UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from ____________ to ___________
Commission File Number
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting Company | ||
| Emerging growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
| Number of Shares | Class: | As of: | ||
| Common Stock $0.001 par value | December 14, 2022 |
DIGERATI TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2022
INDEX
| Item 1. | Consolidated Financial Statements (Unaudited) | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 37 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 47 |
| Item 4. | Controls and Procedures | 47 |
| PART II-- OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 48 |
| Item 1A. | Risk Factors | 48 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 48 |
| Item 3. | Defaults Upon Senior Securities | 49 |
| Item 4. | Mine Safety Disclosures | 49 |
| Item 5. | Other Information | 49 |
| Item 6. | Exhibits | 50 |
| SIGNATURES | 51 | |
i
DIGERATI TECHNOLOGIES, INC.
CONTENTS
ii
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
| October 31, | July 31, | |||||||
| 2022 | 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| LONG-TERM ASSETS: | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Property and equipment, net | ||||||||
| Other assets | ||||||||
| Investment in Itellum | ||||||||
| Right-of-use assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Equipment financing | ||||||||
| Convertible note payable, current, net of discount of $ | ||||||||
| Note payable, current, related party, net of discount $ | ||||||||
| Note payable, current, net of discount of $ | ||||||||
| Acquisition payable | ||||||||
| Deferred income | ||||||||
| Derivative liability | ||||||||
| Operating lease liability, current | ||||||||
| Total current liabilities | ||||||||
| LONG-TERM LIABILITIES: | ||||||||
| Note payable, net of discount $ | ||||||||
| Convertible note payable | ||||||||
| Equipment financing | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock, $ | ||||||||
| Convertible Series B Preferred stock, $ | ||||||||
| Convertible Series C Preferred stock, $ | ||||||||
| Series F Super Voting Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Other comprehensive income | ||||||||
| Total Digerati’s stockholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See accompanying notes to consolidated unaudited financial statements
1
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
| Three months ended October 31, | ||||||||
| 2022 | 2021 | |||||||
| OPERATING REVENUES: | ||||||||
| Cloud software and service revenue | $ | $ | ||||||
| Total operating revenues | ||||||||
| OPERATING EXPENSES: | ||||||||
| Cost of services (exclusive of depreciation and amortization) | ||||||||
| Selling, general and administrative expense | ||||||||
| Legal and professional fees | ||||||||
| Bad debt expense | ||||||||
| Depreciation and amortization expense | ||||||||
| Total operating expenses | ||||||||
| OPERATING LOSS | ( | ) | ( | ) | ||||
| OTHER INCOME (EXPENSE): | ||||||||
| Gain (loss) on derivative instruments | ( | ) | ||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||
| Other income (expense) | ( | ) | ||||||
| Interest expense | ( | ) | ( | ) | ||||
| Total other income (expense) | ( | ) | ||||||
| NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST | ( | ) | ||||||
| Less: Net loss attributable to the noncontrolling interests | ||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS | ( | ) | ||||||
| Deemed dividend on Series A Convertible preferred stock | ( | ) | ( | ) | ||||
| NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS | $ | ( | ) | $ | ||||
| INCOME (LOSS) PER COMMON SHARE - BASIC | $ | ( | ) | $ | ||||
| INCOME (LOSS) PER COMMON SHARE - DILUTED | $ | ( | ) | $ | ( | ) | ||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | ||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED | ||||||||
See accompanying notes to consolidated unaudited financial statements
2
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Three Months Ended October 31, 2022
(In thousands, except for share amounts, unaudited)
| Equity Digerati’s Shareholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Common | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Shares | Par | Series B Shares | Par | Series C Shares | Par | Series F Shares | Par | Shares | Par | Additional Paid-in Capital | Accumulated Deficit | Other
Comprehensive Income | Stockholders Equity | Noncontrolling Interest | Totals | |||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, July 31, 2022 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series A Convertible Preferred stock | ( | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for exercise of warrants | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt extension | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Ioss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, October 31, 2022 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated unaudited financial statements
3
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Three Months Ended October 31, 2021
(In thousands, except for share amounts, unaudited)
| Equity Digerati’s Shareholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Common | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Shares | Par | Series B Shares | Par | Series C Shares | Par | Series F Shares | Par | Shares | Par | Additional Paid-in Capital | Accumulated Deficit | Other Comprehensive Income | Stockholders’ Deficit | Noncontrolling Interest | Totals | |||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, July 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, October 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated unaudited financial statements
4
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
| Three months ended October 31, |
||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | ( |
) | $ | ||||
| Adjustments to reconcile net loss to cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Stock compensation and warrant expense | ||||||||
| Bad debt expense | ||||||||
| Amortization of Right-of-use Assets | ||||||||
| Amortization of debt discount | ||||||||
| Loss (gain) on derivative liabilities | ( |
) | ||||||
| (Gain) on settlement of conversion premium on note(s) | ( |
) | ||||||
| Accrued interest added to principal | ||||||||
| Debt extension fee charged to interest expense | ||||||||
| Shares issued for debt extension charged to interest expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( |
) | ||||||
| Prepaid expenses and other current assets | ( |
) | ||||||
| Inventory | ||||||||
| Other Assets | ( |
|||||||
| Right-of-use operating lease liability | ( |
) | ( |
) | ||||
| Accounts payable | ||||||||
| Accrued expenses | ( |
) | ||||||
| Deferred income | ( |
) | ||||||
| Net cash (used in) provided by operating activities | ( |
) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Cash paid in acquisition of equipment | ( |
) | ( |
) | ||||
| Net cash used in investing activities | ( |
) | ( |
) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Borrowings from convertible debt, net of original issuance cost and discounts | ||||||||
| Proceeds from the exercise of warrants | ||||||||
| Borrowings from related party notes, net of original issuance cost and discounts | ||||||||
| Principal payments on convertible debt, net | ( |
) | ||||||
| Principal payments on related party notes, net | ( |
) | ( |
) | ||||
| Principal payment on equipment financing | ( |
) | ( |
) | ||||
| Net cash provided by financing activities | ||||||||
| (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | ( |
) | ||||||
| CASH AND CASH EQUIVALENTS, beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Income tax paid | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Accrued interest rolled into principal | $ | $ | ||||||
| Stock issued with convertible debt - debt discount | $ | $ | ||||||
| Common Stock issued for the conversion of Series A Preferred Stock | $ | $ | ||||||
| Dividend declared | $ | $ | ||||||
See accompanying notes to consolidated unaudited financial statements
5
DIGERATI TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Digerati Technologies, Inc. (“we” “us,” “our,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the United States Securities and Exchange Commission. In the opinion of management, these interim financial statements contain all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of financial position and the results of operations for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosure contained in the audited consolidated financial statements for the year ended July 31, 2022, contained in the Company’s Form 10-K filed on October 31, 2022 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 October 31, | ||||||||
| (in thousands, except per share data) | 2022 | 2021 | ||||||
| NUMERATOR: | ||||||||
| NET INCOME (LOSS) | $ | ( | ) | $ | ||||
| DENOMINATOR: | ||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | ||||||||
| $ | ( | ) | $ | |||||
| Three months ended October 31, | ||||||||
| (in thousands, except per share data) | 2022 | 2021 | ||||||
| NUMERATOR: | ||||||||
| NET INCOME (LOSS) | $ | ( | ) | $ | ||||
| Less: adjustments to net income | $ | $ | ( | ) | ||||
| NET INCOME (LOSS) - DILUTED SHARES OUTSTANDING CALCULATION | $ | ( | ) | $ | ( | ) | ||
| DENOMINATOR: | ||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | ||||||||
| Warrants and Options to purchase common stock | ||||||||
| Convertible Debt | ||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED | ||||||||
| LOSS PER COMMON SHARE - DILUTED | $ | ( | ) | $ | ( | ) | ||
6
The Company excluded the following securities from the calculation of basic and diluted net loss per share as the effect would have been antidilutive
| Three months ended October 31, | ||||||||
| 2022 | 2021 | |||||||
| Convertible Preferred Shares | ||||||||
| Convertible Debt | ||||||||
| Total | ||||||||
Treasury Shares
Customers and Suppliers
We rely on various suppliers to provide services in connection with our VOIP and UCaaS offerings. Our customers include businesses in various industries including Healthcare, Banking, Financial Services, Legal, Real Estate, and Construction. We are not dependent upon any single supplier or customer.
During the three months ended October 31, 2022,
and 2021, the Company did not derive revenues of
As of October 31, 2022, and 2021, the Company
did not have outstanding accounts receivable of
Sources of revenue:
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: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
7
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 data.
Disaggregation of Cloud-based hosted revenues.
Summary of disaggregated revenue is as follows (in thousands):
| For the Three Months ended October 31, | ||||||||
| 2022 | 2021 | |||||||
| Cloud software and service revenue | $ | $ | ||||||
| Product revenue | ||||||||
| Total operating revenues | $ | $ | ||||||
Contract Assets
Contract assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations
are completed. The revenue is recognized when the customer receives services or equipment for a reduced consideration at the onset of
an arrangement; for example, when the initial month’s services or equipment are discounted. Contract assets are included in prepaid and
other current assets in the consolidated balance sheets, depending on if their reduction is recognized during the succeeding 12-month
period or beyond. Contract assets as of October 31, 2022, and July 31, 2022, were $
8
Deferred Income
Deferred income represents billings or payment received in advance of revenue recognition and is recognized upon transfer of control.
Balances consist primarily of annual plan subscription services, for services not yet provided as of the balance sheet date. Deferred
revenues that will be recognized during the succeeding 12-month period are recorded as current deferred revenues in the consolidated balance
sheets, with the remainder recorded as other noncurrent liabilities in the consolidated balance sheets. Deferred income as of October
31, 2022, and July 31, 2022, were $
Customer deposits
The Company in some instances requires customers
to make deposits for 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 October 31, 2022, and July 31, 2022, Digerati’s customer deposits balance was $
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
Direct Costs - Cloud software and service
We incur bandwidth and colocation charges in connection with our UCaaS or cloud communication services. The bandwidth charges are incurred as part of the connectivity between our customers to allow them access to our various services. We also incur costs from underlying providers for fiber, internet broadband, and telecommunication circuits in connection with our data and connectivity solutions.
Derivative financial instruments.
Digerati does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, Digerati 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. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is probable within the next 12 months from the balance sheet date.
9
Fair Value of Financial Instruments.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is used which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy based on the three levels of inputs that may be used to measure fair value are as follows:
| Level 1 – | Quoted prices in active markets for identical assets or liabilities. | |
| Level 2 – | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| Level 3 – | Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. |
For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the short maturity of these instruments. The carrying value of our long-term debt approximates its fair value based on the quoted market prices for the same or similar issues or the current rates offered to us for debt of the same remaining maturities.
Our derivative liabilities as of October 31, 2022,
and July 31, 2022, are approximately $
The following table provides the fair value of the derivative financial instruments measured at fair value using significant unobservable inputs:
| Fair value measurements at reporting date using. | ||||||||||||||||
| Quoted prices in active markets for identical liabilities | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||
| Description | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Derivative liability at July 31, 2022 | $ | $ | ||||||||||||||
| Derivative liability at October 31, 2022 | $ | $ | ||||||||||||||
The fair market value of all derivatives during the year ended July 31, 2022, was determined using the Black-Scholes option pricing model which used the following assumptions:
| Expected dividend yield | |
| Expected stock price volatility | |
| Risk-free interest rate | |
| Expected term |
10
The fair market value of all derivatives during the three months ended October 31, 2022, was determined using the Black-Scholes option pricing model which used the following assumptions:
| Expected dividend yield | |
| Expected stock price volatility | |
| Risk-free interest rate | |
| Expected term |
The following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value on a recurring basis using significant unobservable inputs:
| Balance at July 31, 2022 | $ | |||
| Derivative loss | ||||
| Balance at October 31, 2022 | $ |
Noncontrolling interest
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, which governs the accounting for and reporting of non-controlling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. The net income (loss) attributed to the NCI is separately designated in the accompanying consolidated statements of operations.
On May 1, 2018, T3 Communications, Inc. (“T3”),
a Nevada Corporation, entered into a Stock Purchase Agreement (“SPA”), whereby in an exchange for $250,000, T3 agreed to sell to
the buyers 199,900 shares of common stock equivalent to 19.99% of the issued and outstanding common share of T3 Communications, Inc. The
$
For the three months ending October 31, 2022,
and 2021, the Company accounted for a noncontrolling interest of $
Recently issued accounting pronouncements.
Recent accounting pronouncements, other than below, issued by the 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, 2023, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of this ASU on its financial statements.
11
NOTE 2 – GOING CONCERN
Financial Condition
The Company’s consolidated
financial statements for the three months ending October 31, 2022, have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities in the normal course of business. Since the Company’s inception in 1993, the Company
has incurred net losses and accumulated a deficit of approximately $
Management Plans to Continue as a Going Concern
Management believes that available resources as of October 31, 2022, will not be sufficient to fund the Company’s operations and corporate expenses over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off its obligations, if and when they come due.
We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During fiscal 2023 certain members of our management team will continue to receive a portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from or recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams; 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.
Our cash requirements to meet our interest
payments to Post Road, capital expenditure needs, and operational cash flow needs over the next 18 months are estimated to be
approximately $
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) as of October 31, 2022:
| ● | Maximum Allowed - Senior Leverage Ratio of 4.05 to 1.00 |
| ● | Minimum Allowed - Liquidity of $2,000,000 |
| ● | Maximum Allowed - Capital Expenditures of $94,798 (Quarterly) |
| ● | Minimum Allowed - Fixed Charge Coverage Ratio of 1.5 to 1.00 |
On December 15, 2022, the lender agreed to forbear the financial covenants that were not complied with during the quarter ended October 31,2022. The Company and Post Road are currently working on an amendment to the credit agreement and anticipate having it completed on or before January 31, 2023. However, as of the date of this filing, the Company cannot predict the final outcome of the negotiations with Post Road.
While Digerati, the parent company of T3 Nevada, is not subject to these financial covenants, they have had and will continue to have a material impact on T3 Nevada’s expenditures and ability to raise funds.
In addition, our Term Loan
C Note with Post Road with a maturity date of
We have been successful in raising debt and equity capital in the past and as described in Notes 6, 7, 8, and 13. 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.
The current Credit Agreement with Post Road 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.
Our current cash expenses
are expected to be approximately $
Digerati’s consolidated financial statements as of October 31, 2022, do not include any adjustments that might result from the inability to implement or execute Digerati’s plans to improve our ability to continue as a going concern.
13
NOTE 3 – INTANGIBLE ASSETS
Below are summarized changes in intangible assets at October 31, 2022, and July 31, 2022:
| Gross Carrying | Accumulated | Net Carrying | ||||||||||
| October 31, 2022 | Value | Amortization | Amount | |||||||||
| NetSapiens - license, 10 years | $ | $ | ( | ) | $ | |||||||
| Customer relationships, 5 years | ( | ) | ||||||||||
| Customer relationships, 7 years | ( | ) | ||||||||||
| Trademarks, 7 & 10 years | ( | ) | ||||||||||
| Non-compete, 2 & 3 years | ( | ) | ||||||||||
| Marketing & Non-compete, 5 years | ( | ) | ||||||||||
| Total Definite-lived Intangible Assets | ( | ) | ||||||||||
| Goodwill | ||||||||||||
| Balance, October 31, 2022 | $ | $ | ( | ) | $ | |||||||
| Gross Carrying | Accumulated | Net Carrying | ||||||||||
| July 31, 2022 | Value | Amortization | Amount | |||||||||
| NetSapiens - license, 10 years | $ | $ | ( | ) | $ | |||||||
| Customer relationships, 5 years | ( | ) | ||||||||||
| Customer relationships, 7 years | ( | ) | ||||||||||
| Trademarks, 7 & 10 years | ( | ) | ||||||||||
| Non-compete, 2 & 3 years | ( | ) | ||||||||||
| Marketing & Non-compete, 5 years | ( | ) | ||||||||||
| Total Definite-lived Intangible Assets | ( | ) | ||||||||||
| Goodwill | ||||||||||||
| Balance, July 31, 2022 | $ | $ | ( | ) | $ | |||||||
Total amortization expense for the three months
ended October 31, 2022, and 2021 was $
NOTE 4 – STOCK-BASED COMPENSATION
In November 2015, the Company adopted the Digerati
Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”).
14
During the three months ended October 31, 2022 and October 31, 2021, the Company did not issue any new stock options.
A summary of the stock options outstanding as of October 31, 2022, and July 31, 2022, and the changes during the three months ended October 31, 2022, are presented below:
| Weighted
average exercise | Weighted
average remaining contractual | |||||||||||
| Options | price | term (years) | ||||||||||
| Outstanding at July 31, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited and cancelled | ||||||||||||
| Outstanding on October 31, 2022 | $ | |||||||||||
| Exercisable on October 31, 2022 | $ | |||||||||||
The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) of the 9,130,000 and 9,130,000 stock options outstanding as of October 31, 2022, and July 31, 2022, was $320,160 and $191,722, respectively.
The aggregate intrinsic value of
NOTE 5 – WARRANTS
During the three months ended October 31, 2022 and 2021, the Company did not issue any warrants.
A summary of the warrants outstanding as of October 31, 2022, and July 31, 2022, and the changes during the three months ended October 31, 2022, are presented below:
| Warrants | Weighted
average exercise price | Weighted
average remaining contractual term (years) | ||||||||||
| Outstanding at July 31, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | $ | |||||||||
| Forfeited and cancelled | ( | ) | $ | |||||||||
| Outstanding on October 31, 2022 | $ | |||||||||||
| Exercisable on October 31, 2022 | $ | |||||||||||
15
The aggregate intrinsic value (the difference
between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number
of in-the-money warrants) of the
The aggregate intrinsic value of 325,562 and
NOTE 6 – NOTES PAYABLE NON-CONVERTIBLE
On October 22, 2018, the Company issued a
secured promissory note for $
Credit Agreement and Notes
On November 17, 2020, T3 Communications, Inc.,
a Nevada corporation (“T3 Nevada”), a majority owned subsidiary of Digerati Technologies, Inc. (the “Company”)
and the Company’s other subsidiaries entered into a credit agreement (the “Credit Agreement”) with Post Road. The Company
is a party to certain sections of the Credit Agreement. Pursuant to the Credit Agreement, Post Road will provide T3 Nevada with a secured
loan of up to $
During the three months ended October 31, 2022,
the total debt discount for the Term Loan A Note and the Term Loan B Note was fully amortized. The total debt discount outstanding on
the notes as of October 31, 2022, and July 31, 2022, was $
Term Loan A Note with a maturity date 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.
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 $
16
Pursuant to the First Amendment, the additional
proceeds of $
The A&R Term Loan A Note has a maturity date
of November 17, 2024, and an interest rate of LIBOR (with a minimum rate of
On February 4, 2022, T3 Nevada and Post Road entered
into a Credit Agreement in connection with which T3 Nevada issued a Term Loan C Note, Pursuant to the Credit Agreement, Post Road provided
T3 Nevada with a secured loan of $
The Term Loan C Note has a maturity date of August
4, 2023, and an interest rate of LIBOR (with a minimum rate of
The Credit Agreement contains customary representations, warranties, and indemnification provisions. The Credit Agreement also contains affirmative and negative covenants with respect to operation of the business and properties of the loan parties as well as financial performance. Below are key covenants requirements, (measured quarterly) as of October 31, 2022:
| 2. | Minimum Allowed - EBITDA of $3,771,629 |
| 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 |
While Digerati, the parent company of T3 Nevada, is not subject to these financial covenants, they have had and will continue to have a material impact on T3 Nevada’s expenditures and ability to raise funds.
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 and December 15, 2022 by and among T3 Nevada, the Company’s other subsidiaries, and Post
Road Administrative LLC (the “Guaranty and Collateral Agreement”). In addition, T3 Nevada’s obligations under the
Credit Agreement are, pursuant to a Pledge Agreement (the “Pledge Agreement”), secured by a pledge of a first priority
security interest in T3 Nevada’s
17
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 $
NOTE 7 – RELATED PARTY TRANSACTIONS
On October 4, 2022, the Company entered into a $
During the three months ended October 31, 2022,
and 2021, the Company provided VoIP Hosted and fiber services to a Company owned by one of the Board members of T3 Communications, Inc.,
for $
On November 17, 2020, as a result of the of the
acquisition of ActiveServe’s asset, the two sellers became related parties as they continued to be involved as consultants to manage
the customer relationship, the Company paid on an annual basis $
On December 31, 2021, as a result of the of the
acquisition of Skynet’s asset, the two sellers became related parties as they continued to be involved as consultants for 12 months
to manage the customer relationship, the Company will pay on an annual basis $
Acquisition Payable – Skynet
As part of the acquisition of Skynet’s assets,
the Company will pay to the seller a $
18
NOTE 8 – CONVERTIBLE NOTES PAYABLE
As of October 31, 2022, and July 31, 2022, convertible notes payable consisted of the following:
| October 31, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | 2022 | 2022 | ||||||
| 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. On September 28, 2022, the holder agreed to extend the maturity date until February 28, 2023. After payment of transaction-related expenses and closing fees of $32,000, net proceeds to the Company from the Note totaled $298,000. The Company recorded $32,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 1,000,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $45,003 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $134,423 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a fix conversion price at issuance, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. On September 28, 2022, the lender agreed to extend the maturity date until February 28, 2023. The total unamortized discount on the Note as of October 31, 2022, and July 31, 2022, was $0. The total principal balance outstanding as of October 31, 2022, and July 31, 2022, was $165,000 (See below variable conversion terms No.1). | $ | $ | ||||||
| On January 27, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, annual interest rate of 8% and a maturity date of January 27, 2022. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $24,368 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $44,368 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.05 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. On January 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. On August 1, 2022, the lender agreed to extend the maturity date until January 31, 2023. As consideration for the extension on the note, the Company agreed to add $50,000 to the principal amount outstanding and charged the total to interest expense, in addition, the Company issued 300,000 shares of common stock with a market value of $28,740 and charged the total to interest expense. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of the amendment date, the total unamortized discount on the Note was $0. The total unamortized discount on the Note as of October 31, 2022, and July 31, 2022, was $0, respectively. The total principal balance outstanding as of October 31, 2022, and July 31, 2022, were $325,000 and $275,000, respectively. | ||||||||
19
| October 31, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | 2022 | 2022 | ||||||
| On April 14, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, annual interest rate of 8% and a maturity date of April 14, 2022. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $63,433 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $96,766 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. 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. On September 16, 2022, the lender agreed to extend the maturity date until April 14, 2023. As consideration for the extension on the note, the Company agreed to add $50,000 to the principal amount outstanding and charged the total to interest expense, in addition, the Company issued 300,000 shares of common stock with a market value of $35,400 and charged the total to interest expense. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of the amendment date, the total unamortized discount on the Note was $0. The total unamortized discount on the Note as of October 31, 2022, and July 31, 2022, was $0, respectively. The total principal balance outstanding as of October 31, 2022, and July 31, 2022, were $325,000 and $275,000, respectively. | ||||||||
| On August 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of August 31, 2022. In connection with the execution of the note, the Company issued 150,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $13,635 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. On September 14, 2022, the lender agreed to extend the maturity date until February 28, 2023. As consideration for the extension on the note, the Company agreed to add $15,000 to the principal amount outstanding and charged the total to interest expense, in addition, the Company issued 90,000 shares of common stock with a market value of $10,845 and charged the total to interest expense. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of the amendment date, the total unamortized discount on the Note was $0. 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 $1,136 as interest expense during the quarter ended October 31, 2022. The total unamortized discount on the Note as of October 31, 2022 and July 31, 2022, were $0 and $1,136, respectively. The total principal balance outstanding as of October 31, 2022 and July 31, 2022, were, $90,000 and $75,000, respectively. | ||||||||
20
| October 31, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | 2022 | 2022 | ||||||
| On September 29, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of September 29, 2022. In connection with the execution of the note, the Company issued 150,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $10,788 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. On September 16, 2022, the lender agreed to extend the maturity date until March 29, 2023. As consideration for the extension on the note, the Company agreed to add $15,000 to the principal amount outstanding and charged the total to interest expense, in addition, the Company issued 90,000 shares of common stock with a market value of $10,620 and charged the total to interest expense. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of the amendment date, the total unamortized discount on the Note was $0. The Company amortized $1,798 as interest expense during the quarter ended October 31, 2022. The total unamortized discount on the Note as of October 31, 2022 and July 31, 2022, were, $0 and $1,798, respectively The total principal balance outstanding as of October 31, 2022 and July 31, 2022, were, $90,000 and $75,000, respectively. | ||||||||
| On October 22, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $150,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of October 22, 2022. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $13,965 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. On September 16, 2022, the lender agreed to extend the maturity date until April 29, 2023. As consideration for the extension on the note, the Company agreed to add $30,000 to the principal amount outstanding and charged the total to interest expense, in addition, the Company issued 180,000 shares of common stock with a market value of $21,240 and charged the total to interest expense. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of the amendment date, the total unamortized discount on the Note was $0. The Company amortized $3,491 as interest expense during the quarter ended October 31, 2022. The total unamortized discount on the Note as of October 31, 2022 and July 31, 2022, were, $0 and $3,491, respectively. The total principal balance outstanding as of October 31, 2022 and July 31, 2022, were, $180,000 and $150,000, respectively. | ||||||||
21
| October 31, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | 2022 | 2022 | ||||||
| On February 4, 2022, as part the acquisition of Next Level Internet (“NLI”), 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. At inception of the notes, the Company recognized the fair market value of the conversion on the notes of $2,382,736, and recognized $117,264 in debt discount, which was amortized over the conversion period. As of the quarter ending October 31, 2022, the conversion option on the notes ended, and the Company recognized $466,000 as other income for the settlement of the conversion option. During the quarter ending October 31, 2022, the Company made a principal payment of $250,000. The total principal balance outstanding on the Unsecured Convertible Promissory Notes as of October 31, 2022 and July 31, 2022, were $1,500,000 and $2,250,000, respectively. The total unamortized debt discount on the notes as of October 31, 2022 and July 31, 2022, were $0 and $33,914, respectively. | ||||||||
| On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, annual interest rate of 8% and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder and recorded $30,446 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 since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. On October 21, 2022, the holder agreed to extend the maturity date until January 31, 2023. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $30,000 and issued 300,000 shares of common stock with a fair market value of $36,330. 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 $30,000 increase in principal and $36,330 fair value of shares issued and charged the total $66,330 to interest expense at the time of the extension. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The total unamortized discount on the Note as of October 31, 2022 and July 31, 2022, were $0 and $18,916, respectively. The Company amortized $18,916 of debt discount as interest expense during the quarter ended October 31, 2022. The total principal balance outstanding as of October 31, 2022 and July 31, 2022, were $260,000 and $230,000, respectively. | ||||||||
22
| October 31, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | 2022 | 2022 | ||||||
| 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 $30,446 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 since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. On October 21, 2022, the holder agreed to extend the maturity date until January 31, 2023. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $30,000 and issued 300,000 shares of common stock with a fair market value of $36,330. 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 $30,000 increase in principal and $36,330 fair value of shares issued and charged the total $66,330 to interest expense at the time of the extension. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. On October 21, 2022, the holder agreed to extend the maturity date until January 31, 2023. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $30,000 and issued 300,000 shares of common stock with a fair market value of $36,330. 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 $30,000 increase in principal and $36,330 fair value of shares issued and charged the total $66,330 to interest expense at the time of the extension. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The total unamortized discount on the Note as of October 31, 2022 and July 31, 2022, were $0 and $18,916, respectively. The Company amortized $18,916 of debt discount as interest expense during the quarter ended October 31, 2022. The total principal balance outstanding as of October 31, 2022 and July 31, 2022, were $260,000 and $230,000, respectively. | ||||||||
| On July 27, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $165,000, annual interest rate of 8% and a maturity date of April 27, 2023. After payment of transaction-related expenses and closing fees of $19,500, net proceeds to the Company from the note totaled $145,500. Additionally, the Company issued 300,000 shares of our common stock to the note holder. The Company recorded the $19,500 and the relative fair market value of the shares of $22,093 as debt discount and amortized to interest expense over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the note 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 $0.10 (ten) 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 an 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 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 total unamortized discount on the Note as of October 31, 2022 and July 31, 2022, were $27,729 and $41,593, respectively. The Company amortized $13,864 of debt discount as interest expense during the quarter ended October 31, 2022. The total principal balance outstanding as of October 31, 2022 and July 31, 2022, was $165,000 and $119,500, respectively. | ||||||||
23
| October 31, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | 2022 | 2022 | ||||||
| On September 12, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, annual interest rate of 8% and a maturity date of September 12, 2023. 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 $15,880 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The total unamortized discount on the Note as of October 31, 2022 was $19,925. The Company amortized $3,985 of debt discount as interest expense during the quarter ended October 31, 2022. The total principal balance outstanding as of October 31, 2022 was $75,000 | - | |||||||
| On October 3, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $165,000, annual interest rate of 8% and a maturity date of July 3, 2023. After payment of transaction-related expenses and closing fees of $19,500, net proceeds to the Company from the note totaled $145,500. Additionally, the Company issued 300,000 shares of our common stock to the note holder. The Company recorded the $19,500 and the relative fair market value of the shares of $32,143 as debt discount and amortized to interest expense over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the note 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 $0.10 (ten) 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 an 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 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 total unamortized discount on the Note as of October 31, 2022 was $45,905. The Company amortized $5,738 of debt discount as interest expense during the quarter ended October 31, 2022. The total principal balance outstanding as of October 31, 2022 was $165,000. | - | |||||||
| On October 10, 2022, 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 April 10, 2023. After payment of transaction-related expenses and closing fees of $25,000, net proceeds to the Company from the note totaled $250,000. The Company recorded the $25,000 as debt discount and amortized to interest expense over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the note 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. Any Principal Amount or interest on this Note which is not paid when due shall bear interest at the rate the lesser of (a) twenty-four percent (24%) per annum from the due date thereof until the same is paid (“Default Interest”); or (b) the maximum rate allowed by law. 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 total unamortized discount on the Note as of October 31, 2022 was $20,833. The Company amortized $4,167 of debt discount as interest expense during the quarter ended October 31, 2022. The total principal balance outstanding as of October 31, 2022 was $275,000. | - | |||||||
24
| October 31, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | 2022 | 2022 | ||||||
| On October 27, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $28,500, annual interest rate of 8% and a maturity date of July 26, 2023. After payment of transaction-related expenses and closing fees of $3,500, net proceeds to the Company from the note totaled $25,000. The Company recorded the $3,500 as debt discount and amortized to interest expense over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the note 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 $0.10 (ten) 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 an 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 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 total unamortized discount on the Note as of October 31, 2022 was $3,500. The Company amortized $0 of debt discount as interest expense during the quarter ended October 31, 2022. The total principal balance outstanding as of October 31, 2022 was $28,500. | - | |||||||
| On October 27, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $71,500, annual interest rate of 8% and a maturity date of July 26, 2023. After payment of transaction-related expenses and closing fees of $6,500, net proceeds to the Company from the note totaled $65,000. Additionally, the Company issued 200,000 shares of our common stock to the note holder. The Company recorded the $6,500 and the relative fair market value of the shares of $38,768 as debt discount and amortized to interest expense over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the note 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 $0.10 (ten) 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 an 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 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 total unamortized discount on the Note as of October 31, 2022, was $45,268. The Company amortized $0 of debt discount as interest expense during the quarter ended October 31, 2022. The total principal balance outstanding as of October 31, 2022 and was $71,500. | - | |||||||
| On October 31, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $350,000, annual interest rate of 14% and a maturity date of February 28, 2023. Net proceeds to the Company from the note totaled $350,000. In the event that any payment is not made when due, either of principal or interest, and whether upon maturity or as a result of acceleration, interest shall thereafter accrue at the rate per annum equal to the lesser of (a) the maximum non-usurious rate of interest permitted by the laws of the State of Texas or the United States of America, whichever shall permit the higher rate or (b) twenty percent (20%) per annum, from such date until the entire balance of principal and accrued interest on this Note has been paid. At any time after sixty (60) days following the date hereof, Payee may elect to convert a percentage of the amount of principal and accrued interest outstanding on the Note into common stock of Debtor, in accordance with the following terms: (i) If prior to uplist to Nasdaq or NYSE, Payee may convert up to 50% of the amount outstanding on the Note into Common Stock. In such event, the price per share of Common Stock applicable to such conversion (the “Applicable Conversion Price”) shall be the greater of: (a) the Variable Conversion Price or (b) the Fixed Conversion Price. The “Variable Conversion Price” shall be equal to a 20% discount to the average closing price for Common Stock for the five (5) Trading Day period immediately preceding the Conversion Date. “Trading Day” shall mean any day on which the Common Stock is tradable for any period on the principal securities exchange or other securities market on which the Common Stock is then being traded. The “Fixed Conversion Price” shall mean $0.10; and (ii) If following the Uplist, Payee may convert up to 100% of the amount outstanding on the Note into Common Stock. In such event, the Applicable Conversion Price shall be the greater of: (a) the post-Uplist Variable Conversion Price (i.e., if less than 5 days after the Uplist, then the average of the days available since the Uplist up to 5) or (b) the Fixed Conversion Price. 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 total principal balance outstanding as of October 31, 2022 was $350,000. | - | |||||||
| Total convertible notes payables non-derivative: | $ | $ | ||||||
25
| October 31, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE - DERIVATIVE | 2022 | 2022 | ||||||
| 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. 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 July 26, 2022, the holder agreed to extend the maturity date until December 31, 2022. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $50,000 and issued 300,000 shares of common stock with a market value of $30,000. 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 for both the $50,000 increase in principal and $30,000 fair value of shares issued and charged the total $80,000 to interest expense at the time of the extension. The total principal balance outstanding as of October 31, 2022, and July 31, 2022, was $480,000 and $480,000, respectively. | ||||||||
| 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. On March 7, 2022, the holder agreed to extend the maturity date until July 31, 2022. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or seventy-five percent (75%) of the lowest daily volume weighted average price (“VWAP”) over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $59,413. The total unamortized discount on the Note as of October 31, 2022, and July 31, 2021, was $0 and $0, respectively. On September 28, 2022, the holder agreed to extend the maturity date until February 28, 2023. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $62,500 and charged the total to interest expense, in addition, the Company issued 500,000 shares of common stock with a market value of $70,000 and charged the total to interest expense. The total principal balance outstanding as of October 31, 2022, and July 31, 2022, were $142,735 and $80,235, respectively. | ||||||||
26
| October 31, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE - DERIVATIVE | 2022 | 2022 | ||||||
| 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 18, 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. On June 28, 2022, the lender agreed to extend the maturity date until September 30, 2022. As consideration for the extension on the note, the Company agreed to add $20,000 to the principal amount outstanding and charged the total to interest expense. The agreement as of June 28, 2022, provides the Company the option extend the maturity date for an additional 90 days for an additional $20,000 to be added to the principal amount. On September 30, 2022, the Company extended the maturity date of the note until December 30, 2022 and charged to interest expense the total $20,000 added to principal balance. The Company evaluated the amendments and accounted for these changes as an extinguishment of debt. The total unamortized discount on the Note as of October 31, 2022 and July 31, 2022, was $0. The total principal balance outstanding as of October 31, 2022, and July 31, 2022, were, $183,000 and $163,000, respectively. | ||||||||
| Total convertible notes payable - derivative: | $ | $ | ||||||
| Total convertible notes payable derivative and non-derivative | ||||||||
| Less: discount on convertible notes payable | ( | ) | ( | ) | ||||
| Total convertible notes payable, net of discount | ||||||||
| Less: current portion of convertible notes payable | ( | ) | ( | ) | ||||
| Long-term portion of convertible notes payable | $ | $ | ||||||
Additional terms No.1: The Holder of the Note originally dated October 13, 2020 with a balance of $165,000 as of October 31, 2022, shall have the right to convert any portion of the outstanding and unpaid principal balance into fully paid and nonassessable shares of Common Stock. The conversion price (the “Conversion Price”) shall equal $0.05 (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 total unamortized discount on the convertible
notes as of October 31, 2022, and July 31, 2022, were $
27
NOTE 9 – LEASES
The leased properties have a remaining lease term of three to sixty-three months as of October 31, 2022. 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. | ||||||||
| 8023 Vantage Dr., Suite 660, San Antonio, Texas 78230 | $ | |||||||||||
| 10967 Via Frontera, San Diego, CA 92127 | $ | |||||||||||
| 1610 Royal Palm Avenue, Suite 300, Fort Myers, FL 33901 | $ | |||||||||||
| 2121 Ponce de Leon Blvd., Suite 200, Coral Gables FL 33134 | $ | |||||||||||
| 7218 McNeil Dr., FL-1, Austin, TX 78729 | $ | |||||||||||
| 6606 Lyndon B. Johnson, Fwy., FL1, Suite 125, Dallas, TX 75240 | $ | |||||||||||
| 9701 S. John Young Parkway, Orlando, FL 32819 | $ | |||||||||||
| 50 NE 9th St, Miami, FL 3313 | $ | |||||||||||
| 350 NW 215 St., Miami Gardens, FL 33169 | $ | |||||||||||
| 8333 NW 53rd St, Doral, FL 33166 | $ | |||||||||||
| 100 SE 2nd Street, Miami, FL 33131 | $ | |||||||||||
| 9055 SW 73rd Ct, Miami, FL 33156 | $ | |||||||||||
| 9517 Fontainebleau Blvd., Miami, FL 33172 | $ | |||||||||||
The Company has not entered into any sale and leaseback transactions during the three months ended October 31, 2022.
On
May 17, 2022, the Company extended the office and wireless internet network leases in Coral Gables, Florida. The Company accounted for
the extension as a lease modification. The Company used the discount rate of
In
February 2022, as part of the acquisition of NLI, the Company secured an office lease, with a monthly base lease payment of $
In
December 2021, as part of the acquisition of Skynet Telecom LLC’s assets, the Company assumed an office lease in San Antonio, Texas.
28
Amounts recognized as of July 31, 2022, and October 31, 2022, for operating leases are as follows:
| ROU Asset | July 31, 2022 | $ | ||||
| Amortization | $ | ( | ) | |||
| Addition - Asset | $ | |||||
| ROU Asset | October 31, 2022 | $ | ||||
| Lease Liability | July 31, 2022 | $ | ||||
| Amortization | $ | ( | ) | |||
| Addition - Liability | $ | |||||
| Lease Liability | October 31, 2022 | $ | ||||
| Lease Liability | Short term | $ | ||||
| Lease Liability | Long term | $ | ||||
| Lease Liability | Total: | $ |
| Operating lease cost: | $ | |||
| Cash paid for amounts included in the measurement of lease labilities | ||||
| Operating cashflow from operating leases: | $ | |||
| Weighted-average remain lease term-operating lease: | ||||
| Weighted-average discount rate | % |
The future minimum lease payment under the operating leases are as follows:
| Lease | ||||
| Period Ending July 31, | Payments | |||
| 2023* | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total: | $ | |||
| * | remaining 9 Months |
29
NOTE 10 – EQUIPMENT FINANCING
The
Company entered into various financing agreement for equipment purchased. Under the term of the agreement, assets with a cost of approximately
$
The future payments under the equipment financing agreements are as follows:
| Year | Amount | |||
| 2023* | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total future payments: | $ | |||
| * |
| Less: amounts representing interest | 5,681 | |||
| Present value of net minimum equipment financing payments | $ | |||
| Less current maturities | ||||
| Long-term equipment financing obligation | $ | |||
| Lease cost: | ||||
| Amortization of ROU assets | $ | |||
| Interest on lease liabilities | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cashflow from equipment financing: | $ | |||
| Financing cashflow from equipment financing: | ||||
| Weighted-average remaining lease term - equipment financing: | ||||
| Weighted-average discount rate | % |
30
NOTE 11 – EQUITY
During the three months ended October 31, 2022, the Company issued the following shares of common stock:
On August 1, 2022,
the Company entered into a note extension agreement with Tysadco Partners, LLC, and as consideration
for the extension, the Company issued
On September 12,
2022, the Company entered into a $
On September 14,
2022, the Company entered into a note extension agreement with Tysadco Partners, LLC, and as consideration
for the extension, the Company issued
On September 16,
2022, the Company entered into a note extension agreement with Tysadco Partners, LLC, and as consideration
for the extension, the Company issued
On September 16,
2022, the Company entered into a note extension agreement with Tysadco Partners, LLC, and as consideration
for the extension, the Company issued
On September 16, 2022, the Company entered into a note extension agreement
with Tysadco Partners, LLC, and as consideration for the extension, the Company issued
31
On September 28, 2022, the Company entered into
a note extension agreement with Platinum Point Capital, LLC, and as consideration for the extension, the Company issued
On September 28, 2022, William Figueroa, a Series
A Preferred Shareholder converted
On October 3, 2022, the Company entered into a
$
On October 21, 2022, the Company entered into
a note extension agreement with Lucas Ventures, LLC, and as consideration for the extension, the Company issued
On October 21, 2022, the Company entered into
a note extension agreement with LGH Investments, LLC, and as consideration for the extension, the Company issued
On October 27, 2022, the Company entered into
a $
In October 2022, the Company issued to various
individuals
On November 28, 2022, the Company entered into
a convertible note with Mast Hill Fund, L.P., and issued
32
NOTE 12 – SUBSEQUENT EVENTS
MEOA Business Combination
On August 30, 2022, Digerati entered into a Business Combination Agreement (as it may be amended, supplemented or otherwise modified from time to time, the “Business Combination Agreement”), by and among Digerati, Minority Equality Opportunities Acquisition Inc., a Delaware corporation (“MEOA”), and Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of MEOA (“Merger Sub”).
The Business Combination Agreement and the transactions contemplated thereby were approved by the board of directors of each of MEOA and Digerati.
The Business Combination Agreement provides, among other things, that Merger Sub will merge with and into Digerati, with Digerati as the surviving company in the merger and, after giving effect to such merger, Digerati shall be a wholly-owned subsidiary of MEOA (the “Merger”). In addition, MEOA will be renamed Digerati Holdings, Inc. The Merger and the other transactions contemplated by the Business Combination Agreement are hereinafter referred to as the “Business Combination”. Other capitalized terms used, but not defined, herein, shall have the respective meanings given to such terms in the Business Combination Agreement
In accordance
with the terms and subject to the conditions of the Business Combination Agreement, at the Effective Time, among other things: (i) each
share of Digerati common stock outstanding as of immediately prior to the Effective Time will be exchanged for shares of MEOA common stock,
par value $
The Business Combination is expected to close in the first calendar quarter of 2023, following the receipt of the required approval by the stockholders of MEOA and Digerati, approval by Nasdaq of MEOA’s initial listing application filed in connection with the Business Combination, and the fulfillment of other customary closing conditions.
The Business Combination Agreement may be terminated under certain customary and limited circumstances at any time prior to the closing, including, without limitation, (i) by the mutual written consent of MEOA and Digerati; (ii) by MEOA, subject to certain exceptions, if any of the representations or warranties made by Digerati are not true and correct or if Digerati fails to perform any of its covenants or agreements under the Business Combination Agreement (including an obligation to consummate the closing) such that certain conditions to our obligations could not be satisfied and the breach (or breaches) of such representations or warranties or failure (or failures) to perform such covenants or agreements is (or are) not cured or cannot be cured within the earlier of (A) thirty (30) days after written notice thereof, and (B) February 25, 2023 (the “Termination Date”); (iii) by Digerati, subject to certain exceptions, if any of the representations or warranties made by our company or Merger Sub are not true and correct or if MEOA or Merger Sub fails to perform any of its covenants or agreements under the Business Combination Agreement (including an obligation to consummate the closing) such that the condition to the obligations of Digerati could not be satisfied and the breach (or breaches) of such representations or warranties or failure (or failures) to perform such covenants or agreements is (or are) not cured or cannot be cured within the earlier of (A) thirty (30) days after written notice thereof, and (B) the Termination Date; (iv) by either MEOA or Digerati, if the closing does not occur on or prior to the Termination Date, unless the breach of any covenants or obligations under the Business Combination Agreement by the party seeking to terminate proximately caused the failure to consummate the transactions contemplated by the Business Combination Agreement; (v) by either MEOA or Digerati, if (A) any governmental entity shall have issued an order or taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions contemplated by the Business Combination Agreement and such order or other action shall have become final and non-appealable; or (B) if the Required MEOA Stockholder Consent is not obtained; (vi) by MEOA, if (A) Digerati does not deliver, or cause to be delivered to MEOA a Transaction Support Agreement duly executed by certain Digerati stockholders or (B) the Digerati stockholders meeting has been held, has concluded, the Digerati stockholders have duly voted, and Digerati stockholder approval was not obtained; (vii) by MEOA, if Digerati does not deliver, or cause to be delivered, to MEOA a duly executed copy of the PRG Resolution Agreement on or prior to October 15, 2022. The parties are currently negotiating an extension to this deadline. There can be no assurance that an agreement on this matter will be reached; (viii) by Digerati, should MEOA not have timely taken such actions as are reasonably necessary to extend the period of time to complete an initial business combination for an additional period of three months from November 30, 2022; provided, that it shall be the obligation of Digerati to timely make the deposit into the Trust Account in connection with such extension, and Digerati shall not have a right to terminate the Business Combination Agreement as a result of Digerati’s failure to make such deposit; (ix) by MEOA should Digerati not deposit into the Trust Account in a timely manner the funds necessary to extend the period for our company to complete an initial business combination for an additional period of three months from November 30, 2022, in accordance with, and as required pursuant to, the Business Combination Agreement; and (x) by MEOA should: (A) Nasdaq not approve the initial listing application for the combined company with Nasdaq in connection with the Business Combination; (B) the combined company not have satisfied all applicable initial listing requirements of Nasdaq; or (C) the common stock of the combined company not have been approved for listing on Nasdaq prior to the date of the closing.
33
If the Business Combination Agreement is validly
terminated, none of the parties to the Business Combination Agreement will have any liability or any further obligation under the Business
Combination Agreement other than customary confidentiality obligations, except in the case of a willful breach of any covenant or agreement
under the Business Combination Agreement or fraud, provided, that (A) if MEOA terminates the Business Combination Agreement pursuant
to clauses (ii), (vi), (vii) or (viii) of the preceding paragraph, Digerati shall pay to MEOA, promptly following such termination, and
in any event within not less than five business days following delivery of notice of termination, a termination fee in the amount of
$
On October 28, 2022, MEOA filed a preliminary proxy statement on Schedule 14A (the “Proxy”) with the Securities and Exchange Commission (the “SEC”) to hold a special meeting of the stockholders of MEOA (the “Special Meeting”) to consider and vote upon a proposal to amend MEOA’s amended and restated certificate of incorporation to give MEOA the right to extend the date by which MEOA is required.
Unsecured Convertible Promissory Notes payment
On
November 4, 2022, the Company made a quarterly principal payment of $
NLI Adjustable Note MRC Targets Payment – extension of Deferred Payment amount
On
November 18, 2022, the Company and The Jerry and Lisa Morris Revocable Trust Dated November 18, 2002 agreed to a Forbearance Agreement
which allows the Company to an extension of the principal payment (“Deferred Payment”) amount of $
Securities Purchase Agreement and Promissory Note
On November 28, 2022, Digerati Technologies, Inc. (the “Company”), entered into a securities purchase agreement (the “SPA”) with Mast Hill Fund, L.P. (the “Investor”). Although the SPA and other transaction documents are dated November 22, 2022, the SPA and other transaction documents were signed on November 28, 2022. The closing of the transaction took place on November 29, 2022.
34
The
Investor has the right to convert all or any portion of the amount the Company owes pursuant to the Note into shares of the Company’s
common stock, $
The
Note’s conversion price is $
The
Company shall at all times reserve the greater of (i)
The Company can, at its option, prepay the amount the Company owes pursuant to the Note without a penalty. The Investor is allowed to convert the Note into shares of Common Stock for a period of seven (7) trading days following the Company submitting a prepayment notice to the Investor.
The
Investor can require the Company to repay all or any portion the amount the Company owes pursuant to the Note via a payment of up to
fifty percent (
The Note is a long-term debt obligation that is material to the Company. The Note contains covenants and events of default including if the Company is delinquent in its periodic report filings with the SEC and increases in the amount of the principal and interest rates under the Note in the event of such defaults.
The
Company used a portion of the net proceeds to make a deposit in the amount of $
35
Commitment Shares and Warrant
The
Company can force the exercise of the Warrant if, among other requirements, (i) the VWAP (as defined in the Warrant) of the Common Stock
during each of the ten (10) trading days prior to the date on which the Company will deliver shares to the Investor pursuant to the forced
exercise (the “Forced Exercise Shares”) equals or exceed
Registration Rights Agreement
In connection with the signing of the SPA and the issuance of the Note and Warrant, the Company and the Investor entered into a Registration Rights Agreement (the “RRA”) with regard to the Commitment Shares, the shares of Common Stock issuable pursuant to the conversion of the Note (the “Conversion Shares”), and the shares of Common Stock issuable pursuant to the exercise of the Warrant (the “Warrant Shares” and, together with the Commitment Shares and the Conversion Shares, the “Registrable Securities”). Pursuant to the RRA, the Company is obligated to file a registration statement with the Securities and Exchange Commission to register the Registrable Securities under the Securities Act of 1933, as amended (the “Securities Act”) for resale by the Investor. The RRA’s deadline to file the resale registration statement is within one hundred fifty (150) days of November 22, 2022 with the effectiveness deadline being within one hundred eighty (180) days of November 22, 2022. Failure to meet these deadlines constitutes an event of default under the Note.
Second Amendment to Asset Purchase Agreement
On
December 5, 2022, the Company, amended its Asset Purchase Agreement with Paul Golibart and Jerry Ou, each an individual resident in the
State of Texas (each, an “Owner” and collectively, the “Owners”).
NLI Adjustable Note MRC Targets Payment
On
December 12, 2022, the Company paid the NLI Adjustable MRC target payment for the quarter ended October 31, 2022 for $
36
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. “Forward-looking statements” are those statements that describe management’s beliefs and expectations about the future. We have identified forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” “plan,” and “intend.” Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties. Some of these risks include the availability and capacity of competitive data transmission networks and our ability to raise sufficient capital to continue operations. Additional risks are included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2022, filed with the Securities and Exchange Commission on October 31, 2022.
The following is a discussion of the unaudited interim consolidated financial condition and results of operations of Digerati for the three months ended October 31, 2022, and 2021. It should be read in conjunction with our audited Consolidated Financial Statements, the Notes thereto, and the other financial information included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2022, filed with the Securities and Exchange Commission on October 31, 2022. For purposes of the following discussion, fiscal 2023 or 2023 refers to the year that will end on July 31, 2023, and fiscal 2022 or 2022 refers to the year ended July 31, 2022.
Overview
Digerati Technologies, Inc., a Nevada corporation (including our subsidiaries, “we,” “us,” “Company” or “Digerati”), through its operating subsidiaries in Texas, Florida, and California that includes Shift8 Networks, Inc., dba, T3 Communications (a Texas entity), T3 Communications, Inc. (a Florida entity) (with both T3 in Florida and T3 in Texas being referred to herein, collectively, as “T3”), Nexogy Inc. (a Florida entity), and NextLevel Internet, Inc. (a California entity), provides cloud services specializing in Unified Communications as a Service (“UCaaS”) and broadband connectivity solutions for the business market. Our product line includes a portfolio of Internet-based telephony products and services delivered through our cloud application platform and session-based communication network and network services including Internet broadband, fiber, mobile broadband, and cloud WAN solutions (SD WAN). We provide enterprise-class, carrier-grade services to the small-to-medium-sized business (“SMB”) at cost-effective monthly rates. Our UCaaS or cloud communication services include fully hosted IP/PBX, video conferencing, mobile applications, Voice over Internet Protocol (“VoIP”) transport, SIP trunking, and customized VoIP services all delivered Only in the Cloud™. Our broadband connectivity solutions for the delivery of digital oxygen are designed for reliability, business continuity and to optimize bandwidth for businesses using the Company’s cloud communication services and other cloud-based applications.
As a provider of cloud communications solutions to the SMB, we are seeking to capitalize on the migration by businesses from the legacy telephone network to the Internet Protocol (“IP”) telecommunication network and the migration from hardware-based on-premise telephone systems to software-based communication systems in the cloud. Most SMBs are lagging in technical capabilities and advancement and seldom reach the economies of scale that their larger counterparts enjoy, due to their achievement of a critical mass and ability to deploy a single solution to a large number of workers. SMBs are typically unable to afford comprehensive enterprise solutions and, therefore, need to integrate a combination of business solutions to meet their needs. Cloud computing has revolutionized the industry and opened the door for businesses of all sizes to gain access to enterprise applications with affordable pricing. This especially holds true for cloud telephony applications, but SMBs are still a higher-touch sale that requires customer support for system integration, network installation, cabling, and troubleshooting. We have placed a significant emphasis on that “local” touch when selling, delivering, and supporting our services which we believe will differentiate us from the national providers that are experiencing high attrition rates due to poor customer support.
37
The adoption of cloud communication services is being driven by the convergence of several market trends, including the increasing costs of maintaining installed legacy communications systems, the fragmentation resulting from use of multiple on-premise systems, and the proliferation of personal smartphones used in the workplace. Today, businesses are increasingly looking for an affordable path to modernizing their communications system to improve productivity, business performance and customer experience. Modernization has also led to businesses adopting other cloud-based business applications, including CRM, payroll, and accounting software, placing an even more important emphasis on reliable Internet connectivity.
Our cloud solutions offer the SMB reliable, robust, and full-featured services at affordable monthly rates that eliminates high-cost capital expenditures and provides for integration with other cloud-based systems. By providing a variety of comprehensive and scalable solutions, we can cater to businesses of different sizes on a monthly subscription basis, regardless of the stage of development for the business.
Recent Developments
MEOA Business Combination
On August 30, 2022, Digerati entered into a Business Combination Agreement (as it may be amended, supplemented, or otherwise modified from time to time, the “Business Combination Agreement”), by and among Digerati, Minority Equality Opportunities Acquisition Inc., a Delaware corporation (“MEOA”), and Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of MEOA (“Merger Sub”).
The Business Combination Agreement and the transactions contemplated thereby were approved by the board of directors of each of MEOA and Digerati.
The Business Combination Agreement provides, among other things, that Merger Sub will merge with and into Digerati, with Digerati as the surviving company in the merger and, after giving effect to such merger, Digerati shall be a wholly-owned subsidiary of MEOA (the “Merger”). In addition, MEOA will be renamed Digerati Holdings, Inc. The Merger and the other transactions contemplated by the Business Combination Agreement are hereinafter referred to as the “Business Combination”. Other capitalized terms used, but not defined, herein, shall have the respective meanings given to such terms in the Business Combination Agreement.
In accordance with the terms and subject to the conditions of the Business Combination Agreement, at the Effective Time, among other things: (i) each share of Digerati common stock outstanding as of immediately prior to the Effective Time will be exchanged for shares of MEOA common stock, par value $0.0001 per share (each, an “MEOA Share” and collectively, the “MEOA Shares”), based upon the exchange ratio set forth in the Business Combination Agreement (the “Exchange Ratio”); (ii) all vested and unvested stock options of Digerati will be assumed by MEOA and thereafter be settled or exercisable for MEOA Shares, as applicable, determined based on the Exchange Ratio; (iii) each warrant to purchase shares of Digerati common stock will be canceled in exchange for a warrant to purchase MEOA Shares determined based on the Exchange Ratio; (iv) any shares of the Series A Preferred Stock of Digerati outstanding as of the Effective Time will thereafter be convertible into a number of MEOA Shares determined by multiplying the number of shares of Digerati common stock into which such preferred shares would have been convertible immediately prior to the Effective Time by the Exchange Ratio; (v) certain convertible notes of Digerati issued following the signing of the Business Combination Agreement and outstanding as of the Effective Time will thereafter be convertible into a number of MEOA Shares determined by multiplying the number of shares of Digerati common stock into which such convertible notes would have been convertible immediately prior to the Effective Time by the Exchange Ratio; and (vi) each share of MEOA Class A common stock, par value $0.0001 per share (the “MEOA Class A Common Stock”), and each share of MEOA Class B common stock, par value $0.0001 per share (the “MEOA Class B Common Stock”), that is issued and outstanding immediately prior to the effective time shall become one MEOA Share following the consummation of the Business Combination.
38
The Business Combination is expected to close in the first calendar quarter of 2023, following the receipt of the required approval by the stockholders of MEOA and Digerati, approval by Nasdaq of MEOA’s initial listing application filed in connection with the Business Combination, and the fulfillment of other customary closing conditions.
The Business Combination Agreement may be terminated under certain customary and limited circumstances at any time prior to the closing, including, without limitation, (i) by the mutual written consent of MEOA and Digerati; (ii) by MEOA, subject to certain exceptions, if any of the representations or warranties made by Digerati are not true and correct or if Digerati fails to perform any of its covenants or agreements under the Business Combination Agreement (including an obligation to consummate the closing) such that certain conditions to our obligations could not be satisfied and the breach (or breaches) of such representations or warranties or failure (or failures) to perform such covenants or agreements is (or are) not cured or cannot be cured within the earlier of (A) thirty (30) days after written notice thereof, and (B) February 25, 2023 (the “Termination Date”); (iii) by Digerati, subject to certain exceptions, if any of the representations or warranties made by our company or Merger Sub are not true and correct or if MEOA or Merger Sub fails to perform any of its covenants or agreements under the Business Combination Agreement (including an obligation to consummate the closing) such that the condition to the obligations of Digerati could not be satisfied and the breach (or breaches) of such representations or warranties or failure (or failures) to perform such covenants or agreements is (or are) not cured or cannot be cured within the earlier of (A) thirty (30) days after written notice thereof, and (B) the Termination Date; (iv) by either MEOA or Digerati, if the closing does not occur on or prior to the Termination Date, unless the breach of any covenants or obligations under the Business Combination Agreement by the party seeking to terminate proximately caused the failure to consummate the transactions contemplated by the Business Combination Agreement; (v) by either MEOA or Digerati, if (A) any governmental entity shall have issued an order or taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions contemplated by the Business Combination Agreement and such order or other action shall have become final and non-appealable; or (B) if the Required MEOA Stockholder Consent is not obtained; (vi) by MEOA, if (A) Digerati does not deliver, or cause to be delivered to MEOA a Transaction Support Agreement duly executed by certain Digerati stockholders or (B) the Digerati stockholders meeting has been held, has concluded, the Digerati stockholders have duly voted, and Digerati stockholder approval was not obtained; (vii) by MEOA, if Digerati does not deliver, or cause to be delivered, to MEOA a duly executed copy of the PRG Resolution Agreement on or prior to October 15, 2022. The parties are currently negotiating an extension to this deadline. There can be no assurance that an agreement on this matter will be reached; (viii) by Digerati, should MEOA not have timely taken such actions as are reasonably necessary to extend the period of time to complete an initial business combination for an additional period of three months from November 30, 2022; provided, that it shall be the obligation of Digerati to timely make the deposit into the Trust Account in connection with such extension, and Digerati shall not have a right to terminate the Business Combination Agreement as a result of Digerati’s failure to make such deposit; (ix) by MEOA should Digerati not deposit into the Trust Account in a timely manner the funds necessary to extend the period for our company to complete an initial business combination for an additional period of three months from November 30, 2022, in accordance with, and as required pursuant to, the Business Combination Agreement; and (x) by MEOA should: (A) Nasdaq not approve the initial listing application for the combined company with Nasdaq in connection with the Business Combination; (B) the combined company not have satisfied all applicable initial listing requirements of Nasdaq; or (C) the common stock of the combined company not have been approved for listing on Nasdaq prior to the date of the closing.
If the Business Combination Agreement is validly terminated, none of the parties to the Business Combination Agreement will have any liability or any further obligation under the Business Combination Agreement other than customary confidentiality obligations, except in the case of a willful breach of any covenant or agreement under the Business Combination Agreement or fraud, provided, that (A) if MEOA terminates the Business Combination Agreement pursuant to clauses (ii), (vi), (vii) or (viii) of the preceding paragraph, Digerati shall pay to MEOA, promptly following such termination, and in any event within not less than five business days following delivery of notice of termination, a termination fee in the amount of $2,000,000, (B) if Digerati terminates the Business Combination Agreement pursuant to clauses (iii) or (ix) of the preceding paragraph, MEOA shall pay to Digerati promptly following such termination, and in any event within not less than five business days following delivery of notice of termination, a termination fee in the amount of $2,000,000 and (C) in the event of a termination by MEOA pursuant to clauses (ix) or (x) of the preceding paragraph, Digerati shall pay to MEOA, promptly following such termination, and in any event within not less than five business days following delivery of notice of termination, a termination fee in the amount of $1,265,000.
On October 28, 2022, MEOA filed a preliminary proxy statement on Schedule 14A (the “Proxy”) with the Securities and Exchange Commission (the “SEC”) to hold a special meeting of the stockholders of MEOA (the “Special Meeting”) to consider and vote upon a proposal to amend MEOA’s amended and restated certificate of incorporation to give MEOA the right to extend the date by which MEOA is required. MEOA’s stockholders voted in favor of this proposal.
The Company made a deposit in the amount of $83,333.33 into the MEOA trust account on November 30, 2022 to extend the period for MEOA to complete an initial business combination for an additional one month from November 30, 2022. The Company was required to make this payment pursuant to the Merger transaction documents.
39
Key Performance indicators:
EBITDA from operations, as adjusted is a non-GAAP measure and should be considered in addition to, not as a substitute for, net income (loss), cash flow and other measures of financial performance reported in accordance with GAAP. In addition, this measure does not reflect cash available to fund requirements and excludes items, such as corporate expenses, transactional legal expenses, stock option expense, and depreciation and amortization, which are significant components in assessing the Company’s financial performance. The Company believes that the presentation of EBITDA from operations, as adjusted provides useful information regarding the Company’s operations and other factors that affect the Company’s reported results. Specifically, the Company believes that by excluding certain one-time or non-cash items such as transactional legal fees and depreciation and amortization, as well as potential distortions between periods caused by factors such as financing and capital structures, the Company provides users of its consolidated financial statements with insight into both its operations as well as the factors that affect reported results between periods but which the Company believes are not representative of its operations. As a result, users of the Company’s consolidated financial statements are better able to evaluate changes in the financial consolidated results of the Company across different periods.
The following tables provide information regarding certain key performance indicators for Digerati for the three months ended October 31, 2022, and 2021. Management utilizes these metrics to track and forecast revenue trends and expected results from operations:
| Three months ended October 31, | ||||||||||||||||
| 2022 | 2021 | Variances | % | |||||||||||||
| OPERATING REVENUES: | ||||||||||||||||
| Cloud-based hosted services | $ | 8,130 | $ | 3,777 | $ | 4,353 | 115 | % | ||||||||
| Total operating revenues | 8,130 | 3,777 | 4,353 | 115 | % | |||||||||||
| Cost of services (exclusive of depreciation and amortization) | 2,851 | 1,490 | 1,361 | 91 | % | |||||||||||
| GROSS MARGIN | 5,279 | 2,287 | 2,992 | 131 | % | |||||||||||
| Selling, general and administrative expense | 4,118 | 1,764 | 2,354 | 133 | % | |||||||||||
| Stock compensation expense | 23 | 24 | (1 | ) | -4 | % | ||||||||||
| Legal and professional fees | 556 | 574 | (18 | ) | -3 | % | ||||||||||
| Bad debt | 29 | 13 | 16 | 123 | % | |||||||||||
| Depreciation and amortization expense | 953 | 492 | 461 | 94 | % | |||||||||||
| OPERATING LOSS | (400 | ) | (580 | ) | 180 | -31 | % | |||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Gain (loss) on derivative instruments | (3,076 | ) | 4,433 | (7,509 | ) | -169 | % | |||||||||
| Income tax expense | (50 | ) | (77 | ) | 27 | -35 | % | |||||||||
| Other income (expense) | 446 | (4 | ) | 450 | -11250 | % | ||||||||||
| Interest expense | (2,065 | ) | (1,506 | ) | (559 | ) | 37 | % | ||||||||
| Total other income (expense) | (4,745 | ) | 2,846 | (7,591 | ) | -267 | % | |||||||||
| NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST | (5,145 | ) | 2,266 | (7,411 | ) | -327 | % | |||||||||
| Less: Net loss attributable to the noncontrolling interests | 161 | 158 | 3 | 2 | % | |||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS | $ | (4,984 | ) | $ | 2,424 | $ | (7,408 | ) | -306 | % | ||||||
| Deemed dividend on Series A Convertible preferred stock | (4 | ) | (5 | ) | 1 | -20 | % | |||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS | $ | (4,988 | ) | $ | 2,419 | $ | (7,407 | ) | -306 | % | ||||||
40
Reconciliation of Net Income (Loss) to Adjusted EBITDA, Net of Non-cash expenses & Transactional Costs.
| NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS, as reported | $ | (4,984 | ) | $ | 2,424 | $ | (7,408 | ) | -306 | % | ||||||
| EXCLUDING NON-CASH ITEMS TRANSACTIONAL COSTS & CORP EXP ADJUSTMENTS: | ||||||||||||||||
| Stock compensation & warrant expense | 23 | 24 | (1 | ) | -4 | % | ||||||||||
| Corp Expenses (Net of stock compensation, - Transactional cost) | 480 | 382 | 98 | 26 | % | |||||||||||
| Transactional costs | 219 | 368 | (149 | ) | -40 | % | ||||||||||
| Depreciation and amortization expense | 953 | 492 | 461 | 94 | % | |||||||||||
| OTHER ADJUSTMENTS | ||||||||||||||||
| Gain (loss) on derivative instruments | 3,076 | (4,433 | ) | 7,509 | -169 | % | ||||||||||
| Income tax expense | 50 | 77 | (27 | ) | -35 | % | ||||||||||
| Other income (expense) | (446 | ) | 4 | (450 | ) | -11250 | % | |||||||||
| Interest expense | 2,065 | 1,506 | 559 | 37 | % | |||||||||||
| ADJUSTED EBITDA - OPCO | $ | 1,436 | $ | 836 | $ | 600 | 72 | % | ||||||||
| ADD-BACKS Expenses Corp Expenses (Net of stock compensation & Transactional cost) | 480 | 382 | 98 | 26 | % | |||||||||||
| ADJUSTED EBITDA - INCOME | $ | 795 | $ | 304 | $ | 491 | 162 | % |
| Three months ended October 31, | ||||||||||||||||
| Other Key Metrics | 2022 | 2021 | Variances | % | ||||||||||||
| Total Customers | 4,565 | 2,658 | 1,907 | 72 | % | |||||||||||
41
Cloud software and service revenue increased by $4,353,000, or 115% from the three months ended October 31, 2021, to the three months October 31, 2022. In addition, our gross margin increased by $2,992,000 from the three months ended October 31, 2021, to the three months ended October 31, 2022. The increase in revenue and gross margin between years is primarily attributed to the increase in total customers between periods due to the acquisitions of Skynet and NextLevel.
EBITDA from operations, as adjusted, increased from $836,000 from the quarter ended October 31, 2021, to $1,436,000 for the quarter ended October 31, 2022. The primary reason for the improvement in EBITDA from operations is due to the increase in gross margin of $2,992,000 between the quarters ended October 31, 2021 and 2022. The improvement in gross margin was offset by the increase in total operational expenses of $2,812,000 between the quarter ended October 31, 2021, and 2022. EBITDA from operations, as adjusted is not intended to represent cash flows for the periods presented, nor have they been presented as an alternative to operating income or as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Our total customers increased from 2,658 during the quarter ended October 31, 2021, to 4,565 for the quarter months ended October 31, 2022. The increase in customers is attributed to the acquisitions and consolidation of Skynet and NextLevel during the quarter ended October 31, 2022. Going forward, absent further acquisitions, we expect a net increase in our number of customers of 1% to 5% each fiscal year.
Sources of revenue:
Cloud Software and Service Revenue: We provide UCaaS or cloud communication services and managed cloud-based solutions to small and medium size enterprise customers and to other resellers. Our Internet-based services include fully hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice and web conferencing, call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized IP/PBX features in a hosted or cloud environment. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, mobile broadband, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster recovery.
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.
42
Results of Operations
Three Months ended October 31, 2022, Compared to Three Months ended October 31, 2021.
Cloud Software and Service Revenue. Cloud software and service revenue increased by $4,353,000 or 115% from the three months ended October 31, 2021, to the three months ended October 31, 2022. The increase in revenue is primarily attributed to the increase in total customers between periods due to the acquisitions of Skynet in December 2021 and the acquisition of Next Level Internet in February 2022. Our total number of customers increased from 2,658 for the three months ended October 31, 2021, to 4,565 customers for the three months ended October 31, 2022. As part of the acquisitions, our primary emphasis is on integrating the secured customers base, consolidating products and services, retaining the monthly recuring revenue, and providing exceptional customer support.
Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $1,361,000 or 91%, from the three months ended October 31, 2021, to the three months ended October 31, 2022. The increase in cost of services is primarily attributed to the consolidation of various networks as part of the increase in total customers between periods due to the acquisition of Skynet in December 2021 and the acquisition of Next Level Internet in February 2022. Our total number of customers increased from 2,658 for the three months ended October 31, 2022, to 4,565 customers for the three months ended October 31, 2022. However, our consolidated gross margin improved by $2,992,000 from the quarter ended October 31, 2021, to the quarter ended October 31, 2022. We are not aware of any events that are reasonably likely to cause a material change in the relationship between our costs and our revenues.
Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A expenses increased by $2,354,000, or 133%, from the three months ended October 31, 2021, to the three months ended October 31, 2022. The increase in SG&A is attributed to the acquisition of Skynet in December 2021 and the acquisition of Next Level Internet in February 2022; the Company absorbed all of the employees responsible for service delivery for the customer base, technical support, sales, customer service, and administration.
Stock Compensation expense. Stock compensation expense decreased by $1,000, from the three months ended October 31, 2021, to the three months ended October 31, 2022.
Legal and professional fees. Legal and professional fees decreased by $18,000 or 3%, from the three months ended October 31, 2021, to the three months ended October 31, 2022, which include legal and professional fees that relate to due diligence, audits for the acquisitions, purchase price allocation, legal fees paid to counsel for Post Road Group, and investor relations.
Bad debt. Bad debt increased by $16,000 from the three months ended October 31, 2021, to the three months ended October 31, 2022. The increase is attributed to the recognition of $29,000 in bad debt for accounts deemed uncollectible during the quarter ended October 31, 2022. During the quarter ended October 31, 2021, the Company recognized $13,000 in bad debt.
Depreciation and amortization. Depreciation and amortization increased by $461,000 or 94%, from the three months ended October 31, 2021, to the three months ended October 31, 2022. The increase is primarily attributed to the acquisitions and related amortization for intangible assets and the additional depreciation related to the assets acquired from Skynet and NextLevel.
Operating loss. The Company reported an operating loss of $400,000 for the three months ended October 31, 2022, compared to an operating loss of $580,000 for the three months ended October 31, 2021. The improvement in operating loss of $180,000 or 31%, between periods is primarily due to the improvement in gross margin of $2,992,000 and the reduction in legal and professional fees of $18,000. These improvements were offset by net increases in SG&A for $2,354,000, cost of services (exclusive of depreciation and amortization) for $1,361,000, $16,000 for bad debt and $461,000 for depreciation and amortization expense.
43
Gain (loss) on derivative instruments. The loss on derivative instruments increased by $7,509,000 from the three months ended October 31, 2021, to the three months ended October 31, 2022. We are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re- measurement of all derivative instruments we recognized a gain or loss between periods.
Income tax benefit (expense). During the three months ended October 31, 2022, the Company recognized an income tax expense of $50,000. During the three months ended October 31, 2021, the Company recognized an income tax expense of $77,000.
Other income (expense). Other income (expense) improved by $450,000 from the three months October 31, 2021, to the three months ended October 31, 2022. The improvement in other income is due to the recognition of a gain on a settlement of conversion premium of $466,000 from a convertible note.
Interest Income (expense). Interest expense increased by $559,000 from the three months ended October 31, 2021, to the three months ended October 31, 2022. During the quarter ended October 31, 2022, the Company recognized amortization of debt discount of $186,000 related to the adjustment to the present value of various convertible notes and debt. Additionally, the Company recognized $905,000 in interest cash payments to Post Road, $3,000 in interest cash payments on various promissory notes, accrual of $85,000 for interest expense for various promissory notes and $250,000 fair value of shares issued as well as $640,000 added to the principal balance of various promissory notes, all charged to interest expense as consideration for extension of the maturity dates.
Net income (loss) including noncontrolling interest. Net income including noncontrolling interest for the three months ended October 31, 2021, was of $2,266,000 compared to the net loss of $5,145,000 for the three months ending in October 31, 2022. The net loss including noncontrolling interest between periods is primarily due to the increases in selling, general and administrative expense for $2,354,000, cost of services (exclusive of depreciation and amortization) for $1,361,000, bad debts expense for $16,000, depreciation and amortization expense for $461,000, derivative loss of $7,509,000, interest expense for $559,000, offset by increases to other income for $450,000, improvement in gross margin of $2,992,000 and the reduction in legal and professional fees of $18,000 and reduction in tax expense for $27,000.
Net income (loss) attributable to the noncontrolling interest. During the three months ended October 31, 2022, and 2021, the consolidated entity recognized a net loss in noncontrolling interest of $161,000 and a net loss of $158,000, respectively. The noncontrolling interest is presented as a separate line item in the Company’s stockholders equity section of the balance sheet.
Net income (loss) attributable to Digerati’s shareholders. Net loss for the three months ended October 31, 2022, was $4,984,000 compared to a net income for the three months ended October 31, 2021, of $2,424,000.
Deemed dividend on Series A Convertible Preferred Stock. Dividend declared on convertible preferred stock for the three months ended October 31, 2022, and 2021, were, $4,000 and $5,000, respectively.
Net income (loss) attributable to Digerati’s common shareholders. Net loss for the three months ended October 31, 2022, was $4,988,000 compared to a net income for the three months ended October 31, 2021, of $2,419,000.
44
Liquidity and Capital Resources
Cash Position: We had a consolidated cash balance of approximately $1,048,000 as of October 31, 2022. Net cash used in operating activities during the three months ended October 31, 2022, was approximately $858,000. The net cash used by operating activities resulted primarily from the net loss incurred during the three months ended October 31, 2022 as a result of operating expenses, that included $23,000 in stock compensation and warrant expense, bad debt expense of $29,000, amortization of right-of-use assets for $267,000, gain on settlement of conversion premium for $466,000, amortization of debt discount of $204,000, loss on derivative liability of $3,076,000, depreciation and amortization expense of $953,000, debt extension fee charged to interest expense for $303,000, shares issued for debt extension charged to interest expense for $249,000. Decrease in accrued expense of $110,000, accounts receivable of $251,000, prepaid expenses and other current assets of $266,000, other assets of $74,000 and right-of-use operating liability of $280,000. The increase in deferred revenue of $188,000 and accounts payable $442,000.
Cash used in investing activities during the three months ended October 31, 2022, was $108,000, which was used for the acquisition of equipment.
Cash provided by financing activities during the three months ended October 31, 2022, was $505,000. The net increase in cash provided by financing was primarily due to the Company securing $957,000 from convertible notes, net of issuance costs and discounts and securing $150,000 from debt financing from a related party, net of issuance costs and discounts, proceeds from the exercise of warrants of $21,000, offset by principal payments of $250,000 on various notes, $367,000 in principal payments on related party notes, and $6,000 in principal payments on equipment financing.
Overall, our net operating, investing, and financing activities during the three months ended October 31, 2022, resulted in a net decrease in cash and cash equivalents for $461,000.
Digerati’s consolidated financial statements for the three months ended October 31, 2022, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Since the Company’s inception in 1993, Digerati has incurred net losses and accumulated a deficit of approximately $118,377,000 and a working capital deficit of approximately $43,296,000 which raises doubt about Digerati’s ability to continue as a going concern.
We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During fiscal 2023 certain members of our management team will continue to receive a portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from or recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams; 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.
Our cash requirements to meet our interest payments to Post Road, capital expenditure needs, and operational cash flow needs over the next 18 months are estimated to be approximability $3,500,000. The Company anticipates issuing additional equity or entered into additional Convertible Notes to secure the funding required meet these cash needs. 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, the Company may not be able to meet its interest payments, capital expenditures and operational needs. As a result, the Company will be required to negotiate with its lender the terms of the current financing agreements, in addition to postponing the timing of deployment of its capital expenditures and extending the timing of the operational cash needs.
45
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) as of October 31, 2022:
| ● | Maximum Allowed - Senior Leverage Ratio of 4.05 to 1.00 |
| ● | Minimum Allowed - EBITDA of $3,771,629 |
| ● | Minimum Allowed - Liquidity of $2,000,000 |
| ● | Maximum Allowed - Capital Expenditures of $94,798 (Quarterly) |
| ● | Minimum Allowed - Fixed Charge Coverage Ratio of 1.5 to 1.00 |
| ● | Maximum Allowed - Churn of 3.00% at any time |
On December 15, 2022, the lender agreed to forbear from exercising its remedies in connection with the financial covenants that were not complied with during the quarter ended October 31,2022, as well as certain other specified defaults, until December 23, 2022 or such later date as agreed to in writing by the lender. The Company and Post Road are currently working on an amendment to the credit agreement and anticipate having it completed on or before January 31, 2023. However, as of the date of this filing, the Company cannot predict the final outcome of the negotiations with Post Road.
While Digerati, the parent company of T3 Nevada, is not subject to these financial covenants, they have had and will continue to have a material impact on T3 Nevada’s expenditures and ability to raise funds.
In addition, our Term Loan C Note with Post Road with a maturity date of August 4, 2023, requires a full principal payment (currently $10,000,000) and accrued interest by the maturity date. We will work with our equity partners to secure additional financings to meet this obligation by the maturity date. In addition, we will work with our lender on the current terms to the Term Loan C Note, to extend the maturity date or restructure the terms of the note. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms to meet the cash payment requirements on the Term Loan C Note. In addition, there can be no assurance that we will be able to restructure the terms or extend the maturity date of the Term Loan C Note with Post Road. If the Company is not able to restructure the financing or repay the Term Loan C Note by the August 4th maturity date and Post Road declares an event of default, it would have a material adverse effect on our business and financial condition, including the possibility of Post Road foreclosing on some or all of our assets.
We have been successful in raising debt and equity capital in the past and as described in Notes 6, 7, 8, and 12. We have financing efforts in place to continue to raise cash through debt and equity offerings. On November 28, 2022, the Company entered into a securities purchase agreement (the “SPA”) with Mast Hill Fund, L.P. (the “Investor”). Pursuant to the SPA, the Investor purchased, and the Company issued, an unsecured promissory note (the “Note”) in the aggregate principal amount totaling approximately $1,670,000 (the “Principal Amount”) with an original issue discount of $250,500. The gross proceeds the Company received prior to payment of transaction expenses was $1,419,500. (See Note 12) 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.
The current Credit Agreement with Post Road 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.
46
Management believes that available resources as of October 31, 2022, will not be sufficient to fund the Company’s operations, debt service and corporate expenses over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off its obligations, if and when they come due.
Our current cash expenses are expected to be approximately $1,300,000 per month, including wages, rent, utilities, corporate expenses, and legal professional fees associated with potential acquisitions. As described elsewhere herein, we are not generating sufficient cash from operations to pay for our corporate and ongoing operating expenses, or to pay our current liabilities. As of October 31, 2022, our total liabilities were approximately $71,269,000, which included $13,664,000 in derivative liabilities. We will continue to use our available cash on hand to cover our deficiencies in operating expenses.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Not Applicable.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this quarterly report on Form 10-Q for the quarter ended October 31, 2022, our Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”) evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our PEO and PFO concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as there has been no implementation to date of processes and/or procedures to remedy internal control weaknesses and deficiencies.
47
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On September 21, 2021, T3 Communications, Inc.(“T3”), a subsidiary of the Company, entered into a settlement agreement with Carolina Financial Securities, LLC (“CFS”). Under the settlement agreement the parties agreed to resolve all issues and claims related to the lawsuit. Pursuant to the settlement agreement, T3 agreed to pay CFS a total of $300,000, payable as follows: $100,000 by October 15, 2021, and $200,000 payable in 15 monthly installments of $13,333.33 beginning November 15, 2021. As of October 31, 2022 and July 31, 2022, the outstanding balances $40,000 and $80,000, respectively.
Item 1A. Risk Factors.
Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On August 1, 2022, the Company entered into a note extension agreement with Tysadco Partners, LLC, and as consideration for the extension, the Company issued 300,000 shares of common stock. At the time of issuance, the Company recognized the fair market value of the shares of $28,740 as interest expense.
On September 12, 2022, the Company entered into a $75,000 promissory note with Tysadco Partners, LLC, with a maturity date of September 12, 2023, 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 $15,880 as debt discount, and it will be amortized to interest expense during the term of the promissory note.
On September 14, 2022, the Company entered into a note extension agreement with Tysadco Partners, LLC, and as consideration for the extension, the Company issued 90,000 shares of common stock. At the time of issuance, the Company recognized the fair market value of the shares of $10,845 as interest expense.
On September 16, 2022, the Company entered into a note extension agreement with Tysadco Partners, LLC, and as consideration for the extension, the Company issued 300,000 shares of common stock. At the time of issuance, the Company recognized the fair market value of the shares of $35,400 as interest expense. In addition, the Company agreed to add $50,000 to the principal amount outstanding and the Company recognized $50,000 as interest expense.
On September 16, 2022, the Company entered into a note extension agreement with Tysadco Partners, LLC, and as consideration for the extension, the Company issued 180,000 shares of common stock. At the time of issuance, the Company recognized the fair market value of the shares of $21,240 as interest expense. In addition, the Company agreed to add $30,000 to the principal amount outstanding and the Company recognized $30,000 as interest expense.
On September 16, 2022, the Company entered into a note extension agreement with Tysadco Partners, LLC, and as consideration for the extension, the Company issued 90,000 shares of common stock. At the time of issuance, the Company recognized the fair market value of the shares of $10,620 as interest expense. In addition, the Company agreed to add $15,000 to the principal amount outstanding and the Company recognized $15,000 as interest expense.
On September 28, 2022, the Company entered into a note extension agreement with Platinum Point Capital, LLC, and as consideration for the extension, the Company issued 500,000 shares of common stock. At the time of issuance, the Company recognized the fair market value of the shares of $70,000 as interest expense. In addition, the Company agreed to add $62,500 to the principal amount outstanding and the Company recognized $62,500 as interest expense.
On September 28, 2022, William Figueroa, a Series A Preferred Shareholder converted 25,000 Series A shares and $6,718 of accrued dividends into 105,273 shares of common stock.
48
On October 3, 2022, the Company entered into a $165,000 promissory note with Lucas Ventures, LLC, with a maturity date of July 3, 2023, 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 $32,143 as debt discount, and it will be amortized to interest expense during the term of the promissory note.
On October 21, 2022, the Company entered into a note extension agreement with Lucas Ventures, LLC, and as consideration for the extension, the Company issued 300,000 shares of common stock for the extension with fair value of $30,000. In addition, the Company agreed to add $30,000 to the principal amount outstanding.
On October 21, 2022, the Company entered into a note extension agreement with LGH Investments, LLC, and as consideration for the extension, the Company issued 300,000 shares of common stock for the extension with fair values of $30,000. In addition, the Company agreed to add $30,000 to the principal amount outstanding.
On October 27, 2022, the Company entered into a $71,500 promissory note with Lucas Ventures, LLC, with a maturity date of July 26, 2023, and annual interest rate of 8%. In conjunction with the promissory note, we issued 200,000 shares of common stock. At the time of issuance, the Company recognized the relative fair market value of the shares of $38,768 as debt discount, and it will be amortized to interest expense during the term of the promissory note.
In October 2022, the Company issued to various individuals 160,628 shares of common stock for the exercise of 160,628 warrants, with an exercise price of $0.13 per warrant and secured $20,881 in proceeds.
On November 28, 2022, the Company entered into a convertible note with Mast Hill Fund, L.P., and issued 2,100,000 commitment shares of Common Stock to the Investor.
The sales and issuances of the securities described above were made pursuant to the exemptions from registration contained into Section 4(a)(2) of the Securities Act and Regulation D under the Securities Act. Each purchaser represented that such purchaser’s intention to acquire the shares for investment only and not with a view toward distribution. We requested our stock transfer agent to affix appropriate legends to the stock certificate issued to each purchaser and the transfer agent affixed the appropriate legends. Each purchaser was given adequate access to sufficient information about us to make an informed investment decision. Except as described in this prospectus, none of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not Applicable
Item 5. Other Information.
Not Applicable
49
Item 6. Exhibits
| * | Filed herewith |
| ** | Furnished herewith |
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DIGERATI TECHNOLOGIES, INC. | ||
| Date: December 15, 2022 | By: | /s/ Arthur L. Smith |
| Name: | Arthur L. Smith | |
| Title: | President and | |
| Chief Executive Officer | ||
| (Duly Authorized Officer and Principal Executive Officer) | ||
| Date: December 15, 2022 | By: | /s/ Antonio Estrada Jr. |
| Name: | Antonio Estrada Jr. | |
| Title: | Chief Financial Officer | |
| (Duly Authorized Officer and Principal Financial Officer) |
51