability to continue as a going concern.
NOTE 3 – INTANGIBLE ASSETS
Below are summarized changes in intangible assets
at April 30, 2022, and July 31, 2021:
| |
Gross Carrying | |
Accumulated | |
Net Carrying |
April 30, 2022 | |
Value | |
Amortization | |
Amount |
| |
| |
| |
|
NetSapiens - license, 10 years | |
$ | 150,000 | | |
$ | (150,000 | ) | |
$ | - | |
Customer relationships, 5 years | |
| 40,000 | | |
| (34,682 | ) | |
| 5,318 | |
Customer relationships, 7 years | |
| 1,480,262 | | |
| (857,508 | ) | |
| 622,754 | |
Customer relationships 7 years | |
| 15,110,341 | | |
| (1,601,893 | ) | |
| 13,508,448 | |
Trademarks, 7 years | |
| 9,562,916 | | |
| (873,276 | ) | |
| 8,689,640 | |
Non-compete, 2 & 3 years | |
| 2,456,360 | | |
| (472,920 | ) | |
| 1,983,440 | |
Marketing & Non-compete, 5 years | |
| 800,263 | | |
| (639,985 | ) | |
| 160,278 | |
Total Definite-lived Intangible Assets | |
| 29,600,142 | | |
| (4,630,264 | ) | |
| 24,969,878 | |
Goodwill | |
| 8,877,532 | | |
| - | | |
| 8,877,532 | |
Balance, April 30, 2022 | |
$ | 38,477,674 | | |
$ | (4,630,264 | ) | |
$ | 33,847,410 | |
| |
Gross Carrying | |
Accumulated | |
Net 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 Definite-lived Intangible Assets | |
| 10,941,000 | | |
| (2,414,392 | ) | |
| 8,526,608 | |
Goodwill | |
| 3,931,298 | | |
| - | | |
| 3,931,298 | |
Balance, July 31, 2021 | |
$ | 14,872,298 | | |
$ | (2,414,392 | ) | |
$ | 12,457,906 | |
Total amortization expense for the nine months
ended April 30, 2022, and 2021 was $2,215,872 and $962,429, 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 nine months ended April 30, 2022, the
Company extended the expiration date on 1,150,000 previously issued stock options to various employees until July 31, 2025 and the
exercise price of these options was set at $0.11 per share. The modification of these stock options created a nominal expense to the
Company.
During the nine months ended April 30, 2021, 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. |
| | |
| ● | 500,000 options to purchase common shares to one of our members of the Board of Directors with an exercise price of $0.1475 per share and a term of 5 years. At issuance, 166,666 of the options vested and 333,334 of the options will vest equally over a period of two years. At the time of issuance, the options had a fair market value of $52,531. |
| | |
| ● | 3,730,000 options to purchase common shares to
various employees with an exercise price of $0.04 per share and a term of 5 years. At issuance, 33,333 of the options vested, 66,667 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.
The options have a fair market value of $214,812. |
The Company recognized approximately $74,466 and
$109,685 in stock-based compensation expense for stock options to employees for the nine months ended April 30, 2022, and 2021, respectively.
Unamortized compensation stock option cost totaled $125,653 and $220,861 as of April 30, 2022, and April 30, 2021, respectively.
A summary of the stock options outstanding as
of April 30, 2022, and July 31, 2021, and the changes during the nine months ended April 30, 2022, 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 on April 30, 2022 | |
| 9,230,000 | | |
$ | 0.17 | | |
| 2.64 | |
Exercisable on April 30, 2022 | |
| 7,153,530 | | |
$ | 0.20 | | |
| 2.35 | |
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 as of April 30, 2022, and July 31, 2021, was $141,367
and $392,891, respectively.
The aggregate intrinsic value of 7,153,530 and
6,091,863 stock options exercisable on April 30, 2022, and July 31, 2021, was $44,673 and $91,978, respectively.
NOTE 5 – WARRANTS
During the nine months ended April 30, 2022, the
Company did not issue any warrants.
During the nine months ended April 30, 2021, the
Company 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 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 outstanding as of April
30, 2022, and July 31, 2021, and the changes during the nine months ended April 30, 2022, 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 | |
| (315,000 | ) | |
$ | 0.15 | | |
| - | |
Outstanding on April 30, 2022 | |
| 109,191,179 | | |
$ | 0.01 | | |
| 8.45 | |
Exercisable on April 30, 2022 | |
| 81,965,885 | | |
$ | 0.01 | | |
| 8.44 | |
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 109,191,179 and 109,506,179 warrants outstanding as of April 30, 2022, and July 31, 2021, was $7,530,640
and $14,795,002, respectively.
The aggregate intrinsic value of 81,965,885 and 82,280,885 warrants
exercisable on April 30, 2022, and July 31, 2021, were $5,663,592 and $11,108,930, respectively.
Warrant expense for the nine months ended April
30, 2022, and 2020 were $0 and $0, respectively. Unamortized warrant expense totaled $0 and $0 respectively as of April 30, 2022, and
July 31, 2021.
For the nine months ended April
30, 2022, 315,000 warrants expired with an average exercise price of $0.15.
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. The maturity date was
extended multiple times and on February 26,2022, the lender agreed to extend the maturity until July 31, 2022. 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 April 30, 2022, and July 31, 2021, was $50,000.
Credit Agreement and Notes
On November 17, 2020, T3 Nevada (a majority owned subsidiary of the
Company) and T3 Nevada’s subsidiaries (T3 Nevada and its subsidiaries, collectively, “the T3 Nevada Parties”) entered
into a credit agreement (the “Credit Agreement”) with Post Road Administrative LLC (the “Agent”) and its affiliate
Post Road Special Opportunity Fund II LLP (collectively, “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, 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
During the nine months ended April 30, 2022, the
Company amortized $1,294,201 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 April 30, 2022, and July 31, 2021, were $0 and $5,355,322, respectively.
Term Loan A Note has maturity dates of November
17, 2024, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%). 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.
Term Loan B had 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 Term Loan B was recapitalized under
the revised A&R Term Loan A Note as indicated below.
On December 20, 2021, T3 Nevada and Post Road
entered into an amendment to the Credit Agreement (the “Amendment”) in connection with which T3 Nevada issued an Amended and
Restated Term Loan A Note (the “A&R Term Loan A Note”) in replacement of the Term Loan A Note. Under the First Amendment,
the Term Loan B Note principal of $3,500,000, accrued interest of $187,442, and amendment fee of $1,418,744 were recapitalized under the
revised A&R Term Loan A Note.
Pursuant to the First Amendment, the additional proceeds of $6,000,000
were used to fund the acquisition of Skynet Telecom LLC’s assets and for general corporate and working capital purposes as well
as professional fees and other fees and expenses with respect to the transactions contemplated by the Amendment. The Company evaluated
the amendment and the recapitalization of the notes and accounted for these changes as an extinguishment of debt and recognized a loss
on extinguishment of debt of $5,479,865, the loss is composed of the full amortization debt discount of $4,061,121, and the amendment
fees of $1,418,744.
The A&R Term Loan A Note has maturity dates
of November 17, 2024, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%). The principal balance and
accrued PIK interest outstanding on the A&R Term Loan A Note were $22,168,515 and $302,425, respectively as of April 30, 2022.
On February 4, 2022, the T3 Nevada Parties and Post Road agreed that
Post Road would provide T3 Nevada with a secured loan of $10,000,000 pursuant to a Term Loan C Note. The proceeds of $10,000,000 were
used to fund the acquisition of Next Level and for general corporate and working capital purposes as well as professional fees and other
fees and expenses with respect to the transactions contemplated by the Amendment. At issuance the company recognized $250,000 in OID and
$220,000 in debt issuance cost which were fully amortized to expense. The principal balance and accrued PIK interest outstanding on the
Term Loan C Note were $10,000,000 and $96,977, respectively as of April 30, 2022.
The Term Loan C Note has a maturity date of August
4, 2023, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%).
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 4.05 to 1.00 |
2. | Minimum Allowed - EBITDA of $3,696,175 |
3. | Minimum Allowed - Liquidity of $2,000,000 |
4. | Maximum Allowed - Capital Expenditures of $94,798 (Quarterly) |
5. | Minimum Allowed - Fixed Charge Coverage Ratio of 1.5 to 1.00 |
6. | Maximum Allowed - Churn of 3.00% at any time |
On June 13, 2022, the lender agreed to forbear
the financial covenants that were not complied with during the quarter ending April 30, 2022.
T3 Nevada’s obligations under the Credit Agreement are secured
by a first-priority security interest in all of the assets of T3 Nevada and guaranteed by the other subsidiaries of the Company pursuant
to the Guaranty and Collateral Agreement, dated November 17, 2020, subsequently amended on December 31, 2021, and February 4, 2022, by
and among T3 Nevada, T3’s Nevada’s subsidiaries, and the Agent (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.
Promissory Notes – Next Level Internet
Acquisition
On February 4, 2022, as per the acquisition of Next Level Internet,
Inc. (“Next Level” or “NLI”), the Company entered into two unsecured promissory notes (the “Unsecured Adjustable
Promissory Notes”) for $1,800,000 and $200,000, respectively. The notes are payable in eight equal quarterly installments in the
aggregate amount of $250,000 each commencing on June 4, 2022, through and including March 7, 2024. With a base annual interest rate of
0% and a default annual interest rate of 18%. The amount owed is subject to change based on certain revenue milestones required to be
achieved by Next Level. The total principal balance outstanding as of April 30, 2022 on the Unsecured Adjustable Promissory Notes was
$2,000,000.
NOTE 7 – RELATED PARTY
TRANSACTIONS
During the nine months ended April 30, 2022, and
2021, the Company provided VoIP Hosted and fiber services to a company owned by one of the Board members of T3 Communications, Inc., a
Florida corporation, for $144,687 and $130,029, respectively.
On November 17, 2020, as a result of the of the
acquisition of ActiveServe’s asset, the two sellers became related parties as they continued to be involved as consultants to manage
the customer relationship, the Company paid on an annual basis $90,000 to each of the consultants. These agreements expired as of January
17, 2022, and the parties agreed not to extend. As of April 30, 2022, there’s no balance outstanding under the consulting agreements.
In addition, part of the Purchase Price is payable in 8 equal quarterly payments to the sellers. During the nine months ended
April 30, 2022, the Company paid $589,648 of the principal balance outstanding. In addition, on January 7, 2022, the Company recognized
a reduction of $120,621 on the note balance due to the sellers not achieving certain requirement under the “Customer renewal Value”.
As a result, the Company recognized a reduction of $120,621 in Goodwill associated with the ActiveServe asset acquisition. The total principal
outstanding on the notes as of April 30, 2022, and July 31, 2021, were $424,022 and $1,134,291, respectively.
On December 31, 2021, as a result of the of the acquisition of Skynet
Telecom LLC’s assets, the two sellers became related parties as they continued to be involved as consultants for 12 months to manage
the customer relationship, the Company will pay on an annual basis $100,000 to each of the consultants. A of April 30, 2022, there’s
no balance outstanding under the consulting agreements. Part of the Purchase Price of $600,000 (the “Earn-out Amount”) was
retained by the Company at the Closing and will be paid to Seller in 6 equal quarterly payments. An additional $100,000 (the “Holdback
Amount”) was retained by the Company at the Closing and will be paid to Seller in accordance with the Skynet Telecom LLC asset purchase
agreement. The total principal outstanding on the notes as of April 30, 2022 was $700,000.
Acquisition Payable – Skynet
As part of the acquisition of Skynet Telecom LLC’s
assets, the Company will pay to the Sellers $1,000,000 (the “Share Payment”) by issuance of restricted shares of the Company’s
common stock to the Owners. The Share Payment will be made via the issuance of shares on the earlier of (i) the effective date of that
certain Registration Statement on Form S-1 filed by the Company with the Securities and Exchange Commission on August 11, 2021 (in which
case the stock will be valued at the price set forth in the prospectus that is a part of such Registration Statement, without underwriter
discounts) and (ii) 180 days after December 31, 2021 (in which case the stock will be valued at the average of the last transaction price
on the OTCQB for each of the 10 trading days immediately preceding such issuance date). The total principal outstanding on the acquisitions
payable as of April 30, 2022, was $1,000,000.
NOTE 8 – CONVERTIBLE NOTES PAYABLE
As of April 30, 2022, and July 31, 2021, convertible
notes payable consisted of the following:
| |
April 30, | | |
July 31, | |
CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | |
2022 | | |
2021 | |
On October 13, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $330,000, annual interest rate of 8% and an original maturity date of October 13, 2021, the maturity date was extended until December 15, 2021, and subsequently the maturity date was extended until July 31, 2022. After payment of transaction-related expenses and closing fees of $32,000, net proceeds to the Company from the Note totaled $298,000. The Company recorded $32,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 1,000,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $45,003 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $134,423 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a fix conversion price at issuance, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $17,620 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, and July 31, 2021, were $0 and $17,620, respectively. The total principal balance outstanding as of April 30, 2022 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. On January 27, 2022, the lender agreed to extend the maturity date until July 31, 2022. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $25,000. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of amendment date, the total unamortized discount on the Note was $0. The Company recognized a loss on extinguishment of debt of $25,000 and charged to interest expense at the time of the extension. The Company amortized $34,368 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022 and July 31, 2021, were $0 and $34,368, respectively. The total principal balance outstanding as of April 30, 2022 and July 31, 2021, were $275,000 and $250,000, respectively. | |
| 275,000 | | |
| 250,000 | |
| |
April 30, | | |
July 31, | |
CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | |
2022 | | |
2021 | |
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 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. On April
14, 2022, the lender agreed to extend the maturity date until October 14, 2022. In connection with the extension of the maturity
date on the note, the Company agreed to increase the principal balance by $25,000. The Company evaluated the amendment and accounted
for these changes as an extinguishment of debt. As of amendment date, the total unamortized discount on the Note was $0. The Company
recognized a loss on extinguishment of debt of $25,000 and charged to interest expense at the time of the extension. The Company
amortized $106,799 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of
April 30, 2022 and July 31, 2021, were $0 and $106,799, respectively. The total principal balance outstanding as of April 30, 2022
and July 31, 2021, were $275,000 and $250,000, respectively. | |
| 275,000 | | |
| 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 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 $9,090 as
interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, was
$4,545. The total principal balance outstanding as of April 30, 2022, 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 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 $6,293 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, was $4,495. The total principal balance outstanding as of April 30, 2022, was $75,000. | |
| 75,000 | | |
| - | |
| |
April 30, | | |
July 31, | |
CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | |
2022 | | |
2021 | |
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 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 $6,983 as interest expense during the nine months ended April 30, 2022.
The total unamortized discount on the Note as of April 30, 2022, was $6,982. The total principal balance outstanding as of April 30,
2022, was $150,000. | |
| 150,000 | | |
| - | |
| |
| | | |
| | |
On February 4, 2022, as part the acquisition of Next Level, the Company entered into two unsecured convertible promissory notes (the “Unsecured Convertible Promissory Notes”) for $1,800,000 and $200,000, respectively. The notes are payable in eight equal quarterly installments in the aggregate amount of $250,000 each commencing on April 30, 2022, through and including January 31, 2024. With a base annual interest rate of 0% and a default annual interest rate of 18%. The Sellers have a onetime right to convert all or a portion of the Convertible Notes commencing on the six-month anniversary of the notes being issued and ending 30 days after such six-month anniversary. The conversion price means an amount equal to the volume weighted average price per share of Stock on the Nasdaq Stock Market for the ten (10) consecutive trading days on which the conversion notice is received by the Company; provided, however, that if the stock is not then listed for trading on the Nasdaq Stock Market, the Conversion Price shall be the volume weighted average transaction price per share reported by the OTC Reporting Facility for the ten (10) consecutive trading days immediately preceding the date on which such Conversion Notice is received by the Company. The Company analyzed the Notes for derivative accounting consideration and determined that since the notes are convertible on the six-month anniversary from issuance and ending 30 days after such six-month anniversary, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any of the provisions for conversion are met and if the notes need to be classified as a derivative instrument. The total principal balance outstanding on the Unsecured Convertible Promissory Notes as of April 30, 2022, was $2,000,000. | |
| 2,000,000 | | |
| - | |
Total convertible notes payables non-derivative: | |
$ | 3,015,000 | | |
$ | 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. On July 31, 2021, the holder agreed to extend the maturity date until January 31, 2022. On February 14, 2022, the holder agreed to extend the maturity date until July 31, 2022. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $75,000 and issued 250,000 shares of common stock with a market value of $34,150. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of amendment date, the total unamortized discount on the Note was $0. The Company recognized a loss on extinguishment of debt for both the $75,000 increase in principal and $34,150 fair value of shares issued and charged the total $109,150 to interest expense at the time of the extension. The total principal balance outstanding as of April 30, 2022, and July 31, 2021, were $430,000 and $355,000, respectively. | |
| 430,000 | | |
| 355,000 | |
| |
April 30, | | |
July 31, | |
CONVERTIBLE NOTES PAYABLE - DERIVATIVE | |
2022 | | |
2021 | |
On January 31, 2021, the Company entered into a variable
convertible promissory note with an aggregate principal amount of $80,235, annual interest rate of 8% and a maturity date of
February 17, 2022. Subsequently, on March 7, 2022, the holder agreed to extend the maturity date until July 31, 2022. Until the
earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the
outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall
equal the greater of $0.05 (five) cents or seventy-five percent (75%) of the lowest daily VWAP over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable
conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be
able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting
Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock
Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to
equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange
Note) in the preceding twenty (20) consecutive Trading Days. The Company analyzed the note for derivative accounting consideration
and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion
price. As a result, the Company recognized derivative liability for the convertible note of $61,819, of which $61,819 was recorded
as debt discount and amortized over the term of the note. The Company amortized $27,840 of debt discount as interest expense during
the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, and July 31, 2021, were $0
and $27,840, respectively. The total principal balance outstanding as of April 30, 2022, 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 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 April 30, 2022, and July 31, 2021, were $0 and $102,083, respectively. The Company amortized $102,083 of
debt discount as interest expense during the nine months ended April 30, 2022. On March 7, 2022, the Company paid in full the total
principal balance outstanding of $175,000 and accrued interest and prepayment penalty of $30,000. As part of the payoff of the note,
the Company resolved $76,134 of the derivative liability against additional paid in capital. The total principal balance outstanding
as of April 30, 2022, and July 31, 2021, were $0 and $175,000, respectively. | |
| - | | |
| 175,000 | |
| |
April 30, | | |
July 31, | |
CONVERTIBLE NOTES PAYABLE - DERIVATIVE | |
2022 | | |
2021 | |
On April 15, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $113,000, annual interest rate of 8% and a maturity date of January 15, 2022. After payment of transaction-related expenses and closing fees of $13,000, net proceeds to the Company from the Note totaled $100,000. Additionally, the Company recorded $13,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 100,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $14,138 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.15 (fifteen) cents or (b). seventy-five percent (75%) of the lowest traded price in the prior fifteen (15) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”). Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $64,561, of which $42,822 was recorded as debt discount and amortized over the term of the note. On January 15, 2022, the lender agreed to extend the maturity date until March 31, 2022. As consideration for the extension on the note, the Company agreed to add 15,000 to the principal amount outstanding. On March 31, 2022, the lender agreed to extend the maturity date until July 31, 2022. As consideration for the extension on the note, the Company agreed to add $15,000 to the principal amount outstanding. The Company evaluated the amendments and accounted for these changes as an extinguishment of debt. As of both amendment date, the total unamortized discount on the Note was $0. The Company recognized a loss on extinguishment of debt for both $15,000 increase in principal and charged the total $30,000 to interest expense at the time of the extension. The total unamortized discount on the Note as of April 30, 2022, and July 31, 2021, were $0 and $50,945, respectively. The Company amortized $50,945 of debt discount as interest expense during the nine months ended April 30, 2022. The total principal balance outstanding as of April 30, 2022, and July 31, 2021, were, $143,000 and $113,000, respectively. | |
| 143,000 | | |
| 113,000 | |
| |
| | | |
| | |
On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, annual interest rate of 8% and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder and recorded $300 as debt discount 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 $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $55,866. The Company recorded $30,146 debt discount from derivative. The total unamortized discount on the Note as of April 30, 2022, was $37,831. The Company amortized $18,915 of debt discount as interest expense during the nine months ended April 30, 2022. The total principal balance outstanding as of April 30, 2022, was $230,000. | |
| 230,000 | | |
| - | |
| |
April 30, | | |
July 31, | |
CONVERTIBLE NOTES PAYABLE - DERIVATIVE | |
2022 | | |
2021 | |
On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, annual interest rate of 8% and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder and recorded $300 as debt discount 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 $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $55,866. The Company recorded $30,146 debt discount from derivative. The total unamortized discount on the Note as of April 30, 2022, was $37,831. The Company amortized $18,915 of debt discount as interest expense during the nine months ended April 30, 2022. The total principal balance outstanding as of April 30, 2022, was $230,000. | |
| 230,000 | | |
| - | |
| |
| | | |
| | |
Total convertible notes payable - derivative: | |
$ | 1,113,235 | | |
$ | 723,235 | |
| |
| | | |
| | |
Total convertible notes payable derivative and non-derivative | |
| 4,128,235 | | |
| 1,388,235 | |
Less: discount on convertible notes payable | |
| (91,685 | ) | |
| (339,654 | ) |
Total convertible notes payable, net of discount | |
| 4,036,550 | | |
| 1,048,581 | |
Less: current portion of convertible notes payable | |
| (3,286,550 | ) | |
| (1,048,581 | ) |
Long-term portion of convertible notes payable | |
$ | 750,000 | | |
$ | - | |
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.
The total unamortized discount on the convertible
notes as of April 30, 2022, and July 31, 2021, were $91,685 and $339,654, respectively. The total principal balance outstanding as of
April 30, 2022, and July 31, 2021, were $4,128,235 and $1,388,235, respectively. During the nine months ended April 30, 2022, and April
30, 2021, the Company amortized $399,849 and $528,645, respectively, of debt discount as interest expense.
NOTE 9 - LEASES
The leased properties have a remaining lease
term of twelve to thirty-seven months as of August 1, 2021 (Beginning on the current fiscal year). 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 | |
8023 Vantage Dr., Suite 660, San Antonio, Texas 78230 | |
$ | 49,752 | | |
Sep-22 | |
Office space | |
| 2,843 | |
10967 Via Frontera, San Diego, CA 92127 | |
$ | 366,767 | | |
Mar-26 | |
Office space | |
| 18,541 | |
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 nine months ended April 30, 2022
In February 2022, as part of the acquisition of
NLI, the Company secured an office lease, with a monthly base lease payment of $30,222. The lease expires in March 2026. At the option
of the Company, the lease can be extended for two additional five-year terms, with a base rent at the prevailing market rate at the time
of the renewal.
In December 2021, as part of the acquisition of
Skynet Telecom LLC’s assets, the Company assumed an office lease in San Antonio, Texas. The lease expires in September 2022, and
at the option of the Company, the lease can be extended for a period of five years, with a base rent at the prevailing market rate at
the time of the renewal.
In January 2021, 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 December 31, 2025., 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. 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 April
30, 2022, for operating leases are as follows:
ROU Asset | |
July 31, 2021 | |
$ | 934,260 | |
Amortization | |
| |
$ | (213,662 | ) |
Addition - Asset | |
| |
$ | 1,246,262 | |
ROU Asset | |
April 30, 2022 | |
$ | 1,966,860 | |
| |
| |
| | |
Lease Liability | |
July 31, 2021 | |
$ | 934,260 | |
Amortization | |
| |
$ | (268,000 | ) |
Addition - Liability | |
| |
$ | 1,455,978 | |
Lease Liability | |
April 30, 2022 | |
$ | 2,122,238 | |
| |
| |
| | |
Lease Liability | |
Short term | |
$ | 773,233 | |
Lease Liability | |
Long term | |
$ | 1,349,005 | |
Lease Liability | |
Total: | |
$ | 2,122,238 | |
Operating lease cost: | |
$ | 470,935 | |
| |
| | |
Cash paid for amounts included in the measurement of lease labilities | |
| | |
| |
| | |
Operating cashflow from operating leases: | |
$ | 470,935 | |
| |
| | |
Weighted-average remain lease term-operating lease: | |
| 3.4 years | |
| |
| | |
Weighted-average discount rate | |
| 5.0 | % |
For the nine months ended April 30, 2022, the
amortization of operating ROU assets was$213,662.
For the nine months ended April 30, 2022, the
amortization of operating lease liabilities was $268,000
The future minimum lease payment under the operating
leases are as follows:
Period Ending July 31, | |
Lease Payments | |
2022* | |
$ | 218,569 | |
2023 | |
| 658,144 | |
2024 | |
| 532,546 | |
2025 | |
| 491,145 | |
2026 | |
| 260,209 | |
Total: | |
$ | 2,160,613 | |
NOTE 10 – PREFERED
STOCK
SERIES A CONVERTIBLE
PREFERRED STOCK
In August 2020, the Company’s
Board of Directors designated and authorized the issuance of up to 1,500,000 shares of the Series A Convertible Preferred Stock. Each
share of Series A Convertible 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 is entitled to a dividend at an annual rate of eight percent (8%) per share. The Company had 225,000 shares
of the Series A Convertible Preferred Stock outstanding as of April 30, 2022. During the nine months ended April 30, 2022, the Company
declared a dividend of $13,463 and had $51,397 as accumulated dividends as of April 30, 2022.
The “Conversion Price” at which shares of Common Stock
shall be issuable upon conversion of any shares of Series A Convertible Preferred Stock shall initially be $0.30 per share
During the nine months ended April 30, 2022, the
Company evaluated Series A Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during the
period and determined that the convertible shares were classified as equity instruments.
SERIES B CONVERTIBLE 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 Convertible Preferred Stock. The Series
B Convertible 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 Convertible Preferred Stock at the Stated Value by converting all or part of the debt owed to them
by the Company as of March 25, 2020. Each share of Series B Convertible 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 Convertible 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 Convertible 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 Series B Convertible Preferred Stock outstanding as of April 30, 2022. No dividends are payable on the Series B Convertible
Preferred Stock.
The terms of our Series B Convertible Preferred
Stock allow for:
Mandatory Conversion. Upon (i) an
up-listing of the Company’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 Company’s Common Stock or Common Stock equivalents (a “Material Underwriting”), (iii) the
Company ceases to be a public corporation as the result of a going private transaction, (iv) the Company, 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 Company’s spin-off of its operating subsidiary, T3
Nevada), (v) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company 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 Company, 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 Company, 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 Convertible 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 Company 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 Company’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 Convertible Preferred Stock shall be deemed cancelled and of no further force or effect.
A mandatory conversion is the only means by which Series B Convertible Preferred Stock is convertible as the shares of Series B Convertible
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 Company engages in a Material Underwriting, the
Series B Convertible Preferred Stock will be treated as having been converted immediately prior to the issuance of the securities in the
Material Underwriting.
During the nine months ended April 30, 2022, the
Company evaluated Series B Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during the
period and determined that the convertible shares were classified as equity instruments.
SERIES C CONVERTIBLE
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 Convertible Preferred Stock. Each share of Series C Convertible 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 was issued for accrued compensation to the management team of $554,000.
The Company had 55,400
shares of Series C Convertible Preferred Stock outstanding as of April 30, 2022. No dividends are payable on the Series C Convertible
Preferred Stock.
The terms of our Series C Convertible Preferred
Stock allow for:
Automatic Conversion. Upon (i) an up-listing of
the Company’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 Company’s Common Stock or Common Stock equivalents (a “Material Financing”), (iii) the Company ceases
to be a public corporation as the result of a going private transaction, (iv) the Company, 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 Company’s spin-off of T3 Nevada), (v) any, direct or indirect, purchase
offer, tender offer or exchange offer (whether by the Company 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 Company, 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 Company, 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 Convertible 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 Company 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 Company’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 Convertible Preferred Stock shall be deemed cancelled and of no further force or effect. A mandatory conversion is the only
means by which Series C Convertible Preferred Stock is convertible as the shares of Series C Convertible 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 Company engages in a Material Financing, the Series C Convertible 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 April 30, 2022. No dividends are payable on the Series F Super Voting Preferred
Stock.
The terms of our Series F Super Voting Preferred
Stock allow for:
Voting Rights. As long as any shares
of Series F Super Voting Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the Holders of a majority
of the then outstanding shares of the Series F Super Voting Preferred Stock, (a) alter or change adversely the powers, preferences or
rights given to the Series F Super Voting Preferred Stock or alter or amend its 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 Super Voting Preferred Stock, (d) sell or otherwise dispose of any assets of the Company 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.
Holders of the Series F Super Voting Preferred
Stock shall be entitled to vote on all matters subject to a vote or written consent of the holders of the Company’s Common Stock,
and on all such matters, the shares of Series F Super Voting 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 Company 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 Super Voting Preferred Stock shall have effective voting control of the Company. The Holders of the Series F Super Voting
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 Company’s Common Stock and separately on matters not requiring the approval of holders of the Company’s Common Stock.
Conversion. No conversion rights apply to the Series
F Super Voting Preferred Stock.
NOTE 11 – EQUITY
During the nine months ended
April 30, 2022, 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.
On January 21, 2022, the Company
secured two promissory notes for $460,000, with a maturity date of October 21, 2022, and annual interest rate of 8%. In conjunction with
the promissory notes, we issued 600,000 shares of common stock. At the time of issuance, the Company recognized $600 as debt discount,
and it will be amortized to interest expense during the term of the promissory note
On February 14, 2022, the Company entered into
a note extension agreement, and as consideration for the extension, the Company issued 250,000 shares of common stock. At the time of
issuance, the Company recognized the fair market value of the shares of $34,150 as interest expense. In addition, the Company agreed to
add $75,000 to the principal amount outstanding and the Company recognized $75,000 as interest expense. The Company evaluated the amendment
and accounted for these changes as an extinguishment of debt. The Company recognized a loss on extinguishment of debt for both the $75,000
increase in principal and $34,150 fair value of shares issued and charged the total $109,150 to interest expense at the time of the extension.
On March 7, 2022, the Company
paid in full the total principal balance outstanding on a convertible promissory note of $175,000 and accrued interest and prepayment
penalty of $30,000. As part of the payoff of the convertible promissory note, the Company resolved $76,134 of the derivative liability
against additional paid in capital.
NOTE 12 – ACQUISITIONS
Skynet Asset Purchase
Agreement
On December 31, 2021, our indirect, wholly
owned subsidiary, Shift8 Networks, Inc., a Texas corporation (“Shift8”), executed and closed on an Asset Purchase
Agreement (the “Purchase Agreement”) with Skynet Telecom LLC, a Texas limited liability company (“Seller” or
“Skynet”), and Paul Golibart and Jerry Ou, each an individual resident in the State of Texas (each, an
“Owner” and collectively, the “Owners”).
Pursuant to the Purchase
Agreement, Shift8 acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and
other licenses and miscellaneous assets used in connection with the operation of Seller’s communications business, including but
not limited to subscriber-based Interconnected Voice Over Internet Protocol communication services (“I-VoIP”), Unified Cloud
Communications Services (“UCCS”), and IPPBX based systems of telephony (collectively, the “Purchased Assets”).
The aggregate purchase price
for the Purchased Assets was $5,800,000, subject to adjustment as provided in the Purchase Agreement (the “Purchase Price”).
An amount of $4,100,000 in cash, subject to a Net Working Capital Adjustment as defined in the Purchase Agreement, was paid by Shift8
on the Closing Date. Included within the $4.1 million cash payment were amounts paid by Shift8 directly to creditors of the Seller as
set forth in payoff letters. An additional $600,000 (the “Earn-out Amount”) was retained by Shift8 at the Closing and will
be paid to Seller in accordance with the Purchase Agreement. An additional $100,000 (the “Holdback Amount”) was retained by
Shift8 at the Closing and will be paid to Seller in accordance with the Purchase Agreement. Finally, $1,000,000 (the “Share Payment”)
will be paid by Shift8 to Seller by issuance of restricted shares of the Company’s common stock to the Owners. The Share Payment
will be made via the issuance of shares on the earlier of (i) the effective date of that certain Registration Statement on Form S-1 (File
No. 333-258733) filed by the Company with the Securities and Exchange Commission on August 11, 2021 (in which case the stock will be valued
at the price set forth in the prospectus that is a part of such Registration Statement, without underwriter discounts) and (ii) 180 days
after December 31, 2021 (in which case the stock will be valued at the average of the last transaction price on the OTCQB for each of
the 10 trading days immediately preceding such issuance date).
The acquisition was accounted
for under the purchase method of accounting, with Digerati identified as the acquirer. Under the purchase method of accounting, the aggregate
amount of consideration assumed by Digerati was allocated to customer contracts acquired and intangible assets based on their estimated
fair values as of December 31, 2021. Allocation of the purchase price is based on the best estimates of management.
The following table presents the preliminary allocation
of the purchase price to the assets acquired and liabilities assumed for the acquisition of Skynet. The allocation of fair values is
preliminary and is subject to change in the future during the measurement period.
| |
Skynet | |
| |
(in thousands) | |
| |
| |
Accounts receivable, net | |
$ | 134 | |
Inventory | |
| 8 | |
Intangible assets and Goodwill | |
| 5,800 | |
Property and Equipment, net | |
| 16 | |
Operating lease right-of-use asset | |
| 45 | |
Deposits and other assets | |
| 6 | |
| |
| | |
Total identifiable assets | |
$ | 6,009 | |
| |
| | |
Less: Liabilities assumed | |
| 209 | |
Total Purchase price | |
$ | 5,800 | |
The following table summarizes the cost of intangible assets
related to the acquisition:
| |
Skynet | | |
Useful Life | |
| |
(in thousands) | | |
(in Years) | |
| |
| | |
| |
Customer Relationships | |
$ | 2,378 | | |
7 | |
Trade Names and Trademarks | |
| 1,624 | | |
7 | |
Non-Compete Agreement | |
| 174 | | |
2-3 | |
Goodwill | |
| 1,624 | | |
- | |
Total intangible assets | |
$ | 5,800 | | |
| |
In addition, the Company incurred approximately
$276,000 in costs associated with the acquisition of Skynet. These included legal, regulatory, and accounting, these costs of $276,000
were expensed during the nine months ended April 30, 2022.
As part of the acquisitions of Skynet’s
assets, the Company secured an office lease, with monthly base lease payment of $3,909 from July 1, 2021, through June 30, 2022, and a
monthly base lease payment of $4,027 from July 1, 2022, through September 30, 2022. The lease expires in September 2022, and at the option
of the Company, the lease can be extended for a period of five years, with a base rent at the prevailing market rate at the time of the
renewal.
Proforma
The following schedule contains proforma consolidated
results of operations for the nine months ended April 30, 2022, and 2021 as if the acquisition occurred on August 1, 2020. The proforma
results of operations are presented for informational purposes only and are not indicative of the results of operations that would have
been achieved if the acquisition had taken place on August 1, 2020, or of results that may occur in the future.
| |
(In thousands) | |
| |
Nine months ended April 30, | |
| |
2022 | | |
2021 | |
| |
Reported | | |
Proforma | | |
Reported | | |
Proforma | |
Revenue | |
$ | 15,959 | | |
$ | 17,501 | | |
$ | 8,629 | | |
$ | 11,216 | |
Income (loss) from operations | |
| (3,525 | ) | |
| (3,280 | ) | |
| (1,978 | ) | |
| (1,502 | ) |
Net income (loss) | |
$ | (4,726 | ) | |
$ | (4,479 | ) | |
$ | (15,484 | ) | |
$ | (14,845 | ) |
| |
| | | |
| | | |
| | | |
| | |
Earnings (loss) per common share-Basic and Diluted | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.12 | ) | |
$ | (0.12 | ) |
Next Level Internet Equity Purchase Agreement
On February 4, 2022, the Company, T3 Nevada and
the two owners of NLI (the “Sellers”), entered into and closed on an Equity Purchase Agreement (the “Equity Purchase
Agreement”). Pursuant to the Equity Purchase Agreement, T3 Nevada bought all of the equity interests in NLI from the Sellers. NLI
is engaged in the business of providing cloud based Unified Communications as a Service, collaboration, contact center, managed connectivity
and other voice and data services to small, medium, and large enterprises.
The total purchase price is up to $12.90 million
consisting of: (i) $8.9 million in cash which includes payoff of certain indebtedness held at closing by NLI and certain transaction expenses;
(ii) unsecured promissory notes in the aggregate principal amount of $2 million issued by T3 Nevada to the Sellers (the “Unsecured
Notes”) with such notes payable in eight equal quarterly installments in the aggregate amount of $250,000 each starting on June
15, 2022 through and including March 16, 2024. With a base annual interest rate of 0% and a default annual interest rate of 18%.The amount
owed is subject to change based on certain revenue milestones needing to be met by NLI; and (iii) unsecured convertible promissory notes
(the “Convertible Notes”) in the aggregate principal amount of $2 million issued by T3 Nevada to the Sellers with such notes
payable in eight equal quarterly installments in the aggregate amount of $250,000 each starting on April 30, 2022 through and including
January 31, 2024, with a base annual interest rate of 0% and a default annual interest rate of 18%. The Sellers have a onetime right to
convert all or a portion of the Convertible Notes commencing on the six-month anniversary of the notes being issued and ending 30 days
after such six-month anniversary. The conversion price is the volume weighted average price per share for the ten (10) consecutive trading
days immediately preceding the date on which a conversion notice is received by T3 Nevada.
T3 Nevada paid $8.69 million in cash to the Sellers
on the closing date of February 4, 2022.
In addition, 120 days after the closing of the
transaction, T3 Nevada will pay the Sellers the amount by which net working capital deficit is better than $2.16 million or the Sellers
will pay T3 Nevada the amount by which net working capital deficit is worse than $2.36 million. As of April 30, 2022, the Company and
the sellers agreed that there’s no purchase price adjustment required.
The acquisition was accounted
for under the purchase method of accounting, with Digerati identified as the acquirer. Under the purchase method of accounting, the aggregate
amount of consideration assumed by Digerati was allocated to customer contracts acquired and intangible assets based on their estimated
fair values as of February 4, 2022. Allocation of the purchase price is based on the best estimates of management.
The following table presents the preliminary allocation
of the purchase price to the assets acquired and liabilities assumed for the Next Level acquisition. The allocation of fair values is
preliminary and is subject to change in the future during the measurement period.
| |
Next Level | |
| |
Internet | |
| |
(in thousands) | |
| |
| |
Cash | |
$ | 171 | |
Accounts receivable, net | |
| 469 | |
Prepaid and other current assets | |
| 541 | |
Intangible assets and Goodwill | |
| 18,103 | |
Property and Equipment, net | |
| 1,302 | |
Deposits and other assets | |
| 339 | |
Operating lease right-of-use asset | |
| 1,246 | |
Total identifiable assets | |
$ | 22,171 | |
| |
| | |
Less: Liabilities assumed | |
| 7,902 | |
Less: Operating lease liability | |
| 1,408 | |
Total Purchase price | |
$ | 12,861 | |
The following table summarizes the cost of intangible assets
related to the acquisition:
| |
Next Level | | |
| |
| |
Internet | | |
Useful Life | |
| |
(in thousands) | | |
(in Years) | |
| |
| | |
| |
Customer Relationships | |
$ | 7,422 | | |
7 | |
Trade Names and Trademarks | |
| 5,069 | | |
7 | |
Non-Compete Agreement | |
| 1,991 | | |
2 | |
Goodwill | |
| 3,621 | | |
- | |
| |
| | | |
| |
Total intangible assets | |
$ | 18,103 | | |
| |
In addition, the Company incurred approximately
$845,000 in costs associated with the Next Level acquisition. These included legal, regulatory, and accounting costs which were expensed
during the nine months ended April 30, 2022.
Proforma
The following schedule contains proforma consolidated
results of operations for the nine months ended April 30, 2022, and 2021 as if the acquisition occurred on August 1, 2020. The proforma
results of operations are presented for informational purposes only and are not indicative of the results of operations that would have
been achieved if the acquisition had taken place on August 1, 2020, or of results that may occur in the future.
| |
(In thousands) | |
| |
Nine months ended April 30, | |
| |
2022 | | |
2021 | |
| |
Reported | | |
Proforma | | |
Reported | | |
Proforma | |
Revenue | |
$ | 15,959 | | |
$ | 23,291 | | |
$ | 8,629 | | |
$ | 18,007 | |
Income (loss) from operations | |
| (3,525 | ) | |
| (3,165 | ) | |
| (1,978 | ) | |
| (2,260 | ) |
Net income (loss) | |
$ | (4,726 | ) | |
$ | (4,382 | ) | |
$ | (15,484 | ) | |
$ | (15,800 | ) |
| |
| | | |
| | | |
| | | |
| | |
Earnings (loss) per common share-Basic and Diluted | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.12 | ) | |
$ | (0.12 | ) |
As part of the acquisition of NLI., the Company
secured an office lease, with a monthly base lease payment of $30,222. The lease expires on March 11, 2026. At the option of the Company,
the lease can be extended for two additional five-year terms, with a base rent at the prevailing market rate at the time of the renewal.
NOTE 13 – SUBSEQUENT
EVENTS
Unsecured Convertible Promissory Notes
payment
On May 2, 2022, the Company made a quarterly principal
payment of $250,000 towards the NLI Unsecured Convertible Promissory Notes.
Unsecured Adjustable Promissory Notes payment
On June 6, 2022, the Company made a quarterly
principal payment of $250,000 towards the NLI Unsecured Adjustable Promissory Notes.
Forbearance Agreement and Third Amendment to Credit Agreement
On February 4, 2022, the T3 Nevada Parties and NLI (collectively, the
“Loan Parties”) and Post Road entered into a Joinder and Second Amendment to Credit Agreement (the “Joinder”)
whereby, among other terms, NLI became a guarantor of T3’s obligations pursuant to the Credit Agreement and notes issued pursuant
thereto.
On June 13, 2022, the parties to the Joinder entered into a Forbearance
Agreement and Third Amendment to Credit Agreement (“Forbearance Agreement”).
The Forbearance Agreement was entered into because certain events of
default related to both the Credit Agreement and the Joinder have occurred. The events of default related to financial covenants were
failure to maintain a Senior Leverage Ratio (as defined in the Credit Agreement) of less than 4.05 to 1.00 and failure to comply with
a Credit Agreement provision whereby the Loan Parties are not allowed to make annual Capital Expenditures (as defined in the Credit Agreement)
greater than $379,190.
The events of default unrelated to financial covenants were the Loan
Parties’ failure to: (a) deliver certain certificates, financial information and projections, lease, landlord, and control agreements,
and evidence of a UCC-3 filing; (b) close or consolidate certain bank accounts; (c) provide ten (10) business days’ notice prior
to the Company filing certain filings with the Securities and Exchange Commission (the “SEC”) and the Nevada Secretary of
State; and (d) engage an industry consultant acceptable to the Agent to consult with the Loan Parties on integration strategy, future
acquisitions, operating performance, and various business issues.
Pursuant to the Forbearance Agreement, Post Road
agreed to forbear through the Forbearance Period (as defined below) from (i) exercising its rights and remedies with regard to the existing
events of default and (ii) requiring compliance with the financial covenants set forth in Section 11.12 of the Credit Agreement (related
to leverage, EBITDA, liquidity, capital expenditures, fixed charge coverage ratio, and churn). The “Forbearance Period” is
from June 13, 2022 through the earlier of (a) August 8, 2022, (b) the date on which any other event of default not enumerated in the Forbearance
Agreement occurs or is deemed to have occurred, or (c) the date of any failure of any Loan Party to comply with any aspect of the Forbearance
Agreement. The forbearance does not constitute a waiver of the defaults enumerated nor does it impair the ability of Post Road to exercise
its rights and remedies after the expiration of the Forbearance Period.
In addition, the Forbearance Agreement amends the
Credit Agreement to clarify Section 10.15 with regard to the Company’s affirmative covenant to comply with its SEC reporting obligations.
It also amends the Credit Agreement to clarify the provisions of the Section 10 (affirmative covenants) whose violation constitute an
event of default. Finally, the Forbearance Agreement amends the Joinder to allow T3 Nevada to give the Agent draft copies of its 10-Ks
and 10-Qs and 8-Ks for the Agent and its advisors review only five business days (10-Ks) or two business days (10-Qs and 8-Ks) in advance
rather than ten business days in advance as originally required by the Joinder.
The Company anticipates implementing remedies
by July 31, 2022 to resolve the financial covenants breaches and the breaches regarding delivering a compliance certificate, financial
projections, and a landlord agreement along with engaging an industry consultant. The Company and Post Road have agreed to work in good
faith to adjust the financial covenants set forth in Section 11.12 of the Credit Agreement to include the financial impact of the acquisition
of Skynet and Next Level. As of the date of this filing, the Company cannot predict the final outcome of the negotiations with Post Road.
The other non-financial events of default were covenants that were
complied with, however, the compliance was not timely pursuant to the provisions of the Credit Agreement and Joinder. These events of
default have not been waived by Post Road.
The foregoing summary of the Forbearance Agreement contains only a
brief description of the material terms of the Forbearance Agreement and such description is qualified in its entirety by reference to
the full text of the Forbearance Agreement, filed herewith as Exhibit 10.3 and incorporated by reference herein.
Expired Leases
As detailed in Note 9, two of the Company’s
lease agreements (one for a property in Dallas, Texas and one for a property in Miami Gardens, Florida) expired in May 2022. Those leases
are now on a month to month basis with the monthly lease payment remaining the same as it was in May 2022. The Company is currently negotiating
long-term extensions of those lease agreements although no guarantees can be made that such extensions will be reached.
Series A Convertible Preferred Stock Certificate
of Correction
On May 24, 2022, the Company filed a Certificate
of Correction with the Nevada Secretary of State with regard to the Company’s Series A Convertible Preferred Stock Certificate
of Designation originally filed in August 2020.
The Certificate of Correction was filed to correct,
among other provisions, certain dates, to correct the Series A Convertible Preferred Stock’s initial conversion price (it is $0.30
and the conversion price is not related to any offering), the date that dividends commenced being paid, to correct the mandatory conversion
provisions (with such provision not related to a listing of the Common Stock on a national securities exchange).
The foregoing summary of the Certificate of Correction
contains only a brief description of the material terms of the Certificate of Correction and such description is qualified in its entirety
by reference to the full text of the Certificate of Correction, filed herewith as Exhibit 3.1 and incorporated by reference herein.