As
filed with the Securities and Exchange Commission on August 11, 2021
Registration
Statement No. 333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER THE SECURITIES ACT OF 1933
DIGERATI
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
|
4813
|
|
74-2849995
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(Primary
Standard Industrial
Classification
Code Number)
|
|
(I.R.S.
Employer
Identification
Number)
|
Digerati
Technologies, Inc.
825
W. Bitters, Suite 104
San
Antonio, Texas 78216
(210)
775-0888
(Address,
including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Arthur
L. Smith
825
W. Bitters, Suite 104
San
Antonio, Texas 78216(210) 775-0888
(Name,
address, including zip code, and telephone number, including area code, of agent for service)
Copies
to:
Joseph
M. Lucosky, Esq.
Steven
A. Lipstein, Esq.
Lucosky
Brookman LLP
101
Wood Avenue South, 5th Floor
Woodbridge,
New Jersey 08830
Tel.
No.: (732) 395-4400
|
|
Leslie
Marlow, Esq.
Hank
Gracin, Esq.
Patrick
J. Egan, Esq.
Gracin
& Marlow, LLP
405
Lexington Avenue, 26th Floor
New
York, New York 10174
Tel.
No.: (212) 907-6457
|
Approximate
date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: ☒
If
this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the earlier effective registration statement for the same
offering. ☐
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering.
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
|
☐
|
Non-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 7(a)(2)(B) of the Securities Act. ☐
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of Securities to be Registered (1)
|
|
Proposed
Maximum
Aggregate
Offering
Price
|
|
|
Amount
of
Registration
Fee
|
|
Units,
each consisting of one share of Common Stock, par value $0.001 per share, and one Warrant to purchase one share of Common Stock (2)
|
|
$
|
11,500,000
|
(4)
|
|
$
|
1,254.65
|
|
Common
Stock included as part of the Units (3)(4)
|
|
|
—
|
|
|
|
—
|
|
Warrants
to purchase shares of Common Stock as part of the Units (3)(4)(5)(6)
|
|
|
—
|
|
|
|
—
|
|
Common
Stock issuable upon exercise of the Warrants (3)
|
|
$
|
12,650,000
|
|
|
$
|
1,380.12
|
|
Representative’s
warrants (5)
|
|
|
—
|
|
|
|
—
|
|
Common
Stock issuable upon exercise of Representative’s Warrants (3)(7)(8)
|
|
$
|
770,000
|
|
|
$
|
84.01
|
|
TOTAL
|
|
$
|
24,920,000
|
|
|
$
|
2,718.78
|
(9)
|
(1)
|
Estimated
solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933,
as amended (the “Securities Act”). Includes shares of common stock which may be issued upon exercise of a 45-day option granted
to the Representative.
|
|
|
(2)
|
Includes
Common Stock to cover the exercise of the over-allotment option granted to the underwriter.
|
|
|
(3)
|
Pursuant
to Rule 416, the securities being registered hereunder include such indeterminate number of additional securities as may be issued after
the date hereof as a result of stock splits, stock dividends or similar transactions.
|
|
|
(4)
|
No
separate fee is required pursuant to Rule 457(i) under the Securities Act.
|
|
|
(5)
|
In
accordance with Rule 457(g) under the Securities Act, because the shares of our Common Stock underlying the warrants and Representative’s
warrants are registered hereby, no separate registration fee is required with respect to the warrants registered hereby.
|
|
|
(6)
|
Includes
Common Stock which may be issued upon exercise of additional warrants which may be issued upon exercise of the over-allotment option
granted to the underwriter.
|
|
|
(7)
|
The
warrants are exercisable at a per share price of 110% of the public offering price.
|
|
|
(8)
|
Estimated
solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The Representative’s
warrants are exercisable for up to the number of shares of common stock equal to 7% of the aggregate number of shares included in
sold in this offering (excluding the over-allotment shares) at a per share exercise price equal to 110% of the public offering price.
As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed
maximum aggregate offering price of the representative’s warrants is $770,000, which is equal to 110% of $700,000 (7% of the
proposed maximum aggregate offering price of $10,000,000).
|
|
|
(9)
|
Paid
herewith.
|
The
registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective
in accordance with section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities
and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, PRELIMINARY PROSPECTUS DATED AUGUST 11, 2021
DIGERATI
TECHNOLOGIES, INC.
Units
Each
Unit Consisting of One Share of Common Stock and
One
Warrant to Purchase Common Stock
We are offering [_______]
units (each a “Unit” and collectively, the “Units”) of Digerati Technologies, Inc., a Nevada corporation (the
“Company,” “we,” “our” or “us”) with each Unit consisting of one share of common stock,
par value $0.001 per share, which we refer to as the “Common Stock”, and one warrant (the “Warrant”) to purchase
one share of Common Stock. The Units have no stand-alone rights and will not be certified or issued as stand-alone securities. The shares
of Common Stock and the Warrants comprising the Units are immediately separable and will be issued separately in this offering. Each Warrant
upon exercise at a price of 110% of the public offering price of the Common Stock will result in the issuance of ____ a share of Common
Stock to the holder of such Warrant. Each warrant offered hereby is immediately exercisable on the date of issuance and will expire five
years from the date of issuance. This offering also relates to the shares of Common Stock issuable upon exercise of any Warrants sold
in this offering.
This is a firm commitment
underwritten public offering of Units, based on an assumed initial offering
price of $ per unit, the mid-point of the anticipated price range of the Units, of the Company. We anticipate a public offering price
between $[__] and $[__] per Unit. Each Unit consists of one share of Common Stock, and one Warrant to purchase one share of Common Stock
at an exercise price of $[__] per share (110% of the price of each Unit sold in this offering based on an assumed initial offering
price of $[__] per unit, the mid-point of the anticipated price range).
Our Common Stock is presently
traded on the OTCQB Marketplace (“OTCQB”), operated by OTC Markets Group, under the symbol “DTGI.” We have applied
to have our Common Stock and Warrants listed on The Nasdaq Capital Market under the symbols “NXGY” and “NXGYW”,
respectively. No assurance can be given that our application will be approved. On August 10, 2021, the last reported sales price for our
Common Stock as quoted on the OTCQB was $0.13 per share. We will not proceed with this offering in the event the Common Stock and Warrants
are not approved for listing on Nasdaq.
On [____], our majority stockholders
approved a reverse stock split within the range of 1-for-[__] to 1-for-[__] of our issued and outstanding shares of Common Stock and authorized
our Board of Directors, in its discretion, to determine the final ratio, effective date, and date of filing of the certificate of amendment
to our articles of incorporation, as amended, in connection with the reverse stock split. We intend to effectuate the reverse split of
our Common Stock in a ratio to be determined by the Board of Directors immediately following the effective date but prior to the closing
of the offering. Unless otherwise stated and other than in our financial statements and the notes thereto, all share and per share information
in this prospectus reflects a proposed reverse stock split of the outstanding Common Stock and treasury stock of the Company at an assumed
1-to-[__] ratio to occur immediately following the effective date but prior to the closing of the offering.
The number of Units offered
in this prospectus and all other applicable information has been determined based on an assumed public offering price of $
per Unit, which is based on the last reported sale price of the Common Stock of $ per share on August [ ], 2021 (assuming
a reverse stock split ratio of 1-for- ). The actual public offering price for the Units will be determined between the underwriters
and the Company at the time of pricing, considering our historical performance and capital structure, prevailing market conditions, and
overall assessment of our business, and may be at a discount to the current market price. Therefore, the assumed public offering price
used throughout this prospectus may not be indicative of the actual public offering price for our Common Stock and the Warrants.
INVESTING
IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE “rISK FACTORS” BEGINNING ON PAGE 10 OF THIS PROSPECTUS. yOU SHOULD
CAREFULLY CONSIDER THESE RISK FACTORS, AS WELL AS THE INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE YOU INVEST.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
|
|
Per Unit (1)
|
|
|
Total
|
|
Public offering price
|
|
$
|
|
|
|
$
|
|
|
Underwriting discounts and commissions(1)(2)
|
|
$
|
|
|
|
$
|
|
|
Proceeds to us before offering expenses(3)
|
|
$
|
|
|
|
$
|
|
|
(1)
|
The
public offering price and underwriting discount and commissions in respect of each unit correspond to a public offering price per
share of Common Stock of $and a public offering price per accompanying warrant of $0.01.
|
|
|
(2)
|
We
have also agreed to issue warrants to purchase shares of our Common Stock to the representative of the underwriters in this offering
and to reimburse the representative of the underwriters for certain expenses. See “Underwriting” for additional information
regarding total underwriter compensation.
|
|
|
(3)
|
Does
not include proceeds from the exercise of the Warrants in cash, if any.
|
We
have granted a 45-day option to the representative of the underwriters, exercisable one or more times in whole or in part, to purchase
up to an additional shares of Common Stock and/or additional Warrants at a price from us in any combination thereof at
the public offering price per share of Common Stock and $0.01 per Warrant, respectively, less, in each case, the underwriting discounts
payable by us, in any combination solely to cover over-allotments, if any. The securities issuable upon exercise of this over-allotment
option are identical to those offered by this prospectus and have been registered under the registration statement of which this prospectus
forms a part
The
underwriters expect to deliver shares of Common Stock and Warrants against payment in U.S. dollars in New York, New York on or about
, 2021.
Sole Book-Running Manager
Maxim
Group LLC
The
date of this Prospectus is , 2021
TABLE
OF CONTENTS
You
should rely only on information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made
available to you. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information
different from that contained in this prospectus or in any free writing prospectus. Neither the delivery of this prospectus nor the sale
of our securities means that the information contained in this prospectus or any free writing prospectus is correct after the date of
this prospectus or such free writing prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy our securities
in any circumstances under which the offer or solicitation is unlawful or in any state or other jurisdiction where the offer is not permitted.
The
information in this prospectus is accurate only as of the date on the front cover of this prospectus and the information in any free
writing prospectus that we may provide you in connection with this offering is accurate only as of the date of that free writing prospectus.
Our business, financial condition, results of operations and prospects may have changed since those dates.
No
person is authorized in connection with this prospectus to give any information or to make any representations about us, the securities
offered hereby or any matter discussed in this prospectus, other than the information and representations contained in this prospectus.
If any other information or representation is given or made, such information or representation may not be relied upon as having been
authorized by us.
Neither
we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction
where action for that purpose is required, other than the United States. You are required to inform yourself about, and to observe any
restrictions relating to, this offering and the distribution of this prospectus.
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Some
of the statements in this prospectus and in the documents incorporated herein by reference contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).
These statements relate to future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our ability to control or predict
and that may cause actual results, levels of activity, performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by forward-looking statements.
In
some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,”
“expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology,
although not all forward-looking statements contain these identifying words. Our forward-looking statements may include, among other
things, statements about:
|
●
|
our
ability to continue as a going concern and our history of losses;
|
|
●
|
our
ability to obtain additional financing;
|
|
●
|
our
use of the net proceeds from this offering;
|
|
●
|
our
ability to prosecute, maintain or enforce our intellectual property rights;
|
|
●
|
the
accuracy of our estimates regarding expenses, future revenues and capital requirements;
|
|
●
|
the
implementation of our business model and strategic plans for our business and technology;
|
|
●
|
the
successful development and regulatory approval of our technologies and products;
|
|
●
|
the
potential markets for our products and our ability to serve those markets;
|
|
●
|
the
rate and degree of market acceptance of our products and any future products;
|
|
●
|
our
ability to retain key management personnel; and
|
|
●
|
regulatory
developments and our compliance with applicable laws.
|
Forward-looking
statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might
not even anticipate. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable
assumptions at the time made, we can give no assurance that such expectations will be achieved. Actual events or results may differ materially.
Readers are cautioned not to place undue reliance on forward-looking statements. We have no duty to update or revise any forward-looking
statements after the date of this prospectus or to conform them to actual results, new information, future events or otherwise.
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels
of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness
of these forward-looking statements.
You
should read the risk factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking
statements wherever they appear in this prospectus. If one or more of these factors materialize, or if any underlying assumptions prove
incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed
or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether
as a result of new information, future events or otherwise, except as required by law.
PROSPECTUS
SUMMARY
You
should carefully read all information in the prospectus, including the financial statements and their explanatory notes under the Financial
Statements prior to making an investment decision.
This
summary highlights selected information appearing elsewhere in this prospectus. While this summary highlights what we consider to be
important information about us, you should carefully read this entire prospectus before investing in our securities, especially the risks
and other information we discuss under the headings “Risk Factors” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our consolidated financial statements and related notes beginning on page
F-1. Our fiscal year end is July 31 and our fiscal years ended July 31, 2020 and 2019 are sometimes referred to herein as fiscal years
2020 and 2019, respectively. Some of the statements made in this prospectus discuss future events and developments, including our future
strategy and our ability to generate revenue, income and cash flow. These forward-looking statements involve risks and uncertainties
which could cause actual results to differ materially from those contemplated in these forward-looking statements. See “Cautionary
Statement Concerning Forward-Looking Statements.” Unless otherwise indicated or the context requires otherwise, the words “we,”
“us,” “our”, the “Company” or “our Company” or “Digerati” refer to Digerati
Technologies, Inc., a Nevada corporation, and our each of our subsidiaries.
When
used in this prospectus the following terms have the following meanings related to our subsidiaries.
|
●
|
“Shift8
Networks” refers to Shift8 Networks, Inc., a company organized under the laws of the State of Texas. Shift8 Networks is doing
business as T3 Communications.
|
|
●
|
“T3
Communications” refers to T3 Communications, Inc., a company organized under the laws of the State of Florida.
|
|
●
|
“Nexogy”
refers to Nexogy, Inc., a company organized under the laws of the State of Florida.
|
|
●
|
“T3
Nevada” refers to T3 Communications, Inc., a company organized under the laws of the State of Nevada that is 80.1% owned by
Digerati and is the parent entity of each of Shift8 Networks, T3 Communications, and Nexogy, each of which is a wholly-owned subsidiary
of T3 Nevada.
|
Corporate
History
Digerati
Technologies, Inc., a Nevada corporation formed in 2003 (including our subsidiaries, “we,” “us,” “Company”
or “Digerati”), through its operating subsidiaries, Shift8 Networks, T3 Communications, and Nexogy, provides cloud services
specializing in Unified Communications as a Service (“UCaaS”) solutions for the business market. Our product line includes
a portfolio of Internet-based telephony products and services delivered through our cloud application platform and session-based communication
network and network services including Internet broadband, fiber, mobile broadband, and cloud WAN solutions (SD WAN). Our services are
designed to provide enterprise-class, carrier-grade services to the small-to-medium-sized business (“SMB”) at cost-effective
monthly rates. Our UCaaS or cloud communication services include fully hosted IP/PBX, mobile applications, Voice over Internet Protocol
(“VoIP”) transport, SIP trunking, and customized VoIP services all delivered Only in the Cloud™.
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.
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. Most recently, the COVID-19 Pandemic
has increased demand for communication systems that support remote working environments.
Our
cloud solutions offer the SMB reliable, robust, and full-featured services at what we consider to be affordable monthly rates that eliminates
high-cost capital expenditures and provides for integration with other cloud-based systems.
Recent
Developments
Nexogy
Merger
On
November 17, 2020, T3 Nevada’s wholly owned subsidiary, Nexogy Acquisition, Inc., merged with and into Nexogy, Inc. (“Nexogy”)
resulting in Nexogy becoming a wholly owned subsidiary of T3 Nevada (the “Merger”). Nexogy is a provider in South Florida
of Unified Communications as a Service and managed services, offering a portfolio of cloud-based solutions to the high-growth SMB market.
The purchase price for Nexogy
was $9 million in cash, plus an additional $452,000 in initial excess net working capital with $900,000 of the $9 million being placed
in an indemnity escrow account and $50,000 of the $9 million being placed in a working capital escrow account. In addition, at the closing
of the Merger, T3 Nevada paid a number of Nexogy’s liabilities which were included in the $9 million purchase price.
ActivePBX
Asset Purchase
On
November 17, 2020, our indirect, wholly owned subsidiary, T3 Communications, Inc., a Florida corporation (“T3 Florida”),
executed and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation
(“Seller”). Pursuant to the Purchase Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual
property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s
telecommunications business known as ActivePBX (collectively, the “Purchased Assets”).
The
aggregate purchase price for the Purchased Assets was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase
Price”). $1,190,000 of the Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida
for a period of 12 months to cover part of potential future indemnification obligations of Seller to T3 Florida due
to Seller’s breaches, if any, of any representations and warranties made to T3 Florida by Seller under the Purchase Agreement,
and $40,000 of such amount being credited to T3 Florida against a payment in that amount made by T3 Florida to Seller pursuant
to the Second Amendment to Letter of Intent between Seller and T3 Florida dated as of October 15, 2020.
Part
of the Purchase Price is payable in 8 equal quarterly payments of $136,250, subject to T3 Florida achieving quarterly post-purchase recurring
revenues under monthly contracts or subscriptions from the acquired customer base, excluding charges for taxes, regulatory fees,
additional set-up fees, equipment purchases or lease, and consulting fees. To the extent that a quarterly revenue threshold is not reached,
the amount of the corresponding quarterly payment shall be reduced on a proportional basis. T3 Florida’s $1,190,000 payment obligation
is represented by a promissory note of T3 Florida in the form included as an exhibit to the Purchase Agreement. The note, in turn, is
subject to the Subordination Agreement, included as an Exhibit to the Purchase Agreement, among Seller, the Company’s parent, T3
Nevada, and Post Road Administrative, LLC, in its capacity as administrative agent for the Post Road lenders. $275,000 of the
Purchase Price (the “Customer Renewal Value”) represents an incentive earn-out to be paid with respect to Seller’s
customer accounts which are transferred to T3 Florida at closing, that are renewed, expanded and/or revised with T3 Florida for a minimum
term of twelve months with an auto-renewal for 12 months.
In
connection with the Purchase Agreement, we entered into Consulting Agreements and a Non-Compete Agreement with each of Alex Gonzalez
and Jose Gonzalez, the Chief Executive Officer and Chief Technology Officer of Seller.
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 Administrative LLC and its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post Road”).
The Company is a party to certain sections of the Credit Agreement. Pursuant to the Credit Agreement, Post Road will provide T3 Nevada
with a secured loan of up to $20,000,000 (the “Loan”), with initial loans of $10,500,000 pursuant to the issuance of a Term
Loan A Note and $3,500,000 pursuant to the issuance of a Term Loan B Note, each funded on November 17, 2020, and an additional $6,000,000
on loans, in increments of $1,000,000 as requested by T3 Nevada before the 18 month anniversary of the initial funding date to be lent
pursuant to the issuance of a Delayed Draw Term Note.
The
Term Loan A and Delayed Draw Term Notes have maturity dates of November 17, 2024 and an interest rate of LIBOR (with a minimum rate of
1.5%) plus twelve percent (12%). Term Loan A is non-amortized (interest only payments) through the maturity date and contains an option
for the Company to pay interest in kind (PIK) for up to five percent (5%) of the interest rate in year one, four percent (4%) in year
two and three percent (3%) in year three.
Term
Loan B has a maturity date of December 31, 2021 and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%).
Term Loan B is non-amortized (interest only payments) through the maturity date and contains an option for the Company to pay interest
in kind (PIK) for up to five percent (5%) of the interest rate in year one, four percent (4%) in year two and three percent (3%) in year
three.
Permitted use of proceeds
for the initial $14,000,000 of the Loan included approximately $9.452 million for the purchase price for the merger of Nexogy with and
into an indirect wholly owned subsidiary of the Company described above, $1.190 million for the purchase price and transaction fees of
certain assets of ActiveServe, Inc. described above, $1.487 million for the payment in full of outstanding debts owed and accrued interest
to three creditors, including the secured creditor Thermo Communication, Inc., the payment of approximately $464,000 paid to Post Road,
and recognized as deferred financing cost, and will be amortized over the terms of the notes. In addition, the Company expensed $430,000
in legal fees associated to the acquisitions and financing.
The
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.
T3
Nevada’s obligations under the Credit Agreement are secured by a first-priority security interest in all of the assets of T3 Nevada
and guaranteed by the other subsidiaries of the Company pursuant to the Guaranty and Collateral Agreement, dated November 17, 2020, by
and among T3 Nevada, the Company’s other subsidiaries, and Post Road Administrative LLC (the “Guaranty and Collateral Agreement”).
In addition, T3 Nevada’s obligations under the Credit Agreement are, pursuant to a Pledge Agreement (the “Pledge Agreement”),
secured by a pledge of a first priority security interest in T3 Nevada’s 100% equity ownership of each of T3 Nevada’s operating
companies.
Post
Road Warrant
In
connection with the Credit Agreement, on November 17, 2020, the Company issued a Warrant to Post Road Special Opportunity Fund II LP
(the “Post Road Warrant”) to purchase, initially, twenty-five percent (25%) of the Company’s total shares outstanding,
calculated on a fully diluted basis as of the date of issuance (the “Post Road Warrant Shares”) and subject to a reduction
to fifteen percent (15%) as described below.
The number of Post Road Warrant
Shares is adjustable to allow the holder to maintain, subject to certain share issuances that are exceptions, the right to purchase twenty-five
percent (25%) of the Company’s total shares outstanding, calculated on a fully diluted basis. The Post Road Warrant has an exercise
price of $0.01 per share and the Post Road Warrant expires on November 17, 2030. Seventy-five percent (75%) of the Post Road Warrant Shares
are immediately fully vested and not subject to forfeiture at any time for any reason. The remaining twenty-five percent (25%) of the
Post Road Warrant Shares are subject to forfeiture based on the Company achieving certain performance targets which, if achieved, would
result in twenty percent (20%) warrant coverage. If the minority shareholders of T3 Nevada convert their T3 Nevada shares into shares
of the Common Stock, par value $0.001 per share, the Post Road Warrant Shares percentage shall also be lowered such that when combined
with the achievement of the performance targets, the warrant coverage could be reduced to fifteen percent (15%) of the shares outstanding.
In
connection with the issuance of the Post Road Warrant, the three executives of the Company, Art Smith, Antonio Estrada, and Craig Clement
entered into a Tag-Along Agreement (the “Tag-Along Agreement”) whereby they agreed that the holder of the Post Road Warrant
or Post Road Warrant Shares will have the right to participate or “tag-along” in any agreements to sell any shares of their
common stock that such executives enter into. The Company also agreed, in connection with the issuance of the Post Road Warrant and pursuant
to a Board Observer Agreement (the “Board Observer Agreement”), to grant Post Road the right to appoint a representative
to each of the boards of directors of the Company and each of its subsidiaries, to attend all board meeting in a non-voting observer
capacity.
Equity
Issuance
On November 17, 2020, the
Company issued 3,730,000 options to purchase common shares to various employees with an exercise price of $0.04 per share and a term of
5 years. The options vest equally over a period of three years.
Listing
on The Nasdaq Capital Market
We have applied to list our
Common Stock and Warrants on The Nasdaq Capital Market (“Nasdaq”) under the symbols “NXGY” and “NXGYW”,
respectively. Assuming the listing is confirmed, we expect to list our Common Stock and warrants on Nasdaq upon consummation of this offering,
at which point our Common Stock will cease to be traded on the OTCQB. No assurance can be given that our listing application will be approved.
This offering will occur only if Nasdaq approves the listing of our Common Stock and warrants on Nasdaq. Nasdaq listing requirements include,
among other things, a stock price threshold. If Nasdaq does not approve the listing of our Common Stock and warrants, we will not proceed
with this offering. Quotes of stock trading prices on an over-the-counter marketplace may not be indicative of the market price on a national
securities exchange.
Corporate
Information
We
are incorporated under the laws of the State of Nevada. Our principal corporate offices are located at 825 W. Bitters, Suite 104, San
Antonio, Texas 78216. Our telephone number is (210) 614-7240. The address of our website is www.digerati-inc.com. Our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, are available to you
free of charge through the “Financials” section of our website as soon as reasonably practicable after such materials have
been electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Information contained on our
website does not form a part of this prospectus.
SUMMARY
CONSOLIDATED FINANCIAL INFORMATION
The following summary consolidated
statements of operations data for the years ended July 31, 2020 and 2019 have been derived from our audited consolidated financial statements
included elsewhere in this prospectus. Additionally, the nine months ended April 30, 2021 and 2020 have been derived from our unaudited
condensed consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of April
30, 2021 are derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. The historical
financial data presented below is not necessarily indicative of our financial results in future periods, and the results for the nine
months ended April 30, 2021 is not necessarily indicative of our operating results to be expected for the full fiscal year ending July
31, 2021 or any other period. You should read the summary consolidated financial data in conjunction with those financial statements and
the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Our consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles,
or U.S. GAAP. Our consolidated financial statements have been prepared on a basis consistent with our audited financial statements and
include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of the financial
position and results of operations as of and for such periods.
Digerati Technologies,
Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
|
|
Nine months ended
April 30,
|
|
|
For the Years ended
July 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
Total operating revenues
|
|
$
|
8,629
|
|
|
$
|
4,712
|
|
|
|
6,279
|
|
|
|
6,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
|
|
3,708
|
|
|
|
2,343
|
|
|
|
3,035
|
|
|
|
3,128
|
|
Selling, general and administrative expense
|
|
|
4,969
|
|
|
|
3,357
|
|
|
|
4,106
|
|
|
|
4,208
|
|
Legal and professional fees
|
|
|
717
|
|
|
|
408
|
|
|
|
642
|
|
|
|
390
|
|
Bad debt
|
|
|
9
|
|
|
|
(19
|
)
|
|
|
(5
|
)
|
|
|
6
|
|
Depreciation and amortization expense
|
|
|
1,204
|
|
|
|
465
|
|
|
|
613
|
|
|
|
669
|
|
Total operating expenses
|
|
|
10,607
|
|
|
|
6,554
|
|
|
|
8,391
|
|
|
|
8,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(1,978
|
)
|
|
|
(1,842
|
)
|
|
|
(2,112
|
)
|
|
|
(2,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(13,714
|
)
|
|
|
(1,288
|
)
|
|
|
(1,312
|
)
|
|
|
(2,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS INCLUDING NONCONTROLLING INTEREST
|
|
|
(15,692
|
)
|
|
|
(3,130
|
)
|
|
|
(3,424
|
)
|
|
|
(4,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to the noncontrolling interests
|
|
|
223
|
|
|
|
58
|
|
|
|
47
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS
|
|
|
(15,469
|
)
|
|
|
(3,072
|
)
|
|
|
(3,377
|
)
|
|
|
(4,520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend on Series A Convertible preferred stock
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS
|
|
$
|
(15,484
|
)
|
|
$
|
(3,072
|
)
|
|
$
|
(3,396
|
)
|
|
$
|
(4,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE - BASIC
|
|
$
|
(0.12
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE - DILUTED
|
|
$
|
(0.12
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.27
|
)
|
Digerati Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
|
|
April 30,
2021
|
|
|
July 31,
2020
|
|
|
July 31,
2019
|
|
Cash and cash equivalents
|
|
$
|
2,125
|
|
|
$
|
685
|
|
|
$
|
406
|
|
Total assets
|
|
$
|
17,048
|
|
|
$
|
4,350
|
|
|
$
|
4,239
|
|
Total liabilities
|
|
|
32,430
|
|
|
|
6,963
|
|
|
|
6,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001, 50,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Series A Preferred stock, $0.001, 1,500,000 shares designated, 225,000, 225,000 and 225,000 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible Series B Preferred stock, $0.001, 1,000,000 shares designated, 425,442, 407,477 and 0 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible Series C Preferred stock, $0.001, 1,000,000 shares designated, 55,400, 0 and 0 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Series F Super Voting Preferred stock, $0.001, 100 shares designated, 100, 0 and 0 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001, 150,000,000 shares authorized, 137,858,000, 101,323,590 and 23,740,406 issued and outstanding, respectively (25,000,000 reserved in Treasury)
|
|
|
138
|
|
|
|
101
|
|
|
|
24
|
|
Additional paid in capital
|
|
|
89,250
|
|
|
|
86,364
|
|
|
|
82,972
|
|
Accumulated deficit
|
|
|
(104,166
|
)
|
|
|
(88,697
|
)
|
|
|
(85,320
|
)
|
Other comprehensive income
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Total Digerati’s stockholders’ deficit
|
|
|
(14,777
|
)
|
|
|
(2,231
|
)
|
|
|
(2,323
|
)
|
Noncontrolling interest
|
|
|
(605
|
)
|
|
|
(382
|
)
|
|
|
(335
|
)
|
Total stockholders’ deficit
|
|
|
(15,382
|
)
|
|
|
(2,613
|
)
|
|
|
(2,658
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
17,048
|
|
|
$
|
4,350
|
|
|
$
|
4,239
|
|
Summary
of the Offering
Issuer:
|
|
Digerati
Technologies, Inc.
|
|
|
|
Securities
offered by us:
|
|
[_______]
Units, each consisting of one share of Common Stock and one warrant
(the “Warrant”) to purchase one share of Common Stock. The Units will not be certificated or issued in stand-alone form. The
shares of our Common Stock and the Warrants comprising the Units are immediately separable upon issuance and will be issued and tradeable
separately. The [________] Unit amount referenced above is based on the Units being sold at the mid-point of the estimated offering price
range of $[___] per Unit and such Unit amount shall change if the Unit price is less or more than $[__] in such manner to maintain the
gross proceeds at $[__] million. For instance, if the Unit price is $[4.50] per Unit, the number of Units to be sold in the offering shall
be [2,222,222].
|
|
|
|
Assumed
Offering Price:
|
|
$ per
Unit which is the mid-point of the estimated offering price range described on the cover of this prospectus. The actual offering
price per unit will be as determined between Maxim Group LLC (the “Underwriter”) and us at the time of pricing and may
be issued at a discount to the current market price of our Common Stock.
|
|
|
|
Shares
of Common Stock outstanding prior to the offering:
|
|
shares
|
|
|
|
Shares
of Common Stock outstanding after the offering:
|
|
excluding
the possible sale of over-allotment shares, and assuming none of the Warrants issued in this offering are exercised.
|
|
|
|
Trading
symbols:
|
|
Our
Common Stock is presently quoted on the OTCQB under the symbol “DTGI.” We have applied to have our Common Stock and warrants
listed on Nasdaq under the symbols “NXGY” and “NXGYW,” respectively. We will not proceed with this offering
in the event the Common Stock and Warrants are not approved for listing on Nasdaq.
|
|
|
|
Over-allotment
Option:
|
|
We have granted the representative of the underwriters an option, exercisable for 45 days after the date of this prospectus, to purchase
up to an additional shares of Common Stock and/or Warrants to purchase up to [______] shares of Common Stock, in any combination
thereof, at the public offering price per Unit , less, in each case, the underwriting discounts payable by us, in any combination solely
to cover over-allotments, if any.
|
|
|
|
Use
of proceeds:
|
|
We expect to receive net proceeds of approximately $
million from this offering, based on a public offering price of $ per share
of Common Stock and Warrant and assuming the underwriter(s) do not exercise their option to purchase additional shares of Common Stock
or Warrants and excluding the shares of Common Stock issuable upon the exercise of the Warrants or other outstanding warrants, after deducting
underwriting discounts and commissions and estimated offering expenses payable by us.
We plan to use the net proceeds we receive from this offering primarily
for the following purposes: approximately 40% of the net proceeds (approximately $3.5 million) to repay the Term Loan B Note owed to Post
Road the proceeds of which were used to fund the Nexogy acquisition; approximately 20% of the net proceeds (approximately $1.5 million)
to fund potential acquisitions although we do not have any agreements at this time to potentially acquire other entities; approximately
40% of the net proceeds (approximately $3.5 million) for working capital and other general corporate purposes; and one-time cash payments
to officers of the Company in the approximate aggregate amount of $170,000 ($75,000 to be paid to Art Smith, our CEO, $60,000 to be paid
to Antonio Estrada, our CFO, and $35,000 to be paid to Craig Clement, our Executive Chairman) upon the Company listing on a primary stock
exchange, provided that each recipient of such cash payment may elect to receive Common Stock or apply such amount towards the
exercise of vested stock options in lieu of the cash payment. See “Use of Proceeds.”
|
Description
of the warrants:
|
|
The exercise price of the Warrants is $[__] per share (110%
of the assumed public offering price of one Unit). Each warrant is exercisable for one share of Common Stock, subject to adjustment in
the event of stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting our Common
Stock as described herein. A holder may not exercise any portion of a warrant to the extent that the holder, together with its affiliates
and any other person or entity acting as a group, would own more than 4.99% of the outstanding Common Stock after exercise, as such percentage
ownership is determined in accordance with the terms of the warrants, except that upon notice from the holder to us, the holder may waive
such limitation up to a percentage, not in excess of 9.99%. Each warrant will be exercisable immediately upon issuance and will expire
five years after the initial issuance date. The terms of the warrants will be governed by a Warrant Agreement, dated as of the effective
date of this offering, between us and [____], as the warrant agent (the “Warrant Agent”). This prospectus also relates to
the offering of the shares of Common Stock issuable upon exercise of the Warrants. For more information regarding the warrants, you should
carefully read the section titled “Description of Securities—Warrants” in this prospectus.
|
|
|
|
Representative’s
Warrants
|
|
The
registration statement of which this prospectus is a part also registers for sale warrants (the “Representative’s Warrants”)
to purchase shares of our Common Stock (based on an offering price of $[__] per share, which is the mid-point of the estimated offering
price range described on the cover of this prospectus) to Maxim Group LLC (the “Representative”), as the representative of
the several underwriters, as a portion of the underwriting compensation payable to the Representative in connection with this offering.
The Representative’s Warrants will be exercisable at any time, and from time to time, in whole or in part, during the period
beginning 180 days from the commencement of sales of the securities in this offering, will expire five (5) years from the commencement
of sales of the securities issued in this offering and will have an exercise price of $[__] (110% of the assumed public offering
price of the Units). Please see “Underwriting—Representative’s Warrants” for a description of these warrants.
|
|
|
|
Reverse
Stock Split
|
|
On [____], our stockholders approved a reverse stock split within
the range of 1-for-[__] to 1-for-[__] of our issued and outstanding shares of Common Stock and authorized our Board of Directors (the
“Board”), in its discretion, to determine the final ratio, effective date, and date of filing of the certificate of amendment
to our articles of incorporation, as amended, in connection with the reverse stock split. We intend to effectuate the reverse split of
our Common Stock in a ratio to be determined by the Board immediately following the effective date but prior to the closing of the offering.
Unless otherwise stated and other than in our financial statements and the notes thereto, all share and per share information in this
prospectus reflects a proposed reverse stock split of the outstanding Common Stock and treasury stock of the Company at an assumed 1-to-[__]
ratio to occur immediately following the effective date but prior to the closing of the offering.
|
|
|
|
Risk
factors
|
|
Investing
in our securities involves substantial risks. You should carefully review and consider the “Risk Factors” section of
this prospectus beginning on page 10 and the other information in this prospectus for a discussion of the factors you should consider
before you decide to invest in this offering.
|
Lock-up
and related arrangements:
|
|
Our directors, officers, and any other holder(s) of three percent
(3%) or more of the outstanding shares of our Common Stock have agreed with the Representative not to offer for sale, issue, sell, contract
to sell, pledge or otherwise dispose of any of our Common Stock or securities convertible into Common Stock for a period of six (6) months
after the date of this prospectus and for a period of eighteen (18) months from the date of this prospectus, we our any successor to or
any subsidiary of ours, will grant the Representative the right of first refusal. See “Underwriting” on page 68.
|
Unless specifically stated
otherwise, the information in this prospectus, as of August 9, 2021:
|
●
|
excludes an additional 45,952,758 1 shares of our Common Stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $0.01 per share;
|
|
●
|
excludes an additional 2,135,000 shares of our Common Stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $0.33 per share;
|
|
●
|
excludes an additional 9,230,000 shares of our Common Stock issuable upon outstanding options to purchase shares of Common Stock with a weighted average exercise price of $0.17 per share;
|
|
●
|
assumes
no exercise of the over-allotment by the Representative; and
|
|
●
|
excludes all shares of our Common Stock underlying warrants to be issued in this offering.
|
|
1
|
Represents twenty-five percent (25%) of the Company’s shares
that are currently outstanding including the shares issuable to Post Road pursuant to the exercise of the Post Road Warrant. The 107,701,179
warrant shares that Post Road reported it owned in the Schedule 13D it filed on November 27, 2020 represents twenty-five percent (25%)
of the Company’s total shares of Common Stock, calculated on a fully diluted basis, which assumes future share issuances that are
not certain or not yet contractually obligated to be issued. As described above under “Post Road Warrant,” based on the Company’s
achievement of certain performance targets, the Post Road Warrant may be exercisable into twenty percent (20%) of the Common Stock, calculated
on a fully-diluted basis as described above. In addition, the Post Road Warrant may be exercisable into fifteen percent (15%) of the Common
Stock, calculated on a fully-diluted basis as described above, if the minority stockholders of T3 Nevada, convert their T3 Nevada shares
into shares of the Common Stock.
|
RISK
FACTORS
Any
investment in our securities involves a high degree of risk. You should consider carefully the risks described below, together with all
of the other information contained in this prospectus, before you decide whether to purchase our securities. If any of these actually
occur, our business, financial condition or operating results could be adversely affected. The risks described below are not the only
ones we face. Additional risks not currently known to us or that we currently do not deem material also may become important factors
that may materially and adversely affect our business. The trading price of our securities could decline due to any of these described
or additional risks and you could lose part or all of your investment.
Risks
Related to Our Business
WE
HAVE A HISTORY OF OPERATING LOSSES, ANTICIPATE FUTURE LOSSES, AND MAY NEVER BE PROFITABLE.
We
have experienced significant operating losses in our Company’s recent history. Our ability to achieve annual profitability in the
future depends on a number of factors, including our ability to attract and service customers on a profitable basis and the growth of
the UCaaS (Unified Communications as a Service) sector of our industry. If we are unable to achieve annual profitability, we may not
be able to execute our business plan, our prospects may be harmed, and our stock price could be materially and adversely affected.
WE
HAVE AN ACCUMULATED DEFICIT AND WE ANTICIPATE CONTINUING LOSSES THAT WILL RESULT IN SIGNIFICANT LIQUIDITY AND CASH FLOW PROBLEMS AND
WE MAY BE FORCED TO CEASE OPERATIONS.
We have incurred losses since
our inception and have an accumulated deficit of approximately $104,166,000 as of April 30, 2021. Our operations have been financed primarily
through the issuance of equity and debt. For the year ended July 31, 2020, our net loss was $3,424,000. For the nine months ended April
30, 2021, net loss including noncontrolling interest and cash used in operating activities were $15,692,000 and $403,000, respectively.
We are constantly evaluating our cash needs and our burn rate, in order to make appropriate adjustments in operating expenses. We anticipate
that our cash used in operations will continue to increase as a result of being a public company due to increased professional fees. Our
continued existence is dependent upon, among other things, our ability to raise capital and to market and sell our products and services
successfully. While we are attempting to increase sales, growth has not been significant enough to support daily operations, there is
no assurance that we will continue as a going concern. If we are unable to continue as a going concern and were forced to cease operations,
it is likely that our stockholders would lose their entire investment in our company.
OUR
AUDITORS HAVE EXPRESSED DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. IF WE WERE FORCED TO CEASE OUR BUSINESS AND OPERATIONS,
YOU WOULD LOSE YOUR INVESTMENT IN OUR COMPANY.
Our
revenues are not sufficient to enable us to meet our operating expenses and otherwise implement our business plan. The report of our
independent registered public accounting firm on our financial statements for the year ended July 31, 2020 contains an explanatory paragraph
raising doubt as to our ability to continue as a going concern as a result of our losses from operations, stockholders’ deficit,
and negative working capital. Our consolidated financial statements, which appear elsewhere in this prospectus, are prepared assuming
we will continue as a going concern. The financial statements do not include any adjustments to reflect future adverse effects on the
recoverability and classification of assets or amounts and classification of liabilities that may result if we are not successful.
THE
MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE.
The
cloud services and internet-based telephony products and services markets in which we primarily compete are highly competitive and are
influenced by competitive factors including:
|
●
|
our
ability to rapidly develop and introduce new high performance integrated solutions;
|
|
|
|
|
●
|
the
price and total cost of ownership and return on investment associated with the solutions;
|
|
|
|
|
●
|
the
simplicity of deployment and use of the solutions;
|
|
|
|
|
●
|
the
reliability and scalability of the solutions;
|
|
|
|
|
●
|
the
market awareness of a particular brand;
|
|
|
|
|
●
|
our
ability to provide secure access to data networks;
|
|
|
|
|
●
|
our
ability to offer a suite of products and solutions;
|
|
|
|
|
●
|
our
ability to allow centralized management of the solutions; and
|
|
|
|
|
●
|
our
ability to provide quality product support.
|
New
entrants seeking to gain market share by introducing new technology and new products may also make it more difficult for us to sell our
products and could create increased pricing pressure.
We
expect competition to continuously intensify as other established and new companies introduce new products in the same markets that we
serve or intend to enter, as these markets consolidate. Our business will suffer if we do not maintain our competitiveness.
A
number of our current or potential competitors have longer operating histories, greater brand recognition, larger customer bases, and
significantly greater resources than we do.
As
we move into new markets for different types of products, our brand may not be as well-known as incumbents in those markets. Potential
customers may prefer to purchase from their existing suppliers or well-known brands rather than a new supplier, regardless of product
performance or features. We expect increased competition from other established and emerging companies as our markets continue to develop
and expand. As we enter new markets, we expect to face competition from incumbent and new market participants and there is no assurance
that our entry into new markets will be successful.
MANY
OF THE COMPANIES AGAINST WHICH WE COMPETE HAVE SIGNIFICANTLY GREATER FINANCIAL, TECHNICAL, MARKETING, DISTRIBUTION AND OTHER RESOURCES
THAN WE DO AND ARE BETTER POSITIONED TO ACQUIRE AND OFFER COMPLEMENTARY PRODUCTS AND TECHNOLOGIES.
Industry
consolidation, acquisitions and other arrangements among competitors may adversely affect our competitiveness because it may be more
difficult to compete with entities that have access to their combined resources. As a result of such consolidation, acquisition or other
arrangements, our current and potential competitors might be able to adapt more quickly to new technologies and consumer preference,
devote greater resources to the marketing and promotion of their products, initiate or withstand price competition, and take advantage
of acquisitions or other opportunities more readily and develop and expand their products more quickly than we do. These combinations
may also affect customers’ perceptions regarding the viability of companies our size and, consequently, affect their willingness
to purchase our products.
THE
COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR EXPENSES CAUSED BY UNDETECTED DEFECTS OR BUGS.
Our
products may contain defects and bugs when they are introduced, or as new versions are released. We have focused, and intend to focus
in the future, on getting our new products to market quickly. Due to our rapid product introductions, defects and bugs that may be contained
in our products may not yet have manifested. We have in the past experienced, and may in the future experience, defects and bugs. If
any of our products contain material defects or bugs, or has reliability, quality, or compatibility problems, we may not be able to correct
these problems promptly or successfully. The existence of defects or bugs in our products may damage our reputation and disrupt our sales.
If any of these problems are not found until after we have commenced commercial production and distribution of a new product, we may
be required to incur additional development costs from our technology provider, repair or replacement costs, and other costs relating
to regulatory proceedings, product recalls and litigation, which could harm our reputation and operating results. Undetected defects
or bugs may lead to negative online Internet reviews of our products, which are increasingly becoming a significant factor in the success
of our new product launches, especially for our consumer products. If we are unable to quickly respond to negative reviews, including
end user reviews posted on various prominent online retailers, our ability to sell these products will be harmed. Moreover, we may offer
stock rotation rights to our distributors. If we experience greater returns from retailers or end customers, or greater warranty claims,
in excess of our reserves, our business, revenue and operating results could be harmed.
SECURITY
VULNERABILITIES IN OUR PRODUCTS, SERVICES AND SYSTEMS COULD LEAD TO REDUCED REVENUES AND CLAIMS AGAINST US.
The
quality and performance of some of our products and services may depend upon their ability to withstand cyber attacks. Third parties
may develop and deploy viruses, worms, and other malicious software programs, some of which may be designed to attack our products, systems,
or networks. Some of our products and services also involve the storage and transmission of users’ and customers’ proprietary
information which may be the target of cyber attacks. Hardware and software that we produce or procure from third parties also may contain
defects in manufacture or design, including bugs and other problems, which could compromise their ability to withstand cyber attacks.
The
costs to us to eliminate or alleviate security vulnerabilities can be significant, and our efforts to address these problems may not
be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede
our sales, manufacturing, distribution, or other critical functions, as well as potential liability to the company. The risk that these
types of events could seriously harm our business is likely to increase as we expand the web-based products and services that we offer.
WE
WILL NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON ACCEPTABLE TERMS IF AT ALL. DUE TO THE SIZE OF OUR COMPANY AND THE
LACK OF A PUBLIC MARKET FOR OUR COMMON STOCK IT IS LIKELY THAT THE TERMS OF ANY FINANCING WE MAY BE ABLE TO SECURE WILL BE DETRIMENTAL
TO OUR CURRENT STOCKHOLDERS.
Our
current operations are not sufficient to fund our operating expenses and we will need to raise additional working capital to continue
our current business and to provide funds for marketing to support our efforts to increase our revenues. Generally, small businesses
such as ours which lack a robust public market for their securities, face significant difficulties in their efforts to raise equity capital.
While to date we have relied upon the relationships of our executive officers in our capital raising efforts, there are no assurances
that we will be successful utilizing these existing sources. We have engaged the Representative to assist us in our capital raising efforts
via this offering. There are no assurances that the terms of this offering will be as favorable as those we have offered our investors
to date. While we do not have any commitments to provide additional capital, if we are able to raise capital, the structure of that capital
raise could impact our company and our stockholders in a variety of ways. If we raise additional capital through the issuance of debt,
this will result in interest expense. In addition, the Term Loan Notes we’ve issued to Post Road requires us to obtain Post Road’s
consent prior to closing this offering.
If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage ownership of our company held by existing stockholders will
be reduced and those stockholders may experience significant dilution. In addition, new securities may contain certain rights, preferences
or privileges that are senior to those of our Common Stock. We cannot assure you that we will be able to raise the working capital as
needed in the future on terms acceptable to us, if at all. If we do not raise funds as needed, we may not be able to continue our operations
and it is likely that you would lose your entire investment in our company.
WE
MAY NEED TO RAISE CAPITAL OVER THE NEXT TWELVE MONTHS TO FUND OUR OPERATIONS.
We
do not have any additional commitments to provide capital and we cannot assure you that funds are available to us upon terms acceptable
to us, if at all. If we do not raise funds as needed, our ability to provide for current working capital needs and satisfy our obligations
is in jeopardy. In this event, you could lose all of your investment in our company.
WE
DEPEND ON OUR KEY MANAGEMENT PERSONNEL AND THE LOSS OF THEIR SERVICES COULD ADVERSELY AFFECT OUR BUSINESS.
We
place substantial reliance upon the efforts and abilities of our executive officers Arthur L. Smith, our President and Chief Executive
Officer, and Antonio Estrada Jr., our Chief Financial Officer. The loss of the services of any of our executive officers could have a
material adverse effect on our business, operations, revenues, or prospects. We maintain a $4 million key man life insurance policy with
regard to Mr. Smith but do not have such a policy with regard to Mr. Estrada.
MANAGEMENT
EXERCISES SIGNIFICANT CONTROL OVER MATTERS REQUIRING SHAREHOLDER APPROVAL WHICH MAY RESULT IN THE DELAY OR PREVENTION OF A CHANGE IN
OUR CONTROL.
Arthur
L. Smith, our President and Chief Executive Officer, Antonio Estrada Jr., our Chief Financial Officer and Craig K. Clement, Chairman
of the Board, have voting power equal to approximately 60% of our voting securities with the inclusion of our Series F Super Voting Preferred
Stock which is only held by Messrs. Smith, Estrada, and Clement. As a result, management through such stock ownership rights has the
ability to exercise significant control over all matters requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of ownership in management may also have the effect of delaying or preventing
a change in control of us that may be otherwise viewed as beneficial by shareholders other than management.
OUR
REVENUES, OPERATING MARGINS, CASH FLOWS AND OTHER OPERATING RESULTS COULD VARY SIGNIFICANTLY FROM PERIOD TO PERIOD AS A RESULT OF VARIOUS
FACTORS, MANY OF WHICH ARE OUTSIDE OF OUR CONTROL.
Our
revenues, operating margins, cash flows and other operating results could vary significantly from period to period as a result of various
factors, many of which are outside of our control. Our customers also have the choice of entering into agreements for term licenses and
agreements for our cloud services.
WE
EMPLOY MULTIPLE AND EVOLVING PRICING MODELS FOR OUR OFFERINGS.
We
offer a subscription model for cloud services. We offer our services in a variety of packages for each of our product lines that includes
UCaaS, SD WAN, and broadband solutions. Each of these product lines have different payment schedules, and depending on the mix of such
licenses and cloud subscriptions, our revenues or deferred revenues could be adversely affected.
IT
MAY BE DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS AND MAY INCREASE RISK THAT WE WILL NOT BE SUCCESSFUL.
Some
of the risks include:
|
●
|
respond
timely and effectively to competitor offerings and pricing models;
|
|
|
|
|
●
|
appropriately
price our offerings;
|
|
|
|
|
●
|
manage
the costs of providing our cloud services;
|
|
|
|
|
●
|
generate
leads and convert users of the trial versions of our offerings to paying customers;
|
|
|
|
|
●
|
prevent
users from circumventing the terms of their licenses and cloud subscriptions;
|
|
●
|
continue
to invest in our platform to deliver additional enhancements and content for our offerings and to foster an ecosystem of developers
and users to expand the use cases of our offerings;
|
|
●
|
maintain
and enhance our website and cloud services infrastructure to minimize interruptions when accessing our offerings;
|
|
|
|
|
●
|
process,
store and use our employees, customers’, and other third parties’ data in compliance with applicable governmental regulations
and other legal obligations related to data privacy, data protection, data transfer, data residency, encryption and security;
|
|
|
|
|
●
|
hire,
integrate and retain world-class professional and technical talent; and
|
|
|
|
|
●
|
successfully
integrate acquired businesses and technologies.
|
IF
WE OR OUR THIRD-PARTY SERVICE PROVIDERS EXPERIENCE A SECURITY BREACH OR UNAUTHORIZED PARTIES OTHERWISE OBTAIN ACCESS TO OUR CUSTOMERS’
NETWORK, OUR DATA, OR OUR CLOUD SERVICES, OUR OFFERINGS MAY BE PERCEIVED AS NOT BEING SECURE, OUR REPUTATION MAY BE HARMED, DEMAND FOR
OUR OFFERINGS MAY BE REDUCED, AND WE MAY INCUR SIGNIFICANT LIABILITIES.
Our
offerings involve the storage and transmission of data, and security breaches could result in the loss of this information, litigation,
indemnity obligations and other liability. We may become the target of cyber-attacks by third parties seeking unauthorized access to
our data or users’ data or to disrupt our ability to provide service. While we have taken steps to protect the confidential information
that we have access to, including confidential information we may obtain through our customer support services or customer usage of our
cloud services, our security measures or those of our third-party service providers could be breached or we could suffer data loss. Computer
malware, viruses, social engineering (predominantly spear phishing attacks), and general hacking have become more prevalent in our industry,
particularly against cloud services. In addition, we do not directly control content that customers store in our offerings. If customers
use our offerings for the transmission or storage of personally identifiable information and our security measures are or are believed
to have been breached as a result of third-party action, employee error, malfeasance or otherwise, our reputation could be damaged, our
business may suffer, and we could incur significant liability.
We
also process, store, and transmit our own data as part of our business and operations. This data may include personally identifiable,
confidential, or proprietary information. There can be no assurance that any security measures that we or our third-party service providers
have implemented will be effective against current or future security threats. While we have developed systems and processes to protect
the integrity, confidentiality and security of our data, our security measures or those of our third-party service providers could fail
and result in unauthorized access to or disclosure, modification, misuse, loss or destruction of such data.
Because
there are many different security breach techniques and such techniques continue to evolve, we may be unable to anticipate attempted
security breaches and implement adequate preventative measures. Third parties may also conduct attacks designed to temporarily deny customers
access to our cloud services. Any security breach or other security incident, or the perception that one has occurred, could result in
a loss of customer confidence in the security of our offerings and damage to our brand, reduce the demand for our offerings, disrupt
normal business operations, require us to spend material resources to investigate or correct the breach, expose us to legal liabilities,
including litigation, regulatory enforcement, and indemnity obligations, and adversely affect our revenues and operating results. These
risks may increase as we continue to grow the number and scale of our cloud services, and process, store, and transmit increasingly large
amounts of data.
WE
USE THIRD-PARTY TECHNOLOGY AND SYSTEMS FOR A VARIETY OF REASONS, INCLUDING, WITHOUT LIMITATION, ENCRYPTION AND AUTHENTICATION TECHNOLOGY,
EMPLOYEE EMAIL, CONTENT DELIVERY TO CUSTOMERS, BACK-OFFICE SUPPORT, CREDIT CARD PROCESSING AND OTHER FUNCTIONS.
Although
we have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches,
including systems and processes designed to reduce the impact of a security breach at a third-party vendor, such measures cannot provide
absolute security.
Interruptions
or performance problems associated with our technology and infrastructure, and our reliance on Unified Communications as a Service (“UCaaS”)
technologies from third parties, may adversely affect our business operations and financial results.
Our
continued growth depends in part on the ability of our existing and potential customers to use and access our website or our cloud services
in order to download our on-premises software or encrypted access keys for our software within an acceptable amount of time. We have
experienced, and may in the future experience, website and cloud service disruptions, storage failures, outages, and other performance
problems due to a variety of factors, including infrastructure changes, human or software errors, capacity constraints due to an overwhelming
number of users accessing our website and services simultaneously, unauthorized access, denial of service, security or ransomware attacks.
In some instances, we may not be able to identify the cause or causes of these website or service performance problems within an acceptable
period of time. It may become increasingly difficult to maintain and improve our website and service performance, especially during peak
usage times and as our offerings become more complex and our user traffic increases. If our website or cloud services are unavailable
or if our users are unable to download our software or encrypted access keys within a reasonable amount of time or at all, our business
would be negatively affected. We expect to continue to make significant investments to maintain and improve website and service performance
and to enable rapid releases of new features and apps for our offerings. To the extent that we do not effectively address capacity constraints,
upgrade our systems as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes
in technology, our business and operating results may be adversely affected.
We
could be impacted by unfavorable results of legal proceedings, including the pending proceedings t3 communications, inc., and may, from
time to time, be involved in future litigation in which substantial monetary damages are sought.
We are currently subject to
a legal proceeding involving our subsidiary T3 Communications, Inc., which is discussed in more detail under the heading “Legal
Proceedings.” In connection with this litigation, we may be required to pay monetary damages. Defending against current litigation
is or can be time-consuming, expensive and cause diversion of our management’s attention.
In
addition, we may from time to time be involved in future litigation in which substantial monetary damages are sought. Litigation claims
may relate to intellectual property, contracts, employment, securities and other matters arising out of the conduct of our current and
past business activities. Any claims, whether with or without merit, could be time consuming, expensive to defend and could divert management’s
attention and resources. We may maintain insurance against some, but not all, of these potential claims, and the levels of insurance
we do maintain may not be adequate to fully cover any and all losses.
With
respect to any litigation, our insurance may not reimburse us, or may not be sufficient to reimburse us, for the expenses or losses we
may suffer in contesting and concluding such lawsuit. The results of any future litigation or claims are inherently unpredictable and
substantial litigation costs, unreimbursed legal fees or an adverse result in any litigation may have a material adverse effect on our
results of operations, cash from operating activities or financial condition.
OUR
BUSINESS COULD BE ADVERSELY AFFECTED BY WIDESPREAD PUBLIC HEALTH EPIDEMICS, SUCH AS COVID-19, OR OTHER CATASTROPHIC EVENTS BEYOND OUR
CONTROL.
In
response to the COVID-19 pandemic, we have suspended all non-essential travel for our employees, are canceling or postponing in-person
attendance at industry events and limiting in-person work-related meetings. Currently, as a result of the work and travel restrictions
related to the ongoing pandemic, several of our business activities are being conducted remotely which might be less effective than in-person
meetings or in-office work. Despite these precautions, the necessary work within our laboratory and of our collaborators has continued
without significant interruption. Although we continue to monitor the situation and may adjust our current policies as more information
and guidance become available, temporarily suspending travel and limitations on doing business in-person has and could continue to negatively
impact our business development efforts and create operational or other challenges, any of which could harm our business, financial condition
and results of operations.
In
addition, the COVID-19 pandemic could disrupt our operations due to absenteeism by infected or ill members of management or other employees
because of our limited staffing. COVID-19 related illness could also impact members of our Board of Directors resulting in absenteeism
from meetings of the directors or committees of directors and making it more difficult to convene the quorums of the full Board of Directors
or its committees needed to conduct meetings for the management of our affairs.
Risks
Related to Our Stock
UPON
EXERCISE OF OUR OUTSTANDING WARRANTS, WE WILL BE OBLIGATED TO ISSUE A SUBSTANTIAL NUMBER OF ADDITIONAL SHARES OF COMMON STOCK WHICH WILL
DILUTE OUR PRESENT SHAREHOLDERS.
We are obligated to issue
additional shares of our Stock in connection with our outstanding warrants. Currently outstanding warrants are exercisable for 45,952,758
shares of Common Stock pursuant to the Post Road Warrant. The exercise of these warrants will cause us to issue additional shares of our
Common Stock and will dilute the percentage ownership of our shareholders. The 45,952,758 shares are the current number; however, this
may increase in the future as Post Road is entitled to exercise the Post Road Warrant for at least fifteen percent (15%) of the Common
Stock outstanding, calculated on a fully-diluted basis. The 107,701,179 warrant shares that Post Road reported it owned in the Schedule
13D it filed on November 27, 2020 represents twenty-five percent (25%) of the Company’s total shares of Common Stock, calculated
on a fully diluted basis, which assumes future share issuances that are not certain or not yet contractually obligated to be issued. As
described above under “Post Road Warrant,” based on the Company’s achievement of certain performance targets, the Post
Road Warrant may be exercisable into twenty percent (20%) of the Common Stock, calculated on a fully-diluted basis as described above.
In addition, the Post Road Warrant may be exercisable into fifteen percent (15%) of the Common Stock, calculated on a fully-diluted basis
as described above, if the minority stockholders of T3 Nevada, convert their T3 Nevada shares into shares of the Common Stock.
OUR
STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS.
The market price of our Common
Stock is likely to be highly volatile and could fluctuate widely in response to various factors, many of which are beyond our control,
including the following:
|
●
|
technological
innovations or new products and services by us or our competitors;
|
|
|
|
|
●
|
additions
or departures of key personnel;
|
|
|
|
|
●
|
sales of our Common Stock, particularly under any registration
statement for the purposes of selling any other securities, including management shares;
|
|
|
|
|
●
|
negative
sentiment from investors, customers, vendors, and strategic partners due to doubt about our ability to continue as a going concern;
|
|
|
|
|
●
|
our
ability to execute our business plan;
|
|
|
|
|
●
|
operating
results that fall below expectations;
|
|
|
|
|
●
|
loss
of any strategic relationship;
|
|
|
|
|
●
|
industry
developments;
|
|
|
|
|
●
|
economic
and other external factors; and
|
|
|
|
|
●
|
period-to-period
fluctuations in our financial results.
|
In addition, the securities
markets have from time-to-time experienced significant price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also significantly affect the market price of our Common Stock.
WE
ARE SUBJECT TO PENNY STOCK RULES WHICH WILL MAKE THE SHARES OF OUR COMMON STOCK MORE DIFFICULT TO SELL.
We are subject to the Securities
and Exchange Commission’s “penny stock” rules since our shares of Common Stock sell below $5.00 per share. Penny stocks
generally are equity securities with a per share price of less than $5.00. The penny stock rules require broker-dealers to deliver a standardized
risk disclosure document prepared by the Securities and Exchange Commission that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its salesperson, and monthly account statements showing the market value of
each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation
information must be given to the customer orally or in writing prior to completing the transaction and must be given to the customer in
writing before or with the customer’s confirmation.
In addition, the penny stock
rules require that prior to a transaction the broker-dealer must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser’s written agreement to the transaction. The penny stock rules are burdensome
and may reduce purchases of any offerings and reduce the trading activity for shares of our Common Stock. As long as our shares of Common
Stock are subject to the penny stock rules, the holders of such shares of Common Stock may find it more difficult to sell their securities.
THERE
IS, AT PRESENT, ONLY A LIMITED MARKET FOR OUR COMMON STOCK AND WE CANNOT ENSURE INVESTORS THAT AN ACTIVE MARKET FOR OUR COMMON STOCK
WILL EVER DEVELOP OR BE SUSTAINED.
Our shares of Common Stock
are thinly traded. Due to the illiquidity of our Common Stock, the market price of our Common Stock may not accurately reflect our relative
value. There can be no assurance that there will be an active market for our shares of Common Stock either now or in the future. Because
our Common Stock is so thinly traded, a large block of shares traded can lead to a dramatic fluctuation in the share price and investors
may not be able to liquidate their investment in us at all or at a price that reflects the value of the business. In addition, our Common
Stock currently trades on the OTCQB, which generally lacks the liquidity, research coverage and institutional investor following of a
national securities exchange like the NYSE American, the New York Stock Exchange, or the Nasdaq Stock Market. While we intend to list
our Common Stock on a national securities exchange once we satisfy the initial listing standards for such an exchange, we currently do
not, and may not ever, satisfy such initial listing standards.
OUR
BOARD OF DIRECTORS CAN AUTHORIZE THE ISSUANCE OF PREFERRED STOCK, WHICH COULD DIMINISH THE RIGHTS OF HOLDERS OF OUR COMMON STOCK AND
MAKE A CHANGE OF CONTROL OF US MORE DIFFICULT EVEN IF IT MIGHT BENEFIT OUR SHAREHOLDERS.
Our Board of Directors is
authorized to issue up to 50,000,000 shares of preferred stock in one or more series and to fix the voting powers, preferences and other
rights and limitations of the preferred stock. We may issue additional shares of preferred stock with a preference over our Common Stock
with respect to dividends or distributions on liquidation or dissolution, or that may otherwise adversely affect the voting or other rights
of the holders of Common Stock. Issuances of preferred stock, depending upon the rights, preferences and designations of the preferred
stock, may have the effect of delaying, deterring or preventing a change of control, even if that change of control might benefit our
shareholders.
OFFERS
OR AVAILABILITY FOR SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
Sales of a significant number
of shares of our Common Stock in the public market could harm the market price of our Common Stock and make it more difficult for us to
raise funds through future offerings of Common Stock. As additional shares of our Common Stock become available for resale in the public
market, the supply of our Common Stock will increase, which could decrease the price of our Common Stock.
In addition, if our shareholders
sell substantial amounts of our Common Stock in the public market, upon the expiration of any statutory holding period under Rule 144,
upon the expiration of lock-up periods applicable to outstanding shares, or upon the exercise of outstanding options or warrants, it could
create a circumstance commonly referred to as an “overhang,” in anticipation of which the market price of our Common Stock
could fall. The existence of an overhang, whether or not sales have occurred or are occurring, could also make it more difficult for us
to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable
or appropriate.
WE
DO NOT EXPECT TO PAY DIVIDENDS IN THE FUTURE. AS A RESULT, ANY RETURN ON INVESTMENT, MAY BE LIMITED TO THE VALUE OF OUR COMMON STOCK.
We do not anticipate paying
cash dividends on our Common Stock in the foreseeable future. The payment of dividends on our Common Stock will depend on our earnings,
financial condition and other business and economic factors as our board of directors may consider relevant. If we do not pay dividends,
our Common Stock may be less valuable because a return on an investment in our Common Stock will only occur if our stock price appreciates.
WE
HAVE NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, THE ABSENCE OF WHICH, STOCKHOLDERS MAY HAVE MORE LIMITED PROTECTIONS
AGAINST INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND SIMILAR MATTERS.
Federal
legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed
to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response
to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as
the NYSE or the NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required
under the rules of national securities exchanges are those that address board of directors’ independence, audit committee oversight,
and the adoption of a code of ethics. While we have adopted certain corporate governance measures such as a Code of Ethics, we presently
have only one independent director. It is possible that if we were to add independent directors on our board, stockholders would benefit
from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been
implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of
at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations
for director nominees may be made by our directors who have an interest in the outcome of the matters being decided. Prospective investors
should bear in mind our current lack of corporate governance measures and single independent director in formulating their investment
decisions.
OUR
BUSINESS COULD BE ADVERSELY AFFECTED IF WE FAIL TO IMPLEMENT AND MAINTAIN EFFECTIVE DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL
OVER FINANCIAL REPORTING
We concluded that as of July
31, 2020, our disclosure controls and procedures and our internal control over financial reporting were not effective. We have determined
that we have deficiencies in the design or operation of our internal controls under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) within the required time periods and that material weaknesses in our internal control over financial reporting
exist relating to not being able to provide for adequate review of our financial statements. If we are unable to implement and maintain
effective disclosure controls and procedures and remediate the material weaknesses in a timely manner, or if we identify other material
weaknesses in the future, our ability to produce accurate and timely financial statements and public reports could be impaired, which
could adversely affect our business and financial condition. We identified a lack of sufficient segregation of duties. In addition, investors
may lose confidence in our reported information and the market price of our Common Stock may decline.
PUBLIC
COMPANY COMPLIANCE MAY MAKE IT MORE DIFFICULT FOR US TO ATTRACT AND RETAIN OFFICERS AND DIRECTORS.
The
Sarbanes-Oxley Act, the Dodd-Frank Act, the JOBS Act, the FAST Act, and rules subsequently implemented by the SEC have required changes
in corporate governance practices of public companies. As a public company, we expect these rules and regulations, and amendments to
them, to contribute to our compliance costs and to make certain activities more time consuming and costly. As a public company, we also
expect that these rules and regulations may make it difficult and expensive for us to obtain director and officer liability insurance
and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be difficult for us to attract and retain qualified persons to serve on our board of directors or as executive
officers.
Risks
Related to this Offering
INVESTORS
IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN NET TANGIBLE BOOK VALUE.
The public offering price
will be substantially higher than the net tangible book value per share of our outstanding shares of Common Stock. As a result, investors
in this offering will incur immediate dilution of $ per share, based on the public offering price of $
per share of Common Stock. Investors in this offering will pay a price per share that substantially exceeds the book value of our assets
after subtracting our liabilities. See “Dilution” for a more complete description of how the value of your investment will
be diluted upon the completion of this offering.
The
offering price of the common stock may not be indicative of the value of our assets or the price at which shares can be resold.
The offering price of the
shares of Common Stock may not be an indication of our actual value. The offering price of per share was determined based upon negotiations
between the underwriters and us. Such price does not have any relationship to any established criteria of value, such as book value or
earnings per share. Such price may not be indicative of the current market value of our assets. No assurance can be given that the shares
can be resold at the public offering price.
THE
WARRANTS ARE SPECULATIVE IN NATURE.
The warrants offered in this
offering do not confer any rights of Common Stock ownership on their holders, such as voting rights or the right to receive dividends,
but rather merely represent the right to acquire shares of our Common Stock at a fixed price for a limited period of time. Specifically,
commencing on the date of issuance, holders of the warrants may exercise their right to acquire the Common Stock and pay an exercise price
of 110% of the public offering price of the Common Stock in this offering, prior to five years from the date of issuance, after which
date any unexercised warrants will expire and have no further value. There can be no assurance that the market price of the Common Stock
will ever equal or the exercise price of the warrants and consequently, whether it will ever be profitable for holders of these warrants
to exercise them.
Holders
of the warrants will have no rights as a common stockholder except as otherwise provided in the warrants until they acquire our common
stock.
Until you acquire shares of
our Common Stock upon exercise of your warrants, you will have no rights with respect to shares of our Common Stock issuable upon exercise
of your warrant except as otherwise provided in the warrant. Upon exercise of your warrant, you will be entitled to exercise the rights
of a common stockholder as to the security exercised only as to matters for which the record date occurs after the exercise.
Provisions
of the warrants offered by this prospectus could discourage an acquisition of us by a third party.
In
addition to the discussion of the provisions of our amended and restated articles of incorporation, our amended and restated by-laws,
certain provisions of the warrants offered by this prospectus could make it more difficult or expensive for a third party to acquire
us. The warrants prohibit us from engaging in certain transactions constituting “fundamental transactions” unless, among
other things, the surviving entity assumes our obligations under the warrants. These and other provisions of the warrants offered by
this prospectus could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to you.
OUR
MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING AND MAY NOT USE THE PROCEEDS EFFECTIVELY.
Our
management will have broad discretion over the use of proceeds from this offering. We may use the net proceeds from this offering to
acquire and invest in complementary products, technologies, or businesses; however, we currently have no agreements or commitments to
complete any such transaction. Our management will have considerable discretion in the application of the net proceeds, and you will
not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds
may be used for corporate purposes that do not improve our operating results or enhance the value of our securities.
Our
expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition.
As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon
the completion of this offering. The amounts and timing of our actual use of the net proceeds will vary depending on numerous factors,
including amount of cash used in our operations, which can be highly uncertain, subject to substantial risks and can often change. Our
management will have broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding
the application of the net proceeds of this offering.
The
failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds
from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to
our stockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail
to achieve expected financial results, which could cause our stock price to decline.
Even
if we meet the initial listing requirements of the Nasdaq Capital Market, there can be no assurance that we will be able to comply with
the continued listing standards of the Nasdaq Capital Market. Our failure to meet the continued listing requirements of the Nasdaq Capital
Market could result in a de-listing of our common stock.
Even if we meet the initial
listing requirements of the Nasdaq Capital Market, we cannot assure you that we will be able to comply with the other standards that we
are required to meet in order to maintain a listing of our Common Stock and warrants on the Nasdaq Capital Market. If after listing we
fail to satisfy the continued listing requirements of the Nasdaq Capital Market, such as the corporate governance requirements or the
minimum stockholder’s equity requirement, the Nasdaq Capital Market may take steps to de-list our Common Stock and/or warrants.
Such a de-listing would likely have a negative effect on the price of our Common Stock and warrants and would impair our shareholders’
ability to sell or purchase our Common Stock and warrants when they wish to do so. In the event of a de-listing, we would take actions
to restore our compliance with the Nasdaq Capital Market’s listing requirements, but we can provide no assurance that any action
taken by us would result in our Common Stock and/or warrants becoming listed again, or that any such action would stabilize the market
price or improve the liquidity of our Common Stock or warrants.
There
is no assurance that once listed on the Nasdaq Capital Market we will not continue to experience volatility in our share price.
The OTCQB Marketplace, where
our Common Stock is currently quoted, is an inter-dealer, over-the-counter market that provides significantly less liquidity than the
Nasdaq Capital Market. Our stock is thinly traded due to the limited number of shares available for trading on the OTCQB Marketplace thus
causing large swings in price. As such, investors and potential investors may find it difficult to obtain accurate stock price quotations,
and holders of our Common Stock may be unable to resell their securities at or near their original offering price or at any price. Our
public offering price per share of Common Stock may vary from the market price of our Common Stock after the offering. If an active market
for our stock develops and continues, our stock price may nevertheless be volatile. If our stock experiences volatility, investors may
not be able to sell their Common Stock at or above the public offering price per share in this offering. Sales of substantial amounts
of our Common Stock, or the perception that such sales might occur, could adversely affect prevailing market prices of our Common Stock
and our stock price may decline substantially in a short period of time. As a result, our shareholders could suffer losses or be unable
to liquidate their holdings. No assurance can be given that the price of our Common Stock will become less volatile when listed on the
Nasdaq Capital Market.
Market prices for our Common
Stock will be influenced by a number of factors, including:
|
●
|
the
issuance of new equity securities pursuant to a future offering, including issuances of preferred stock;
|
|
●
|
the
introduction of new products or services by us or our competitors;
|
|
●
|
any
future reseller arrangements with global and domestic providers and brand owners;
|
|
●
|
changes
in interest rates;
|
|
●
|
significant
dilution caused by the anti-dilutive clauses in our financial agreements;
|
|
●
|
competitive
developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
|
|
●
|
variations
in quarterly operating results;
|
|
●
|
change
in financial estimates by securities analysts;
|
|
●
|
a
limited amount of news and analyst coverage for our company;
|
|
●
|
the depth and liquidity of the market for our shares of Common Stock;
|
|
●
|
sales of large blocks of our Common Stock, including sales by our major stockholder, any executive officers or directors appointed in the future, or by other significant shareholders;
|
|
●
|
investor
perceptions of our company and the direct selling segment generally; and
|
|
●
|
general
economic and other national and international conditions.
|
Market
price fluctuations may negatively affect the ability of investors to sell our shares at consistent prices.
Even
if the reverse stock split achieves the requisite increase in the market price of our common stock, we cannot assure you that we will
be able to continue to comply with the minimum bid price requirement of the Nasdaq Capital Market.
Even if the reverse stock
split achieves the requisite increase in the market price of our Common Stock to be in compliance with the minimum bid price of the Nasdaq
Capital Market, there can be no assurance that the market price of our Common Stock following the reverse stock split will remain at the
level required for continuing compliance with that requirement. It is not uncommon for the market price of a company’s common stock
to decline in the period following a reverse stock split. If the market price of our Common Stock declines following the effectuation
of the reverse stock split, the percentage decline may be greater than would occur in the absence of a reverse stock split. In any event,
other factors unrelated to the number of shares of our Common Stock outstanding, such as negative financial or operational results, could
adversely affect the market price of our Common Stock and jeopardize our ability to meet or maintain the Nasdaq Capital Market’s
minimum bid price requirement.
Even
if the reverse stock split increases the market price of our common stock and we meet the initial listing requirements of the Nasdaq
Capital Market, there can be no assurance that we will be able to comply with the continued listing standards of the Nasdaq Capital Market,
a failure of which could result in a de-listing of our common stock.
The Nasdaq Capital Market
requires that the trading price of its listed stocks remain above one dollar in order for the stock to remain listed. If a listed stock
trades below one dollar for more than 30 consecutive trading days, then it is subject to delisting from the Nasdaq Capital Market. In
addition, to maintain a listing on the Nasdaq Capital Market, we must satisfy minimum financial and other continued listing requirements
and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity,
and certain corporate governance requirements. If we are unable to satisfy these requirements or standards, we could be subject to delisting,
which would have a negative effect on the price of our Common Stock and would impair your ability to sell or purchase our Common Stock
when you wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with the listing requirements,
but we can provide no assurance that any such action taken by us would allow our Common Stock to become listed again, stabilize the market
price or improve the liquidity of our Common Stock, prevent our Common Stock from dropping below the minimum bid price requirement, or
prevent future non-compliance with the listing requirements.
The
reverse stock split may decrease the liquidity of the shares of our common stock.
The liquidity of the shares
of our Common Stock may be affected adversely by the reverse stock split given the reduced number of shares that will be outstanding following
the reverse stock split, especially if the market price of our Common Stock does not increase as a result of the reverse stock split.
In addition, the reverse stock split may increase the number of shareholders who own odd lots (less than 100 shares) of our Common Stock,
creating the potential for such shareholders to experience an increase in the cost of selling their shares and greater difficulty effecting
such sales.
Following
the reverse stock split, the resulting market price of our common stock may not attract new investors, including institutional investors,
and may not satisfy the investing requirements of those investors. Consequently, the trading liquidity of our common stock may not improve.
Although we believe that a
higher market price of our Common Stock may help generate greater or broader investor interest, there can be no assurance that the reverse
stock split will result in a share price that will attract new investors, including institutional investors. In addition, there can be
no assurance that the market price of our Common Stock will satisfy the investing requirements of those investors. As a result, the trading
liquidity of our Common Stock may not necessarily improve.
USE
OF PROCEEDS
We estimate that our net
proceeds from the sale of shares of Units in this offering at the offering
price of $ per share Unit will be approximately $8.5 million, after deducting the estimated underwriting
discounts as well as estimated offering expenses payable by us. If the underwriters’ over-allotment option is exercised in full,
we estimate that our net proceeds will be approximately $ .
We intend to use the net
proceeds of this offering as follows: approximately 40% of the net proceeds (approximately $3.5 million) to repay the Term Loan B Note
owed to Post Road whose proceeds were used to fund the Nexogy acquisition; approximately 20% of the net proceeds (approximately $1.5
million) to fund potential acquisitions although we do not have any agreements at this time to potentially acquire other entities; approximately
40% of the net proceeds (approximately $3.5 million) for working capital and other general corporate purposes; and one-time cash payments
to officers of the Company in the approximate aggregate amount of $170,000 ($75,000 to be paid to Art Smith, our CEO, $60,000 to be paid
to Antonio Estrada, our CFO, and $35,000 to be paid to Craig Clement, our Executive Chairman) upon the Company listing on a primary stock
exchange, provided that each recipient of such cash payment may elect to receive Common Stock or apply such amount towards the
exercise of vested stock options in lieu of the cash payment.
The Term Loan B Note bears
interest for the period commencing on the Closing Date (November 17, 2020) through the date Term Loan B is paid in full in cash or same
day funds at a rate equal to (A) LIBOR (with a set Interest Period), plus (B) 12.0% per annum, plus (C) (i) one and twenty five hundredths
(1.25) times the original principal amount of the Term Loan B Note if repaid following June 30, 2021 and on or before September 30, 2021,
or (ii) one and thirty hundredths (1.30) times the original principal amount of the Term Loan B Note if repaid following September 30,
2021 and on or before December 31, 2021.
A $
increase (decrease) in the public offering price of $ per Unit, would increase
(decrease) the net proceeds of this offering by assuming that the number of Units offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
An increase (decrease) in the numner of Units offered by us by 250,000 Units would increase (decrease) the expected net proceeds of the
offering to us by approximately $ ___ million assuming that the assumed public offering price per Unit remains as set forth on the cover
page of this prospectus.
The
amounts and timing of our actual expenditures will depend upon numerous factors, including the amount of proceeds actually raised in
this offering and any cash generated by our operations. We, therefore, cannot predict the relative allocation of net proceeds that we
receive in this offering and may allocate it differently than described above. As a result, management will have broad discretion over
the deployment of the net proceeds from this offering.
DETERMINATION
OF OFFERING PRICE
Prior to this offering, there
was a limited public market for our Common Stock and no public market for our warrants. We will determine at what price we may sell the
shares of Common Stock and the Warrants offered by this prospectus. On August 10, 2021, the last reported sales price for our Common Stock
as quoted on the OTCQB was $0.13 per share. The offering price of the Common Stock and the Warrants has been negotiated between the underwriters
and the Company. The principal factors to be considered when determining the public offering price include:
|
●
|
our
negotiation with the underwriters;
|
|
●
|
the
information set forth in this prospectus;
|
|
●
|
our
history and prospects and the history and prospects for the industry in which we compete;
|
|
●
|
our
past and present financial performance;
|
|
●
|
our
prospects for future earnings and the present state of our development;
|
|
●
|
the
general condition of the securities market at the time of this offering;
|
|
●
|
the
recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and
|
|
●
|
other
factors deemed relevant by the Representative and us.
|
The
estimated public offering price range set forth on the cover page of this prospectus is subject to change as a result of market conditions
and other factors. Neither we nor the underwriters can assure investors that an active trading market will develop for our securities
or that the securities will trade in the public market at or above the public offering price.
MARKET
FOR OUR COMMON STOCK
Market
and Other Information
Our Common Stock is quoted
on the OTCQB under the symbol “DTGI.” We have applied to Nasdaq to list our Common Stock under the symbol “NXGY”,
and the warrants in this offering under the symbol “NXGYW”. On August 10, 2021, the last reported sales price for our Common
Stock as quoted on the OTCQB was $0.13 per share. We will not proceed with this offering in the event the Common Stock and Warrants are
not approved for listing on Nasdaq. As of August 9, 2021, we had approximately 340 shareholders of record.
Reverse
Stock Split
On [____], our majority stockholders
approved a reverse stock split within the range of 1-for-[__] to 1-for-[__] of our issued and outstanding shares of Common Stock and
authorized our Board of Directors, in its discretion, to determine the final ratio, effective date, and date of filing of the certificate
of amendment to our articles of incorporation, as amended, in connection with the reverse stock split. We intend to effectuate the reverse
split of our Common Stock in a ratio to be determined by the Board of Directors immediately following the effective date but prior to
the closing of the offering. Unless otherwise stated and other than in our financial statements and the notes thereto, all share and
per share information in this prospectus reflects a proposed reverse stock split of the outstanding Common Stock and treasury stock of
the Company at an assumed 1-to-[__] ratio to occur immediately following the effective date but prior to the closing of the offering
Transfer
Agent, Warrant Agent and Registrar
The transfer agent and registrar
for our Common Stock and warrant agent for our warrants issued in our initial public offering is American Stock Transfer & Trust
Company LLC. The warrant agent for the warrants offered in this offering is also American Stock Transfer & Trust Company LLC.
Dividend
Policy
We have never declared or
paid cash dividends on our Common Stock and do not anticipate paying any dividends on our Common Stock in the foreseeable future. We
expect to retain future earnings, if any, for reinvestment in our business. We will not be permitted to pay dividends on our Common Stock
unless all dividends on any preferred stock that may be issued have been paid in full. We currently do not have any plans to issue additional
preferred stock. Any credit agreements which we may enter into may also restrict our ability to pay dividends. The payment of dividends
in the future will be subject to the discretion of our Board of Directors and will depend, among other things, on our financial condition,
results of operations, cash requirements, future prospects and any other factors our Board of Directors deems relevant.
CAPITALIZATION
Set
forth below is our cash and capitalization as of April 30, 2021:
|
●
|
on an as adjusted basis to reflect the issuance and sale of the Units by us in this offering at the public offering price of
$ per Unit, after deducting the estimated underwriting
discounts and the estimated offering expenses payable by us.
|
You
should read the information in the below table together with our consolidated financial statements and related notes, and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” each included elsewhere in this prospectus.
|
|
As
of April 30, 2021
(In thousands) (1)
|
|
|
|
Actual
(unaudited)
|
|
|
As
Adjusted
(unaudited)
|
|
Cash and restricted cash
|
|
$
|
2,125
|
|
|
$
|
-
|
|
Total debt at face value
|
|
|
17,225
|
|
|
|
-
|
|
Total stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 500,000,000 shares authorized, 137,858,000 issued and outstanding at April 30, 2021; 500,000 shares authorized and issued and outstanding on a as adjusted basis (25,000,000 reserved in Treasury)
|
|
|
138
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
89,250
|
|
|
|
-
|
|
Accumulated deficit
|
|
|
(104,166
|
)
|
|
|
-
|
|
Other comprehensive income
|
|
|
1
|
|
|
|
-
|
|
Total Digerati’s stockholders’ deficit
|
|
|
(14,777
|
)
|
|
|
-
|
|
Noncontrolling interest
|
|
|
(605
|
)
|
|
|
-
|
|
Total stockholders’ (deficit) equity
|
|
|
(15,382
|
)
|
|
|
-
|
|
A $
increase or decrease in the public offering price of $ per Unit would increase or decrease our as adjusted
cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $
million assuming the number of Units offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting
the underwriting discounts, commissions and estimated offering expenses payable by us. An increase (decrease) of
Units in the number of Units offered by us, as set forth on the cover page of this prospectus, would increase (decrease) as adjusted
cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $
million, assuming no change in the public offering price per Unit and after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
(1)
|
On an actual basis, based on 137,858,000 shares of Common Stock outstanding as of April 30, 2021 and excludes the following as of
that date:
|
|
●
|
9,230,000
shares of Common Stock issuable upon exercise of outstanding stock options, with a weighted-average exercise price of $0.17 per share;
|
|
|
|
|
●
|
109,836,179
shares of Common Stock issuable upon exercise of outstanding warrants, with a weighted-average exercise price of $0.02 per share;
and
|
|
|
|
|
●
|
shares
issuable upon exercise of the Underwriter’s over-allotment option.
|
DILUTION
If you invest in our shares
in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of Common
Stock that is part of the Unit and the as adjusted net tangible book value per share of Common Stock immediately after this offering.
Our historical net tangible
book value as of April 30, 2021, was approximately ($28,254,000), or ($0.20) per share of Common Stock. Our historical net tangible book
value is the amount of our total tangible assets less our liabilities. Historical net tangible book value per share of Common Stock is
our historical net tangible book value divided by the number of outstanding shares of Common Stock as of April 30, 2021.
Our as adjusted net tangible
book value as of April 30, 2021 was $ per share of Common Stock. As adjusted
net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding
Common Stock, after giving effect
to the issuance and sale of the Units by us
in this offering at the public offering price of $ per Unit, after deducting
the estimated underwriting discounts and the estimated offering expenses payable by us.
After giving effect to this
offering, at a public offering price of $ per Unit, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us, our net tangible book value on a as adjusted basis as of April
30, 2021, would have been $ per share of Common Stock. This amount represents
an immediate increase in as adjusted net tangible book value of $ per share
of Common Stock to our existing shareholders and an immediate dilution of $
per share of Common Stock to new investors purchasing Units in this offering. We determine dilution by subtracting the s adjusted net
tangible book value per share after this offering from the amount of cash that a new investor paid for a Unit.
The
following table illustrates this dilution:
Public offering price per Unit
|
|
$
|
|
|
Net tangible book value per Common Stock as of April 30, 2021
|
|
$
|
(0.20
|
)
|
Increase in as adjusted net tangible book value per share attributable to this offering
|
|
|
|
|
As adjusted net tangible book value per share, after this offering
|
|
|
|
|
Dilution per share to new investors in this offering
|
|
$
|
|
|
A $
increase (decrease) in the public offering price of $ per Unit, would increase
(decrease) the as adjusted net tangible book value per share by $ , and increase
(decrease) dilution to new investors by $ per share, in each case assuming
that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
The
foregoing discussion and table do not consider further dilution to new investors that could occur upon the exercise of outstanding warrants
having a per share exercise or conversion price less than the per share offering price to the public in this offering.
If
the underwriters exercise in full their option to purchase additional Units in this offering, the as adjusted net tangible book value
after the offering would be $ per share, the increase in net tangible book
value to existing shareholders would be $ per share, and the dilution to
new investors would be $ per share, in each case at a public offering price
of $ per share.
The
number of shares of Common Stock that will be outstanding after this offering is based on 137,858,000 shares of Common Stock outstanding
as of April 30, 2021, and excludes the following as of that date:
|
●
|
9,230,000
shares of Common Stock issuable upon exercise of outstanding stock options, with a weighted-average exercise price of $0.17 per share;
|
|
|
|
|
●
|
109,836,179
shares of Common Stock issuable upon exercise of outstanding warrants, with a weighted-average exercise price of $0.02 per share;
and
|
|
|
|
|
●
|
shares
issuable upon exercise of the Underwriter’s over-allotment option.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in
this prospectus. Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
are forward-looking statements that are based on current expectations and involve various risks and uncertainties that could cause our
actual results to differ materially from those expressed in these forward-looking statements. We encourage you to review the information
the “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” sections in this prospectus.
Overview
Digerati
Technologies, Inc., a Nevada corporation (including our subsidiaries, “we,” “us,” “Company” or “Digerati”),
through its operating subsidiaries in Texas and Florida, Shift8 Networks, Inc., d/b/a, T3 Communications, T3 Communications, Inc. and Nexogy,
provides cloud services specializing in Unified Communications as a Service (“UCaaS”) solutions for the business market.
Our product line includes a portfolio of Internet-based telephony products and services delivered through our cloud application platform
and session-based communication network and network services including Internet broadband, fiber, mobile broadband, and cloud WAN solutions
(SD WAN). Our services are designed to provide enterprise-class, carrier-grade services to the small-to-medium-sized business (“SMB”)
at cost-effective monthly rates. Our UCaaS or cloud communication services include fully hosted IP/PBX, mobile applications, Voice over
Internet Protocol (“VoIP”) transport, SIP trunking, and customized VoIP services all delivered Only in the Cloud™.
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.
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.
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.
Recent
Activity
Acquisitions
On
November 17, 2020, the Company closed on the acquisitions of Nexogy, Inc. (“Nexogy”), and ActivePBX
(“ActivePBX”), leading providers of cloud communication, UCaaS, and broadband solutions tailored for businesses. As a
combined business, Nexogy, ActivePBX, and our operating subsidiary, T3 Communications, Inc., will serve over 2,600 business
customers and approximately 28,000 users. The business model of the combined entities is supported by strong and predictable
recurring revenue with high gross margins under contracts with business customers in various industries including banking,
healthcare, financial services, legal, insurance, hotels, real estate, staffing, municipalities, food services, and education. The
contribution from the acquisitions is expected to have an immediate and positive impact on the consolidated EBITDA of the Company
with additional improvements to be realized during FY2021 from the anticipated cost synergies and consolidation savings.
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.
Results
of Operations
Three
Months ended April 30, 2021, Compared to Three Months ended April 30, 2020.
Cloud
Software and Service Revenue. Cloud software and service revenue increased by $2,185,000, or 140% from the three months ended April
30, 2020, to the three months ended April 30, 2021. The increase in revenue is primarily attributed to the increase in total customers
between periods due to the acquisitions of Nexogy and ActivePBX. Our total number of customers increased from 731 for the three months
ended April 30, 2020, to 2,612 customers for the three months ended April 30, 2021.
Cost
of Services (exclusive of depreciation and amortization). The cost of services increased by $762,000, or 100%, from the three months
ended April 30, 2020, to the three months ended April 30, 2021. 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 acquisitions of Nexogy and ActivePBX. Our total
number of customers increased from 731 for the three months ended April 30, 2020, to 2,612 customers for the three months ended April
30, 2021. However, our consolidated gross margin improved by $1,423,000 from the three months ended April 30, 2020, to the three months
ended April 30, 2021.
Selling,
General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A
expenses increased by $1,061,000, or 141%, from the three months ended April 30, 2020, to the three months ended April 30, 2021. The
increase in SG&A is attributed to acquisition of Nexogy and ActivePBX, as part of the consolidation, the Company absorbed all of
the employees responsible for customer and technical support, sales, account management, and administration.
Stock
Compensation expense. Stock compensation expense decreased by $115,000, from the three months ended April 30, 2020, to the three
months ended April 30, 2021. The decrease between periods is attributed to the recognition of stock option expense of $63,000 recognized
during the three months ended April 30, 2020, associated with the stock options awarded to various employees during FY2018, FY2019 and
FY2020. The Company also recognized $233,633 in stock compensation for stock issued for the funding of our 401K profit sharing plan during
the period ended April 30, 2020. During the period ended April 30, 2021, the Company only recognized $57,000 in stock options expense
associated with stock options awarded to various employees and $125,000 in stock compensation for consulting services.
Legal
and professional fees. Legal and professional fees increased by $106,000, from the three months ended April 30, 2020, to the three
months ended April 30, 2021. The increase between periods is attributed to the recognition during FY 2021 of $115,000 in professional
fees for the audits related to the acquisitions, investor relations fees, and professional services related to the purchase price allocation.
Bad
debt. Bad debt increased by $24,000, from the three months ended April 30, 2020, to the three months ended April 30, 2021. The increase
is attributed to the recognition of $5,000 in bad debt during the period ended April 30. 2021. During the period ended April 30, 2020,
the Company recognized $19,000 in bad debt recovery, for accounts that were previously considered uncollectible.
Depreciation
and amortization. Depreciation and amortization increased by $463,000, from the three months ended April 30, 2020, to the three months
ended April 30, 2021. The increase is primarily attributed to the acquisitions and related amortization of $431,000 for intangible assets,
in addition to the depreciation of the assets acquired from Nexogy and ActivePBX.
Operating loss. The
Company reported an operating loss of $588,000 for the three months ended April 30, 2021, compared to an operating loss of $472,000 for
the three months ended April 30, 2020. The increase in operating loss between periods is primarily due to the increase of $1,061,000
in SG&A, the increase in legal fees and professional fees of $106,000, the increase in depreciation of $463,000, and the increase
in bad debt of $24,000. These increases were slightly offset by the increase in gross margin of $1,423,000 and the decrease in stock
compensation expense of $115,000.
Gain
(loss) on derivative instruments. Gain (loss) on derivative instruments increased by $10,629,000 from the three months ended April
30, 2020, to the three months ended April 30, 2021. 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 an increase
between periods.
Gain
(loss) on settlement of debt. Gain (loss) on settlement of debt improved by $16,000 from the three months ended April 30, 2020, to
the three months ended April 30, 2021. During the period ended April 30, 2021, the Company recognized a gain on settlement of deb for
that forgiveness by the U.S Small Business Administration of two promissory notes with a total principal of $148,500 and accrued interest
of $1,443.
Income
tax benefit (expense). During the three months ended April 30, 2021, the Company recognized an income tax expense of $63,000. During
the three months ended April 30, 2020, the Company recognized an income tax expense of $10,000.
Interest
expense. Interest income (expense) increased by $1,066,000 from the three months ended April 30, 2020, to the three months ended
April 30, 2021. During the quarter ended April 30, 2021, the Company recognized non-cash interest / accretion expense of $916,000 related
to the adjustment to the present value of various convertible notes and debt. Additionally, the Company recognized $360,560 in interest
expense for cash interest payments on various promissory notes, accrual of $185,000 for interest expense for various promissory notes,
and interest income of $3,089.
Net
income (loss) including noncontrolling interest. Net loss including noncontrolling interest for the three months ended April 30,
2021, was $12,956,000, an increase in net loss of $11,848,000 as compared to a net loss for the three months ended April 30, 2020,
of $1,108,000. The increase in net loss including noncontrolling interest between periods is primarily due to the increase is of
$1,061,000 in SG&A, the increase in legal fees and professional fees of $106,000, the increase in depreciation of $463,000, the
increase in loss on derivative instruments of $10,629,000 and the increase of $1,066,000 in interest expense. These increases were
slightly offset by the improvements in margin of $1,423,000, the decrease in stock compensation expense of $115,000 and the
improvement of $16,000 in gain of settlement of debt.
Net
loss attributable to the noncontrolling interest. During the three months ended April 30, 2021, and 2020, the consolidated entity
recognized net loss in noncontrolling interest of $158,000 and $1,000, 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 quarter ended April 30, 2021, was $12,798,000 compared
to a net loss for the quarter ended April 30, 2020, of $1,107,000.
Deemed
dividend on Series A Convertible Preferred Stock. Dividend declared on convertible preferred stock for the quarter ended April 30,
2021, was $5,000 compared to a deemed dividend on convertible preferred stock for the quarter ended April 30, 2020, of $0.
Net
income (loss) attributable to Digerati’s common shareholders. Net loss for the three months ended April 30, 2021, was $12,803,000
compared to a net loss for the three months ended April 30, 2020, of $1,107,000.
Nine
Months ended April 30, 2021, Compared to Nine Months ended April 30, 2020.
Cloud
Software and Service Revenue. Cloud software and service revenue increased by $3,917,000, or 83% from the nine months ended April
30, 2020, to the nine months ended April 30, 2021. The increase in revenue is primarily attributed to the increase in total customers
between periods due to the acquisitions of Nexogy and ActivePBX. Our total number of customers increased from 731 for the nine months
ended April 30, 2020, to 2,612 customers for the nine months ended April 30, 2021.
Cost
of Services (exclusive of depreciation and amortization). The cost of services increased by $1,365,000, or 58%, from the nine months
ended April 30, 2020, to the nine months ended April 30, 2021. The increase in cost of services is primarily attributed to the consolidation
of various networks and key vendors as part of the increase in total customers between periods due to the acquisitions of Nexogy and
ActivePBX. Our total number of customers increased from 731 for the nine months ended April 30, 2020, to 2,612 customers for the nine
months ended April 30, 2021. However, our consolidated gross margin improved by $2,552,000 from the nine months ended April 30, 2020,
to the nine months ended April 30, 2021.
Selling,
General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A
expenses increased by $2,171,000, or 97%, from the nine months ended April 30, 2020, to the nine months ended April 30, 2021. The increase
in SG&A is attributed to acquisition of Nexogy and ActivePBX, as part of the consolidation, the Company absorbed all of the employees
responsible for customer and technical support, sales, account management, and administration.
Stock
Compensation expense. Stock compensation expense decreased by $559,000, from the nine months ended April 30, 2020, to the nine months
ended April 30, 2021. The decrease between periods is attributed to the recognition of stock option expense of $315,000 recognized during
the nine months ended April 30, 2020, associated with the stock options awarded to various employees during FY2018, FY2019 and FY2020.
The Company also recognized $568,000 in stock compensation for stock issued in lieu of cash payments to the Management team during the
period ended April 30, 2020. During the period ended April 30, 2021, the Company only recognized $110,000 in stock options expense associated
with stock options awarded to various employees, recognized $247,000 in stock compensation expense associated with the funding of the
401(K)-profit sharing plan, recognized $18,000 in stock compensation for stock issued in lieu of cash payments to a former employee,
and recognized $183,000 in stock issued to consultants for professional services.
Legal
and professional fees. Legal and professional fees increased by $309,000, from the nine months ended April 30, 2020, to the nine
months ended April 30, 2021. The increase between periods is attributed to the recognition during the period ending April 30, 2021, of
$333,000 in legal and professional fees related to the acquisitions for audits, purchase price allocation and investor relations.
Bad
debt. Bad debt increased between the periods by $28,000. The increase is attributed to the recognition of $9,000 in bad debt during
the nine months ended April 30. 2021. During the nine months ended April 30, 2020, the Company recognized $19,000 in bad debt recovery,
for accounts that were previously considered uncollectible.
Depreciation
and amortization. Depreciation and amortization increased by $739,000, from the nine months ended April 30, 2020, to the nine months
ended April 30, 2021. The increase is primarily attributed to the acquisitions and related amortization of $678,000 for intangible assets,
and the additional depreciation related to the depreciation for the assets acquired from Nexogy and ActivePBX.
Operating
loss. The Company reported an operating loss of $1,978,000 for the nine months ended April 30, 2021, compared to an operating loss
of $1,842,000 for the nine months ended April 30, 2020. The increase in operating loss between periods is primarily due to the increase
of $2,171,000 in SG&A, the increase in legal fees of $309,000 and the increase in depreciation of $739,000. These increases were
slightly offset by the increase in margin of $2,552,000 and the decrease in stock compensation expense of $559,000.
Gain
(loss) on derivative instruments. Gain (loss) on derivative instruments increased by $10,929,000 from the nine months ended April
30, 2020, to the nine months ended April 30, 2021. 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 an increase
between periods.
Gain
(loss) on settlement of debt. Gain (loss) on settlement of debt improved by $213,000 from the nine months ended April 30, 2020, to
the nine months ended April 30, 2021. During the nine months ended April 30, 2021, the Company recognized a settlement of $197,000 for
an obligation satisfied with our vendors, in addition, the Company recognized a gain on settlement of deb for that forgiveness by the
U.S Small Business Administration of two promissory notes with a total principal of $148,500 and accrued interest of $1,443.
Income
tax benefit (expense). During the nine months ended April 30, 2021, the Company recognized an income tax expense of $122,000. During
the nine months ended April 30, 2020, the Company recognized an income tax benefit of $22,000.
Interest
expense. Interest income (expense) increased by $1,566,000 from the nine months ended April 30, 2020, to the nine months ended April
30, 2021. During the period ended April 30, 2021, the Company recognized non-cash interest / accretion expense of $1,775,000 related
to the adjustment to the present value of various convertible notes and debt, the amortization of debt discount of $6,000 in a related
party note and the amortization to interest expense of $46,000 in debt discount related to the conversions of principal to common shares.
Additionally, the Company recognized $753,000 in interest expense for cash interest payments on various promissory notes, accrual of
$341,000 for interest expense for various promissory notes, and interest income of $18,300.
Net
income (loss) including noncontrolling interest. Net loss including noncontrolling interest for the nine months ended April 30, 2021,
was $15,692,000, an increase in net loss of $12,562,000 as compared to a net loss for the nine months ended April 30, 2020, of $3,130,000.
The increase in net loss including noncontrolling interest between periods is primarily due to the increase of $2,171,000 in SG&A,
the increase in legal fees of $309,000, the increase in depreciation of $739,000, the increase in loss on derivative instruments of $10,929,000
and the increase of $1,566,000 in interest expense. These increases were slightly offset by the improvements in margin of $2,552,000,
the decrease in stock compensation expense of $559,000 and the recognition of $347,000 in gain of settlement of debt during the period
ending April 30, 2021.
Net
loss attributable to the noncontrolling interest. During the nine months ended April 30, 2021, and 2020, the consolidated entity
recognized net loss in noncontrolling interest of $223,000 and $58,000, 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 nine months ended April 30, 2021, was $15,469,000 compared
to a net loss for the period ended April 30, 2020, of $3,072,000.
Deemed
dividend on Series A Convertible Preferred Stock. Dividend declared on convertible preferred stock for the period ended April 30,
2021, was $15,000 compared to a deemed dividend on convertible preferred stock for the period ended April 30, 2020, of $0.
Net
income (loss) attributable to Digerati’s common shareholders. Net loss for the period ended April 30, 2021, was $15,484,000
compared to a net loss for the period ended April 30, 2020, of $3,072,000.
Year
ended July 31, 2020 Compared to Year ended July 31, 2019.
Cloud-based
hosted Services. Cloud-based hosted services revenue increased by $239,000, or 4% from the year ended July 31, 2019 to the year ended
July 31, 2020. The increase in revenue between periods is primarily attributed to the increase in total customers between periods. Our
total number of customers increased from 702 customers for the year ended July 31, 2019 to 728 customers for the year ended July 31,
2020.
Cost
of Services (exclusive of depreciation and amortization). The cost of services decreased by $93,000, or 3%, from the year ended July
31, 2019 to the year ended July 31, 2020. The decrease in cost of services between periods is primarily attributed to the decrease in
fixed costs and consolidation of our networks. In addition, our consolidated gross margin increased by $332,000 or 11%, from the year
ended July 31, 2019 to the year ended July 31, 2020. The increase in gross margin between periods is attributed to a higher concentration
of enterprise customers revenue, which generate a higher margin than services provided via resellers.
Selling,
General and Administrative (SG&A) Expenses (exclusive of Stock compensation expense). SG&A expenses decreased by $185,000,
or 6%, from the year ended July 31, 2019 to the year ended July 31, 2020. The decrease in SG&A is attributed to reduction of a few
sales partners, customer care and technical support partners.
Stock
Compensation expense. Stock compensation expense increased by $83,000, from the year ended July 31, 2018 to the year ended July 31,
2019. The increase between periods is attributed to the recognition of stock option expense of $377,000 recognized during the year ended
July 31, 2020 associated with the stock options with multiple vesting periods that were awarded to various employees during FY2018, FY2019
and FY2020. The Company also recognized $501,000 in stock compensation for stock issued in lieu of cash payments to the Management team
during the year ended July 31, 2020. The Company also recognized $233,633 in stock compensation expense associated with the funding of
the 401(K)-profit sharing plan and recognized $15,000 in stock compensation expense to professionals for the year ended July 31, 2020.
Legal
and professional fees. Legal and professional fees increased by $252,000, or 65%, from year ended July 31, 2019 to the year ended
July 31, 2020. The increase between periods is attributed to the recognition during FY 2020 of $132,400 on professional fees related
to mediation with two former employees and $202,000 in legal fees associated to the acquisitions.
Bad
debt. Bad debt was a benefit of $5,000 for the year ended July 31, 2020; this was recognized for accounts that were previously deemed
uncollectable.
Depreciation
and amortization. Depreciation and amortization decreased by $56,000, from the year ended July 31, 2019 to the year ended July 31,
2020, mainly due to decrease in depreciation expense related to assets that reached their expected useful life.
Operating
loss. The Company reported an operating loss of $2,112,000 for the fiscal period ended July 31, 2020 compared to an operating loss
of $2,361,000 for the fiscal period ended July 31, 2019. The improvement in operating loss between periods is primarily due to the increase
of $332,000 in gross margin, decrease of $185,000 in SG&A, decrease of $11,000 in bad debt expense and the decrease of $56,000 in
depreciation and amortization expense. The positive improvements were offset by the increase of $83,000 in stock compensation expense
and the increase of $252,000 in legal and professional fees.
Gain
(loss) on derivative instruments. Gain (loss) on derivative instruments improved by $337,000 from the year ended July 31, 2019 to
the year ended July 31, 2020. 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 an improvement between periods.
Gain
on settlement of debt. Gain on settlement of debt improved by $129,000 from year ended July 31, 2019 to the year ended July 31, 2020.
During the year ended July 31, 2020 the Company issued 13,582,554 shares of Common Stock for the conversion of $370,000 on the outstanding
principal balance on various promissory notes and $37,476 in accrued interest. At the time of issuance, the Company recognized $129,000
as a gain in settlement of debt.
Income
tax benefit (expense). During the year ended July 31, 2020, the Company recognized an income tax benefit of $33,000. During the year
ended July 31, 2019, the Company recognized an income tax expense of $47,000.
Interest
expense. Interest expense decreased by $313,000 from the year ended July 31, 2019 to the year ended July 31, 2020. The Company recognized
non-cash interest / accretion expense of $1,228,000 related to the adjustment to the present value of various convertible notes and debentures.
Additionally, the Company recognized $547,000 in interest expense for cash interest payments on various promissory notes, $93,000 of
interest paid in stock for various promissory notes.
Other
income. Other income increased by $116,000 from the year ended July 31, 2019 to the year ended July 31, 2020. During the year ended
July 31, 2020, the Company recognized as other income $100,000 for a settlement with one of our vendors, in addition the Company recognized
$16,000 in interest income during the year ended July 31, 2020.
Net
income (loss) including noncontrolling interest. Net loss including noncontrolling interest for the year ended July 31, 2020 was
$3,424,000 compared to a net loss for the year ended July 31, 2019 of $4,648,000. The improvement in net loss including noncontrolling
interest between periods is primarily due to the decrease of $185,000 in SG&A, the decrease of $56,000 in depreciation expense, the
improvement of $975,000 in other income and expenses and the improvement in gross margin of $332,000. The improvements were slightly
offset by the increase of $83,000 in stock compensation expense and the increase of $252,000 in legal and professional fees.
Net
loss attributable to the noncontrolling interest. Net loss attributable to the noncontrolling interest for the year ended July 31,
2020 was $47,000 compared to $128,000 for the year ended July 31, 2019.
Net
income (loss) attributable to Digerati’s shareholders. Net loss for the year ended July 31, 2020 was $3,377,000 compared to
a net loss for the year ended July 31, 2019 of $4,520,000.
Deemed
dividend on Series A Convertible Preferred Stock Net income (loss). Dividend declared on convertible preferred stock for the year
ended July 31, 2020 was $19,000 compared to a Deemed dividend on convertible preferred stock for the year ended July 31, 2019 of $29,000.
Net
income (loss) attributable to Digerati’s common shareholders. Net loss for the year ended July 31, 2020 was $3,397,000 compared
to a net loss for the year ended July 31, 2019 was $4,549,000.
Liquidity
and Capital Resources
Cash
Position: We had a consolidated cash balance of $2,125,000 as of April 30, 2021. Net cash consumed by operating activities during
the nine months ended April 30, 2021 was approximately $403,000, primarily as a result of operating expenses, that included $558,000
in stock compensation and warrant expense, amortization of debt discount of $1,827,000, loss on derivative liability of $10,860,000,
depreciation and amortization expense of $1,204,000, increase in accrued expense of $1,397,000, decrease in accounts receivable of $96,000
and decrease in deferred revenue of $105,000. Additionally, we had an increase of $97,000 in accounts payable, decrease in prepaid expenses
and other current assets of $141,000, increase in inventory of $26,000 and the recognition of a gain on settlement of debt of $347,000.
Cash
used in investing activities during the nine months ended April 30, 2021 was $10,336,000, which included $228,000 for the purchase of
equipment and the cash paid of $10,108,000, net of cash received, for the acquisitions of VoIP assets from Nexogy and ActivePBX.
Cash
provided by financing activities during the nine months ended April 30, 2021, was $12,179,000. The Company secured $1,078,000 from convertible
notes, net of issuance costs and discounts. In addition, the Company secured $13,036,000 from two promissory notes, net of issuance costs.
(See Note 6) The Company made principal payments of $1,330,000 on various notes, principal payments of $266,000 on convertible
notes, principal payments of $316,000 on related party notes, and $53,000 in principal payments on equipment financing. Overall, our
net operating, investing, and financing activities during the nine months ended April 30, 2021, contributed approximately $1,440,000
of our available cash.
Digerati’s
consolidated financial statements for the nine months ending April 30, 2021, have been prepared on a going concern basis, which contemplates
the realization of assets and the settlement of liabilities in the normal course of business. Since the Company’s inception in
1993, Digerati has incurred net losses and accumulated a deficit of approximately $104,166,000 and a working capital deficit of approximately
$22,924,000 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 2021 certain members of our
management team have taken a significant portion of their compensation in Common Stock to reduce the depletion of our available cash.
To strengthen our business, we intend to adopt best practices from 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, we have also secured various agent agreements to 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.
Management
believes that available resources as of April 30, 2021, 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 $750,000 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 April 30, 2021, our
total liabilities were approximately $32,430,000, which included $17,340,000 in derivative liabilities. We will continue to use our available
cash on hand to cover our deficiencies in operating expenses.
We
estimate that we need approximately $65,000 per month of additional working capital to fund our corporate expenses during Fiscal 2021.
We
have been successful in raising debt capital and equity capital in the past and as described in Notes 6, 7, and 8 to our consolidated
financial statements. We have financing efforts in place to continue to raise cash through debt and equity offerings. Although we have
successfully completed financings and reduced expenses in the past, we cannot assure you that our plans to address these matters in the
future will be successful.
Critical
Accounting Policies
Revenue
Recognition. On August 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were
not completed as of August 1, 2018. Results for reporting periods beginning after August 1, 2018 are presented under Topic 606. There
was no impact to the opening balance of accumulated deficit or revenues for the year ended July 31, 2019 as a result of applying Topic
606.
The
Company recognizes cloud-based hosted services revenue, mainly from subscription services for its cloud telephony applications that includes
hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice and web conferencing, call recording, messaging,
voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized applications.
Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or
SD-WAN (Software-defined Wide Area Network), fiber, and Ethernet over copper. We also offer remote network monitoring, data backup and
disaster recovery services. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized:
(1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction
price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance
obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products transfers
to the customer.
Service Revenue.
Service revenue from subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis
over the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in
advance of subscription services being rendered are recorded as a deferred revenue. Usage fees, either bundled or not bundled, are recognized
when the Company has a right to invoice. Professional services for configuration, system integration, optimization, customer training
and/or education are primarily billed on a fixed-fee basis and are performed by the Company directly. Alternatively, customers may choose
to perform these services themselves or engage their own third-party service providers. Professional services revenue is recognized over
time, generally as services are activated for the customer.
Product
Revenue. The Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred,
which is generally upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical experience.
Disaggregation of Cloud
software and service revenue
Summary
of disaggregated revenue is as follows (in thousands):
|
|
Three months ended
April 30,
|
|
|
Nine months ended
April 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Cloud software and service revenue
|
|
$
|
3,666
|
|
|
$
|
1,556
|
|
|
$
|
8,440
|
|
|
$
|
4,653
|
|
Product revenue
|
|
|
85
|
|
|
|
10
|
|
|
|
189
|
|
|
|
59
|
|
Total operating revenues
|
|
$
|
3,751
|
|
|
$
|
1,566
|
|
|
$
|
8,629
|
|
|
$
|
4,712
|
|
|
|
For the Years ended
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cloud software and service revenue
|
|
$
|
6,212
|
|
|
$
|
5,847
|
|
Product revenue
|
|
|
67
|
|
|
|
193
|
|
Total operating revenues
|
|
$
|
6,279
|
|
|
$
|
6,040
|
|
Contract Assets.
Contract assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations
are completed. The revenue is recognized when the customer receives services or equipment for a reduced consideration at the onset of
an arrangement; for example, when the initial month’s services or equipment are discounted. Contract assets are included in prepaid
and other current assets in the consolidated balance sheets, depending on if their reduction is recognized during the succeeding 12-month
period or beyond. Contract assets as of April 30, 2021, and July 31, 2020, were $13,260 and $5,980, respectively.
Deferred Income.
Deferred income represents billings or payment received in advance of revenue recognition and is recognized upon transfer of control.
Balances consist primarily of annual plan subscription services, for services not yet provided as of the balance sheet date. Deferred
revenues that will be recognized during the succeeding 12-month period are recorded as current deferred revenues in the consolidated
balance sheets, with the remainder recorded as other noncurrent liabilities in the consolidated balance sheets. Deferred income as of
April 30, 2021, and July 31, 2020, were $43,000 and $148,000, respectively.
Customer
Deposits. The Company in some instances requires customers to make deposits for equipment, installation charges and training. As
equipment is installed and training takes places the deposits are then applied to revenue. As of April 30, 2021, and July 31, 2020, Digerati’s
customer deposits balance was $131,000 and $131,000, respectively
Costs to Obtain a Customer Contract.
Sales commissions are paid upon collections of related revenue and are expensed during the same period. Sales commissions for the nine
months ended April 30, 2021, and April 30, 2020, were $576,476 and $51,953, respectively.
Direct
Costs - Cloud software and service. We incur bandwidth and colocation charges in connection with our UCaaS or cloud communication
services. The bandwidth charges are incurred as part of the connectivity between our customers to allow them access to our various services.
We also incur costs from underlying providers for fiber, Internet broadband, and telecommunication circuits in connection with our data
and connectivity solutions.
Goodwill, Intangible
Assets, and Long-Lived Assets. Goodwill is carried at cost and is not amortized. The Company tests goodwill for impairment on an
annual basis at the end of each fiscal year, relying on a number of factors including operating results, business plans, economic projections,
anticipated future cash flows and marketplace data. Company management uses its judgment in assessing whether goodwill has become impaired
between annual impairment tests according to specifications set forth in ASC 350. The Company completed an evaluation of goodwill at
July 31, 2020 and 2019 and determined that there was no impairment.
The
fair value of the Company’s reporting unit is dependent upon the Company’s estimate of future cash flows and other factors.
The Company’s estimates of future cash flows include assumptions concerning future operating performance and economic conditions
and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from the
Company’s market capitalization plus a suitable control premium at date of the evaluation.
The
financial and credit market volatility directly impacts the Company’s fair value measurement through the Company’s weighted
average cost of capital that the Company uses to determine its discount rate and through the Company’s stock price that the Company
uses to determine its market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded.
The
Company recognizes an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal
rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either
individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their useful lives. Impairment
losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash
flows and its carrying amount exceeds its fair value.
The
Company reviews its long-lived assets, including property and equipment, identifiable intangibles, and goodwill annually or whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability
of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows will be less than the carrying
amount of the assets.
Business
combinations. Each investment in a business is being measured and determined whether the investment should be accounted for as a
cost-basis investment, an equity investment, a business combination, or a common control transaction. An investment in which the Company
do not have a controlling interest and which the Company is not the primary beneficiary but where the Company has the ability to exert
significant influence is accounted for under the equity method of accounting. For those investments that we account for in accordance
ASC 805, Business Combinations, the Company records the assets acquired and liabilities assumed at the management’s estimate of
their fair values on the date of the business combination. The assessment of the estimated fair value of each of these can have a material
effect on the reported results as intangible assets are amortized over various lives. Furthermore, according to ASC 805-50-30-5, when
accounting for a transfer of assets or exchange of shares between entities under common control, the entity that receives the net assets
or the equity interests shall initially measure the recognized assets and liabilities transferred at their carrying amounts in the accounts
of the transferring entity at the date of transfer.
Stock-based compensation.
In June 2018 FASB adopted the Accounting Standards Update No. 2018-07, Compensation – Stock Compensation
(Topic 718): Improvements to Non-employee Share-Based Payment Accounting. This update simplifies the accounting for non-employee
share-based payment transactions by expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment
transactions for acquiring goods and services from non-employees. The guidance is effective for annual periods beginning after December 15,
2018, and interim periods within that reporting period. The Company adopted the updated standard as of May 1, 2018, adopting this guidance
did not have a material effect on its consolidated financial statements. During FY 2020 and 2019, the Company issued 21,811,100 common
shares and 1,827,927 common shares, respectively to various employees as part of our profit sharing-plan contribution and stock in lieu
of cash. At the time of issuance during FY 2020 and 2019 we recognized stock-based compensation expense of approximately $1,127,000 and
$1,044,000, respectively equivalent to the market value of the shares issued calculated based on the share’s closing price at the
grant dates.
Derivative
financial instruments. Digerati does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency
risks. However, Digerati analyzes its convertible instruments and free-standing instruments such as warrants for derivative liability
accounting.
For
derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at each reporting date. Any changes in fair value is recorded as non-operating, non-cash income or expense for
each reporting period. For derivative notes payable conversion options Digerati uses the Black-Scholes option-pricing model to value
the derivative instruments.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed
at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current
based on whether or not net-cash settlement of the derivative instrument is probable within the next 12 months from the balance sheet
date.
Treasury
Shares. As a result of entering into various convertible debt instruments which contained a variable conversion feature with no floor,
warrants with fixed exercise price, and convertible notes with fixed conversion price or with a conversion price floor, we reserved 25,000,000
treasury shares for consideration for future conversions and exercise of warrants, for convertible notes with fixed conversion price,
notes with variable conversion feature with a floor and warrants with a conversion price floor. The Company will evaluate the reserved
treasury shares on a quarterly basis, and if necessary, reserve additional treasury shares. As of April 30, 2021, we believe that the
treasury share reserved are sufficient for any future conversions of these instruments. As a result, these debt instruments and warrants
are excluded from derivative consideration.
Fair
Value of Financial Instruments. Fair value is defined as the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. A fair value hierarchy is used which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy based on the three levels of inputs
that may be used to measure fair value are as follows:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level
3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values
are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant judgment or estimation.
For
certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses,
the carrying amounts approximate fair value due to the short maturity of these instruments. The carrying value of our long-term debt
approximates its fair value based on the quoted market prices for the same or similar issues or the current rates offered to us for debt
of the same remaining maturities.
Our
derivative liabilities as of April 30, 2021, and July 31, 2020, of $17,339,843 and $606,123, respectively.
The
following table as of July 31, 2020 and April 30, 2021 provides the fair value of the derivative financial instruments measured at fair
value using significant unobservable inputs:
|
|
|
|
|
Fair
value measurements at reporting
date using:
|
|
Description
|
|
Fair
Value
|
|
|
Quoted
prices in
active
markets
for
identical
liabilities
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Convertible
notes & warrants derivative liability at July 31, 2020.
|
|
$
|
606,123
|
|
|
-
|
|
|
|
-
|
|
|
$
|
606,123
|
|
Convertible
notes & warrants derivative liability at April 30, 2021.
|
|
$
|
17,339,843
|
|
|
-
|
|
|
|
-
|
|
|
$
|
17,339,843
|
|
Balance at July 31, 2020
|
|
$
|
606,123
|
|
Warrants issued in conjunction with new notes
|
|
|
6,462,050
|
|
Derivative liability resolved to additional paid in capital due to debt conversion
|
|
|
(588,097
|
)
|
Derivative (gain) / loss
|
|
|
10,859,767
|
|
Balance at April 30, 2021
|
|
$
|
17,339,843
|
|
The
fair market value of all derivatives during the nine months ended April 30, 2021, was determined using the Black-Scholes option pricing
model which used the following assumptions:
Expected dividend yield
|
|
0.00%
|
|
Expected stock price volatility
|
|
83.28% - 282.87%
|
|
Risk-free interest rate
|
|
0.09% -2.67%
|
|
Expected term
|
|
0.01 - 10.00 years
|
|
BUSINESS
Overview
Digerati
Technologies, Inc., a Nevada corporation (including our subsidiaries, “we,” “us,” “Company” or “Digerati”),
through its operating subsidiaries in Texas and Florida, Shift8 Networks, Inc., dba, T3 Communications (“T3”) and T3 Communications,
Inc. (“T3”), respectively, provides cloud services specializing in Unified Communications as a Service (“UCaaS”)
solutions for the business market. Our product line includes a portfolio of Internet-based telephony products and services delivered
through our cloud application platform and session-based communication network and network services including Internet broadband, fiber,
mobile broadband, and cloud WAN solutions (SD WAN). Our services are designed to provide enterprise-class, carrier-grade services to
the small-to-medium-sized business (“SMB”) at cost-effective monthly rates. Our UCaaS or cloud communication services include
fully hosted IP/PBX, mobile applications, Voice over Internet Protocol (“VoIP”) transport, SIP trunking, and customized VoIP
services all delivered Only in the Cloud™.
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 a poor customer support.
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. Most recently, the COVID-19 Pandemic
has increased demand for communication systems that support remote working environments.
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.
Recent
Developments
Nexogy
Merger
On
November 17, 2020, T3 Nevada’s wholly owned subsidiary, Nexogy Acquisition, Inc., merged with and into Nexogy, Inc. (“Nexogy”)
resulting in Nexogy becoming a wholly owned subsidiary of T3 Nevada (the “Merger”). Nexogy is a leading provider in South
Florida of Unified Communications as a Service and managed services, offering a portfolio of cloud-based solutions to the high-growth
SMB market.
The purchase price for Nexogy
was $9 million in cash, plus an additional $452,000 in initial excess net working capital. In addition, the Company anticipates adjusting
the initial networking capital by approximately $179,000 to reflect additional asset value and other liabilities identified. Of the $9
million, $900,000 was placed in an indemnity escrow account and $50,000 of the $9 million was placed in a working capital escrow account.
In addition, at the closing of the Merger, T3 Nevada paid a number of Nexogy’s liabilities which were included in the $9 million
purchase price.
ActivePBX
Asset Purchase
On
November 17, 2020, our indirect, wholly owned subsidiary, T3 Communications, Inc., a Florida corporation (“T3 Florida”),
executed and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation
(“Seller”). Pursuant to the Purchase Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual
property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s
telecommunications business known as ActivePBX (collectively, the “Purchased Assets”).
The
aggregate purchase price for the Purchased Assets was $2,555,000 in cash, subject to adjustment as provided therein (the
“Purchase Price”). $1,190,000 of the Purchase Price was payable at closing, with $50,000 of such amount being withheld
by T3 Florida for a period of 12 months to cover part of potential future indemnification obligations of Seller to T3 Florida due to
Seller’s breaches, if any, of any representations and warranties made to T3 Florida by Seller under the Purchase Agreement,
and $40,000 of such amount being credited to T3 Florida against a payment in that amount made by T3 Florida to Seller pursuant to
the Second Amendment to Letter of Intent between Seller and T3 Florida dated as of October 15, 2020.
Part
of the Purchase Price is payable in 8 equal quarterly payments of $136,250, subject to T3 Florida achieving quarterly post-purchase recurring
revenues under monthly contracts or subscriptions from the acquired customer base, excluding charges for taxes, regulatory fees,
additional set-up fees, equipment purchases or lease, and consulting fees. To the extent that a quarterly revenue threshold is not reached,
the amount of the corresponding quarterly payment shall be reduced on a proportional basis. T3 Florida’s $1,190,000 payment obligation
is represented by a promissory note of T3 Florida in the form included as an exhibit to the Purchase Agreement. The note, in turn, is
subject to the Subordination Agreement, included as an Exhibit to the Purchase Agreement, among Seller, the Company’s parent, T3
Nevada, and Post Road Administrative, LLC, in its capacity as administrative agent for the Post Road lenders. $275,000 of the
Purchase Price (the “Customer Renewal Value”) represents an incentive earn-out to be paid with respect to Seller’s
customer accounts which are transferred to T3 Florida at closing, that are renewed, expanded and/or revised with T3 Florida for a minimum
term of twelve months with an auto-renewal for 12 months.
In
connection with the Purchase Agreement, we entered into Consulting Agreements and a Non-Compete Agreement with each of Alex Gonzalez
and Jose Gonzalez, the Chief Executive Officer and Chief Technology Officer of Seller.
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 Administrative LLC and its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post Road”).
The Company is a party to certain sections of the Credit Agreement. Pursuant to the Credit Agreement, Post Road will provide T3 Nevada
with a secured loan of up to $20,000,000 (the “Loan”), with initial loans of $10,500,000 pursuant to the issuance of a Term
Loan A Note and $3,500,000 pursuant to the issuance of a Term Loan B Note, each funded on November 17, 2020, and an additional $6,000,000
on loans, in increments of $1,000,000 as requested by T3 Nevada before the 18 month anniversary of the initial funding date to be lent
pursuant to the issuance of a Delayed Draw Term Note.
The
Term Loan A and Delayed Draw Term Notes have maturity dates of November 17, 2024 and an interest rate of LIBOR (with a minimum rate of
1.5%) plus twelve percent (12%). Term Loan A is non-amortized (interest only payments) through the maturity date and contains an option
for the Company to pay interest in kind (PIK) for up to five percent (5%) of the interest rate in year one, four percent (4%) in year
two and three percent (3%) in year three.
Term
Loan B has a maturity date of December 31, 2021 and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%).
Term Loan B is non-amortized (interest only payments) through the maturity date and contains an option for the Company to pay interest
in kind (PIK) for up to five percent (5%) of the interest rate in year one, four percent (4%) in year two and three percent (3%) in year
three.
Permitted use of proceeds
for the initial $14,000,000 of the Loan included approximately $9.452 million for the purchase price for the merger of Nexogy with and
into an indirect wholly owned subsidiary of the Company described above, $1.190 million for the purchase price and transaction fees of
certain assets of ActiveServe, Inc. described above, $1.487 million for the payment in full of outstanding debts owed and accrued interest
to three creditors, including the secured creditor Thermo Communication, Inc., the payment of approximately $464,000 paid to Post Road,
and recognized as deferred financing cost, and will be amortized over the terms of the notes. In addition, the Company expensed $430,000
in legal fees associated to the acquisitions and financing.
The
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.
T3
Nevada’s obligations under the Credit Agreement are secured by a first-priority security interest in all of the assets of T3 Nevada
and guaranteed by the other subsidiaries of the Company pursuant to the Guaranty and Collateral Agreement, dated November 17, 2020, by
and among T3 Nevada, the Company’s other subsidiaries, and Post Road Administrative LLC (the “Guaranty and Collateral Agreement”).
In addition, T3 Nevada’s obligations under the Credit Agreement are, pursuant to a Pledge Agreement (the “Pledge Agreement”),
secured by a pledge of a first priority security interest in T3 Nevada’s 100% equity ownership of each of T3 Nevada’s operating
companies.
Warrant
In
connection with the Credit Agreement, on November 17, 2020, the Company issued a Warrant to Post Road Special Opportunity Fund II LP
(the “Warrant”) to purchase, initially, twenty-five percent (25%) of the Company’s total shares (the “Warrant”),
calculated on a fully diluted basis as of the date of issuance (the “Warrant Shares”) and subject to a reduction to fifteen
percent (15%) as described below.
The number of Warrant Shares
is adjustable to allow the holder to maintain, subject to certain share issuances that are exceptions, the right to purchase twenty-five
percent (25%) of the Company’s total shares, calculated on a fully diluted basis. The Warrant has an exercise price of $0.01 per
share and the Warrant expires on November 17, 2030. Seventy-five percent (75%) of the Warrant Shares are immediately fully vested and
not subject to forfeiture at any time for any reason. The remaining twenty-five percent (25%) of the Warrant Shares are subject to forfeiture
based on the Company achieving certain performance targets which, if achieved, would result in twenty percent (20%) warrant coverage.
If the minority shareholders of T3 Nevada convert their T3 Nevada shares into shares of the Common Stock, the Warrant Shares percentage
shall also be lowered such that when combined with the achievement of the performance targets, the warrant coverage could be reduced to
fifteen percent (15%).
In
connection with the issuance of the Warrant, the three executives of the Company, Art Smith, Antonio Estrada, and Craig Clement entered
into a Tag-Along Agreement (the “Tag-Along Agreement”) whereby they agreed that the holder of the Warrant or Warrant Share
will have the right to participate or “tag-along” in any agreements to sell any shares of their Common Stock that such executives
enter into. The Company also agreed, in connection with the issuance of the Warrant and pursuant to a Board Observer Agreement (the “Board
Observer Agreement”), to grant Post Road the right to appoint a representative to each of the boards of directors of the Company
and each of its subsidiaries, to attend all board meeting in a non-voting observer capacity.
Products
and Services
We
provide a comprehensive suite of Internet-based communication services to meet the global needs of businesses that are seeking simple,
flexible, and cost-effective communication solutions. Our Internet-based services include fully hosted IP/ Private Branch Exchange (“PBX”)
services, Session Initiation Protocol (“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.
Voice
over Internet Protocol Networks
The
basic technology of traditional telecommunications systems was designed for slow mechanical switches. Communications over the traditional
telephone network are routed through circuits that must dedicate all circuit resources to each call from its inception until the call
ends, regardless of whether anyone is actually talking on the circuit. This circuit-switching technology incurs a significant cost per
call and does not efficiently support the integration of voice with data services. Data networks, however, were designed for electronic
switching. They break the data stream into small, individually addressed packages of data (“packets”) that are routed independently
of each other from the origin to the destination. Therefore, they do not require a fixed amount of bandwidth to be reserved between the
origin and destination of each call and they do not waste bandwidth when it is not being used for actual transmission of information.
This allows multiple voice or voice and data calls to be pooled, resulting in these networks being able to carry more calls with an equal
amount of bandwidth. Moreover, they do not require the same complex switching methods required by traditional voice telephone networks,
instead using a multiplicity of routers to direct each packet to its destination and automatically routing packets around blockages,
congestion or outages.
Packet
switching can be used within a data network or across networks, including the public Internet. The Internet itself is not a single data
network owned by any single entity, but rather a loose interconnection of networks belonging to many owners that communicate using the
Internet Protocol. By converting voice signals to digital data and handling the voice signals as data, it can be transmitted through
the more efficient switching networks designed for data transmissions and through the Internet using the Internet Protocol. The transmission
of voice signals as digitalized data streams over the Internet is known as VoIP. A VoIP network has the following advantages over traditional
networks:
|
●
|
Simplification:
An integrated infrastructure that supports all forms of communication allows more standardization, a smaller equipment complement,
and less equipment management.
|
|
●
|
Network
Efficiency: The integration of voice and data fills up the data communication channels efficiently, thus providing bandwidth
consolidation and reduction of the costs associated with idle bandwidth. This combined infrastructure can support dynamic bandwidth
optimization and a fault tolerant design. The differences between the traffic patterns of voice and data offer further opportunities
for significant efficiency improvements.
|
|
●
|
Co-existence
with traditional communication mediums: IP telephony can be used in conjunction with existing public telephone system switches,
leased and dial-up lines, PBXs and other customer premise equipment, enterprise LANs, and Internet connections. IP telephony applications
can be implemented through dedicated gateways, which in turn can be based on open standards platforms for reliability and scalability.
|
|
●
|
Cost
reduction: Under the VoIP network, the connection is directly to the Internet backbone and as a result the telephony access charges,
and settlement fees are avoided.
|
The
growth of voice over the Internet was limited in the past due to poor sound quality caused by technical issues such as delays in packet
transmission and by bandwidth limitations related to Internet network capacity and local access constraints. However, the expansion of
Internet Protocol network infrastructure, improvements in packet switching and compression technology, new software algorithms and improved
hardware have substantially reduced delays in packet transmissions and resulted in superior sound quality to that of the legacy telephone
network. The continued improvement and expansion of the Internet Protocol network has resulted in the use of this technology for other
communication media, including video conferencing and instant messaging.
Cloud
Communications
Cloud
communications are Internet-based voice and data communications where telecommunications applications, switching and storage are
hosted by a third-party service provider outside of the organization using the services. Services are accessed by the user over the public
Internet. Cloud telephony refers specifically to voice services and more specifically the replacement of conventional business
telephone equipment (such as a PBX) with VoIP service hosted by a third-party service provider and delivered over the Internet.
We
operate a cloud communication network that consists of a VoIP switching system and cloud telephony application platform. Our network
allows us to provide end-to-end cloud telephony solutions designed to provide significant benefits to businesses of all sizes, with single
or multiple locations. The integration of our cloud communication platform and global VoIP network allows us to provide our customers
with virtually any type of telephony solution on a global basis.
Our
cloud communication solutions, also known as UCaaS, are designed to minimize upfront capital costs, increase the scalability and flexibility
of the customer’s communications network and service environment, provide robust features and functionality to increase productivity
and reduce the overall cost of communications.
Strategy
Our
strategy is to target the small to medium-sized business market and capitalize on the wave of migration from the legacy telephone network
to cloud telephony. We will continue to concentrate our sales and marketing efforts on developing vertically oriented solutions for targeted
markets primarily focusing on municipalities, banking, healthcare, legal services, and real estate. In addition, we will continue to
partner with our distributors and Value-Added Resellers (“VARs”) to expand our customer base. Our typical VAR, also referred
to as a Partner, is an information technology services firm, traditional PBX vendor, managed service provider, or systems integrator
that has established relationships with businesses in its local market. These VARs are currently providing local customer support for
other IT or PBX services but lack the technology infrastructure to provide cloud communication and VoIP services to their customers.
Our strategy allows these VARs to focus on their strength of providing first tier support to their customers while we provide the second
and third tier technical support required to operate a cloud communication and VoIP network. In addition, we transform our VARs’
business model by introducing new cloud telephony services and adding a new and lucrative recurring revenue stream that increases the
VARs’ value proposition for its current and prospective customers.
Our
cloud-based technology platform enables us and our VARs to deliver enhanced voice services to their business customers. The features
supported on our cloud communication platform include all standard telephone features and value-added applications such as voicemail
to email, VoIP peering, teleconferencing, IVR auto attendant, and dial-by-name directory. Our system provides our customers and VARs
with a migration path from a traditional PBX system to a complete cloud-based PBX solution.
Our
strategic initiatives to successfully meet our long-term business objectives include:
|
●
|
A
disciplined approach to evaluating additional acquisitions as we build on the foundation created by our acquisitions in Texas and
Florida in FY2018. We will continue to target local and/or regional UCaaS/cloud telephony providers which have excelled in their
market with that “local” touch when serving their business customers. We believe the experience gained in integrating
products, personnel, and customers will facilitate continued growth via acquisition.
|
|
●
|
A
continued emphasis on our UCaaS/cloud communication business which operates in a segment of the telecommunication industry that continues
to experience significant growth as businesses migrate from legacy phone systems to cloud-based telephony systems.
|
|
●
|
Enhancements
to our broadband product portfolio with an emphasis on marketing leading-edge network and business continuity solutions like cloud
WAN, also known as SD-WAN (Software Defined Wide-Area Network), to our customers which we anticipate will increase average revenue
per customer.
|
|
●
|
Implementing
a total support model (pre and post sales) for building a world-class service delivery and help desk organization.
|
|
●
|
Emphasis
on our sales distribution model that enables our VARs to offer cloud and session-based communication services to the enterprise market
in various regions and industries.
|
|
●
|
Continue
enhancing our infrastructure and back office system to streamline operations, automate key processes, and support the scalability
of our VAR distribution model.
|
Competitive
Conditions
The
cloud services industry, including the provisioning of cloud communications services, cloud connectivity, cloud storage and cloud computing,
as well as carrier voice and data services, is highly competitive, rapidly evolving and subject to constant technological change and
intense marketing by providers with similar products and services. We expect that new, smaller, but very agile competitors, specializing
in providing service to regional and emerging markets at low margin and hence low cost, may have an impact on our market. Similarly,
the business services market includes competitors who may be significantly larger and have substantially greater market presence, financial,
technical, operational and marketing resources than we do, including Tier 1 carriers, cable companies and premise-based solutions providers
that are implementing cloud communication services. In the event that such a competitor expends significant sales and marketing resources
in one or several markets where we compete with them, we may not be able to compete successfully in those markets. Specialized cloud
services providers, who focus on one or more cloud service or application, could adopt aggressive pricing and promotion practices that
could impact our ability to compete. We also believe that competition will continue to increase, placing downward pressure on prices.
Such pressure could adversely affect our gross margins if we are not able to reduce our costs commensurate with the price reductions
of our competitors. In addition, the pace of technological change makes it impossible for us to predict whether we will face new competitors
using different technologies to provide the same or similar services offered or proposed to be offered by us. If our competitors were
to provide better and more cost-effective services than ours, we may not be able to increase our revenues or capture any significant
market share.
The
VoIP and Internet telephony market are highly competitive. Our competitors include major telecommunications carriers in the U.S., national
UCaaS providers, and numerous small cloud telephony operators. We expect to face continuing competition based on price and service offerings
from existing competitors and new market entrants in the future. The principal competitive factors in our market include price, coverage,
customer service, technical response times, reliability, and network size/capacity. The competitive landscape is rapidly altering the
number, identity, and competitiveness of the marketplace, and we are unable to determine with certainty the impact of potential consolidation
in our industry.
Many
of our competitors have substantially greater financial, technical, and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the industry than we have. As a result, certain of these competitors
may be able to adopt more aggressive pricing policies that could hinder our ability to market our services. We believe that our key competitive
advantages are our ability to deliver reliable, high quality voice service over the Internet in a cost-effective manner, superior customers
service and our VAR distribution model. We cannot provide assurances, however, that these advantages will enable us to succeed against
comparable service offerings from our competitors.
Government
Regulation
VoIP
and other communications services, like ours, have been subject to less regulation at the state and federal levels than traditional telecommunications
services. Providers of traditional telecommunications services are subject to the highest degree of regulation, while providers of VoIP
and other information services are largely exempt from most federal and state regulations governing traditional common carriers. The
FCC has subjected VoIP service providers to a smaller subset of regulations that apply to traditional telecommunications service providers
and has not yet classified VoIP services as either telecommunications or information. The FCC is currently examining the status of VoIP
service providers and the services they provide in multiple open proceedings. In addition, many state regulatory agencies impose taxes
and other surcharges on VoIP services, and certain states take the position that offerings by VoIP providers are intrastate telecommunications
services and therefore subject to state regulation. These states argue that if the beginning and end points of communications are known,
and if some of these communications occur entirely within the boundaries of a state, the state can regulate that offering. We believe
that the FCC has preempted states from regulating VoIP offerings in the same manner as providers of traditional telecommunications services.
However, this issue has not been resolved definitively as a matter of law, and it remains possible that the FCC could determine that
such services are not information services, or that there could be a judicial or legislative determination that the states are not preempted
from regulating VoIP services as traditional telecommunications services. We cannot predict how or when these issues will be resolved
or its potential future impact on our business at this time.
The
effect of any future laws, regulations, and orders on our operations, including, but not limited to, our cloud-based communications and
collaboration services, cannot be determined. But as a general matter, increased regulation and the imposition of additional funding
obligations increases service costs that may or may not be recoverable from our customers, which could result in making our services
less competitive with traditional telecommunications services if we increase our prices or decreasing our profit margins if we attempt
to absorb such costs.
Federal,
state, local and foreign governmental organizations are considering other legislative and regulatory proposals that would regulate and/or
tax applications running over the Internet. We cannot predict whether new taxes will be imposed on our services, and depending on the
type of taxes imposed, whether and how our services would be affected thereafter. Increased regulation of the Internet may decrease its
growth and hinder technological development, which may negatively impact the cost of doing business via the Internet or otherwise materially
adversely affect our business, financial condition, and results of operations.
Regulation
of Internet-based Telecommunication Services in the United States
We
have the necessary authority under Section 214 of the Communications Act to operate as a domestic and international carrier. We are considered
a non-dominant domestic interstate carrier subject to minimal regulation by the FCC. We are not required to obtain FCC authority to initiate
or expand our domestic interstate operations, but we are required to obtain FCC approval to transfer control or discontinue service and
are required to file various reports and pay various fees and assessments. In addition, we must offer service on a nondiscriminatory
basis at just and reasonable rates and are subject to the FCC’s complaint jurisdiction. Generally, our international voice traffic
is subject to minimal regulation by state and local jurisdictions.
We
are a competitive local exchange carrier (CLEC) in Florida. We are subject to the same FCC regulations applicable to telecommunications
companies, as well as regulation by the public utility commission in Florida. As a CLEC, we are generally required to register or seek
certification to provide certain services, to file and update tariffs setting forth the terms, conditions and prices for our intrastate
services and to comply with various consumer protection, reporting, record-keeping, surcharge collection requirements.
The
FCC requires Internet voice communications service providers, such as our company, to provide E-911 service in all geographic areas covered
by the traditional wire-line E-911 network. Under the FCC’s rules, Internet voice communications providers must transmit the caller’s
phone number and registered location information to the appropriate public safety answering point, or PSAP, for the caller’s registered
location. The FCC also requires interconnected VoIP service providers to make Universal Service Fund (“USF”) contributions.
We believe that our services are currently compliant with all applicable requirements of the FCC, and we have made and are making the
required contributions to the USF. However, should we at some time fail to meet certain requirements or fail to make required contributions,
we could be subject to revocation of our authority to operate or to fines or penalties.
As
a result of the FCC’s preemption of states’ ability to regulate certain aspects of VoIP service, and a trend in state legislatures
to affirmatively deregulate VoIP services for most purposes, our VoIP services are subject to relatively few state regulatory requirements
aside from collection of state and local E911 fees and state Universal Service support obligations. We believe that our VoIP services
are currently compliant with all applicable state requirements, and we have made and are making the required contributions to E911, state
USF, and other funds. The state regulatory framework for our VoIP services continues to evolve, so we, in conjunction with our professional
advisors, monitor the actions of the various state regulatory agencies and endeavor to ensure that we are in compliance with applicable
state law, including any new statutes or regulations that may be passed. However, there can be no assurance that we will become aware
of all applicable requirements on a timely basis, or that we will always be fully compliant with applicable rules and regulations. Should
we fail to be compliant with applicable state regulations, or to file required reports with state regulatory agencies, we could be subject
to fines and/or penalties.
In
addition to regulations addressing Internet telephony and broadband services, other regulatory issues relating to the Internet generally
could affect our ability to provide our services. Congress has adopted legislation that regulates certain aspects of the Internet including
online content, user privacy, taxation, liability for third-party activities and jurisdiction. In addition, a number of initiatives pending
in Congress and state legislatures would prohibit or restrict advertising or sale of certain products and services on the Internet, which
may have the effect of raising the cost of doing business on the Internet generally.
International
Regulation
The
regulatory treatment of Internet telephony outside of the U.S. varies widely from country to country. A number of countries that currently
prohibit competition in the provision of voice telephony also prohibit Internet telephony. Other countries permit but regulate Internet
telephony. Some countries will evaluate proposed Internet telephony service on a case-by-case basis and determine whether it should be
regulated as a voice service or as another telecommunications service. In many countries, Internet telephony has not yet been addressed
by legislation or regulation. Increased regulation of the Internet and/or Internet telephony providers or the prohibition of Internet
telephony in one or more countries could adversely affect our business and future prospects if we decide to expand globally.
Legal
Proceedings
On
April 16, 2021, a lawsuit was filed against T3 Communications, Inc. (“T3”), a subsidiary of the Company, by Carolina Financial
Securities, LLC (“CFS”), in North Carolina state court (Forsyth County Superior Court), claiming that T3 owes CFS a placement
fee of $576,000.00 pursuant to an Engagement Letter between the two companies. The Company has removed the case to the United States
District Court for the Middle District of North Carolina. The Company denies liability and intends to vigorously defend the lawsuit. At
the time of this prospectus, the Company cannot predict the outcome of such claim and the financial impact on our ongoing operations.
Customers
and Suppliers
We
rely on various suppliers to provide services in connection with our VoIP and UCaaS offerings. Our customers include businesses in various
industries including Healthcare, Banking, Financial Services, Legal, Real Estate, and Construction. We are not dependent upon any single
supplier or customer.
During
the nine months ended April 30, 2021, and 2020, the Company did not derive a significant amount of revenue from one single customer.
As
of the nine months ended April 30, 2021, and 2020, the Company did not derive a significant number of accounts receivable from one single
customer.
Employees
As of August 9, 2021, we had
49 employees, all of whom performed sales, operational, technical, and administrative functions. We believe our future success will depend
to a large extent on our continued ability to attract and retain highly skilled and qualified employees. We consider our employee relations
to be good. None of our employees belong to labor unions.
MANAGEMENT
Directors
and Executive Officers
The following table contains
the name, age of our Directors and executive officers as of August 9, 2021.
Name
|
|
Age
|
|
Position
Held
|
|
Held Office Since
|
Arthur
L. Smith
|
|
56
|
|
President,
Chief Executive Officer & Director
|
|
2003
|
Craig
K. Clement
|
|
63
|
|
Executive
Chairman of the Board
|
|
2014
|
Maxwell
A. Polinsky
|
|
63
|
|
Director
|
|
2014
|
Antonio
Estrada Jr.
|
|
46
|
|
Chief
Financial Officer
|
|
2007
|
Arthur
L. Smith is our Chief Executive Officer, President, and Director. Mr. Smith has over 25 years of specialized experience in the
telecommunications, technology, and oil and gas industries. Mr. Smith founded ATSI Communications, Inc. (“ATSI”), the
Company’s predecessor. As founder of ATSI, he led the Company’s start-up operation focused on the USA – Mexico telecommunications
corridor to over US$65 million in annual revenue and a listing on the American Stock Exchange that resulted in a market value of
over US$450 million. In 2001, 2008, and 2009, ATSI received Deloitte and Touche’s Fast 500 Award for recognition as one of
the 500 fastest growing technology companies in North America. As CEO of ATSI, Mr. Smith also co-founded the Company’s highly
successful Internet software subsidiary, GlobalSCAPE, Inc., in 1996. As Chairman of the Board of GlobalSCAPE, he led the Company’s
strategic and business development efforts from inception through its growth strategy that resulted in a listing on a public stock exchange and
the subsequent sale of ATSI’s ownership to private investors in June 2002. Mr. Smith is currently President and CEO of the
Company’s cloud communications subsidiary, T3 Communications, Inc., a Nevada corporation.
Craig
K. Clement is the Executive Chairman of Digerati Technologies. Craig has over thirty-five years of executive and director experience
with Technology (telecom, Internet software) and Oil Exploration and Production (E&P) entities where he has been responsible for
asset management, acquisitions and divestitures, strategic and tactical planning, financial operations, corporate finance, legal, transaction
structuring, business development, and investor relations. He assisted in the growth of a San Antonio-based telecom provider from 10
employees to 500, achieving a public market valuation of US$500 million. Craig was the founding CEO of GlobalSCAPE, Inc., and was
the former COO of XPEL, Inc. Craig was also the former Chairman of the South Texas Regional Center for Innovation and Commercialization,
which screened and supported entrepreneurs through the Texas Emerging Technology Fund managed by the Texas Governor’s office, which
invested more than $350 million in Texas-based technology start-ups.
Maxwell
A. Polinsky is a Director. Mr. Polinsky is currently the President, CFO and a Director of Winston Gold Corp, a Canadian-based
mineral exploration company that is traded on the CSE Exchange, and a principal in Venbanc Investment and Management Group Inc.,
an investment and merchant bank he co-founded in 1994. From 2009 to 2011, Mr. Polinsky was the Chief Financial Officer and a director
of RX Exploration Inc., a company that successfully re opened the previous old historic Drumlummon gold mine in Montana. Mr. Polinsky
also served as a director of Nerium Biotechnology from 2006 to 2010, XPEL, Inc. from 2003 to 2009, and Nighthawk Systems from 2001 to
2007 and Cougar Minerals from 2012 to 2014. Mr. Polinsky holds a Bachelor of Commerce degree from the University of Manitoba.
Antonio
Estrada Jr. is our Chief Financial Officer and Treasurer. Mr. Estrada is a seasoned financial executive with over 22 years of experience
in the telecommunications and oil and gas industries. Mr. Estrada’s vast experience includes financial reporting and modeling,
strategic planning, grant writing, and cash management. Mr. Estrada served as the Sr. VP of Finance and Corporate Controller of Digerati,
formerly known as ATSI Communications, Inc., from 2008 to 2013. From 1999 to 2008, Mr. Estrada served in various roles within ATSI, including
International Accounting Manager, Treasurer, Internal Auditor, and Controller. Mr. Estrada graduated from the University of Texas at
San Antonio, with a Bachelor of Business Administration, with a concentration in Accounting.
Family
Relationships
There
are no family relationships among any of our directors or executive officers.
Code
of Ethics
We
adopted an Executive Code of Ethics that applies to the Chief Executive Officer, Chief Financial Officer, Controller, and other members
of our management team. The Executive Code of Ethics may be viewed on our Website, www.digerati-inc.com. A copy of the Executive
Code of Ethics will be provided without charge upon written request to Digerati Technologies, Inc., 825 W. Bitters, Suite 104, San Antonio,
Texas 78216.
Nominating
Committee and Nomination of Directors
We
do not have a nominating committee because the size of our Board of Directors is too small to establish separate standing committees.
Our Directors perform the function of a nominating committee.
The
Directors consider candidates recommended by other members of the Board of Directors, by executive officers and by one or more substantial,
long-term stockholders. In addition, the Board of Directors may seek candidates through a third-party recruiter. Generally, stockholders
who individually or as a group have held 5% of our shares for over one year will be considered substantial, long-term stockholders. In
considering candidates, the Directors take into consideration the needs of the Board of Directors and the qualifications of the candidate.
The Board of Directors has not established a set of criteria or minimum qualifications for candidacy and each candidate is considered
based on the demonstrated competence and knowledge of the individual. To have a candidate considered by the Directors, a stockholder
must submit the recommendation in writing and must include the following information:
|
●
|
The
name of the stockholder and evidence of ownership of our shares, including the number of shares owned and the length of time of ownership;
and
|
|
●
|
The
name of the candidate, the candidate’s resume or a listing of her or his qualifications to be one of our Directors and the
person’s consent to be named as a Director if nominated by the Directors.
|
The
stockholder’s recommendation and information described above must be sent to us at 825 W. Bitters, Suite 104, San Antonio, Texas
78216.
Audit
Committee and Audit Committee Financial Expert
We
do not have an audit or other committee of our Board of Directors that performs equivalent functions. Our Board of Directors performs
all functions of the audit committee. Mr. Maxwell A. Polinsky served as the Audit Committee Financial Expert during the year ended July
31, 2020.
EXECUTIVE
COMPENSATION
The
compensation programs presently in effect with respect to the Chief Executive Officer, Chief Financial Officer and Chairman of the Board
were established by the Board of Directors.
Arthur L. Smith serves as
our President and Chief Executive Officer. On February 14, 2019, the Company entered into an employment agreement with Mr. Smith, the
annual salary was approved by the Board of Directors to be set at $200,000. In addition, the Board of Directors during FY 2015 approved
the reimbursement of monthly expenses up to $1,667. During FY 2020, the Board of Directors approved the issuance of Common Stock in lieu
of cash compensation equivalents up to 50% of Mr. Smith’s annual salary. Below are other compensation and benefits for Mr. Smith
in accordance with the employment agreement:
(1) Stock
Grant. Mr. Smith received at the execution of his employment agreement 450,000 shares of Common Stock. The stock grant pursuant
to the employment agreement vests upon the earlier of the Company achieving $15 million in annualized revenue or listing on a primary
stock exchange (e.g., NASDAQ or NYSE American) and is subject to adjustment for any forward or reverse split of the Company’s stock.
(2) Stipend. Mr.
Smith is eligible to receive a 2% stipend on revenue from acquisition transactions approved by the Board of Directors and closed by the
Company. Acquisition revenue will be calculated based on the trailing twelve months (TTM) revenue of the company or assets (stock or
asset purchase) acquired by the Company. The stipend for acquisitions will be capped at 200% of the annual base salary for the employee.
Mr. Smith may elect to receive Common Stock in the Company in lieu of a cash payment for the acquisition stipend or apply the stipend
towards the exercise of vested stock options in a cashless transaction. The stipend shall be considered fully earned at the closing of
each acquisition and paid within 10 business days from such event. For acquisition transactions closed prior to the signing of the employment
agreement, the stipend shall be paid within 6 months of the signing of the employment agreement or under terms mutually agreed upon between
Mr. Smith and us. The stipend for acquisitions is subject to review and approval by the Board of Directors of the Company on an annual
basis commencing August 1, 2019. The Company accrued for a stipend of $60,000 during the year ended July 31, 2020 associated with the
acquisitions of two additional Companies.
(3) Stipend. Mr.
Smith is eligible to receive a one-time payment of $75,000 upon the Company listing on a primary stock exchange (e.g., NASDAQ or NYSE
American). Mr. Smith may elect to receive Common Stock in the Company in lieu of a cash payment for this up-listing stipend or apply the
stipend towards the exercise of vested Stock options in a cash-less transaction. The stipend shall be considered fully earned upon initial
listing in a primary stock exchange and paid within 10 business days from such event.
(4) Signing
Bonus Stock Options. Mr. Smith received 585,000 stock options as of the effective date of the employment agreement. The stock
options will vest equally over a period of 12 months from the issuance date.
(5) Additional
Compensation. In the event of a Spin-Off (as defined below), Mr. Smith is entitled to receive 3% of the consideration payable
to, and/or received by, the Company or its shareholders in a Spin-Off (calculated and paid from the total shares or cash to be distributed),
which payment shall be made to Employee on the closing of the Spin-Off date. A “Spin-Off’ means the sale of a subsidiary
or distribution of shares of capital stock to the shareholders of the Company that the Company owns in a subsidiary, whether it is 100%
of the ownership or a lesser amount.
Antonio Estrada Jr. serves
as our Chief Financial Officer. On February 14, 2019, the Company entered into an employment agreement with Mr. Estrada, the annual salary
was approved by the Board of Directors to be set at $185,000. In addition, the Board of Directors during FY 2015 approved the reimbursement
of monthly expenses up to $1,667. During FY 2020, the Board of Directors approved the issuance of Common Stock in lieu of cash compensation
equivalents up to 50% of Mr. Estrada’s annual salary. Below are other compensation and benefits for Mr. Estrada in accordance with
the employment agreement:
(1) Stock Grant. Mr.
Estrada received at the execution of this agreement 350,000 shares of Common Stock. Mr. Estrada’s stock grant vests upon the earlier
of the Company achieving $15 million in annualized revenue or listing on a primary stock exchange (e.g., NASDAQ or NYSE American) and
is subject to adjustment for any forward or reverse split of the Company’s stock.
(2) Stipend. Mr.
Estrada is eligible to receive a 1 % stipend on revenue from acquisition transactions approved by the Board of Directors and closed by
the Company. Acquisition revenue will be calculated based on the trailing twelve months (TTM) revenue of the company or assets (stock
or asset purchase) acquired by the Company. The stipend for acquisitions will be capped at 200% of the annual base salary for the employee.
Mr. Estrada may elect to receive Common Stock in the Company in lieu of a cash payment for the acquisition stipend or apply the stipend
towards the exercise of vested stock options in a cashless transaction. The stipend shall be considered fully earned at the closing of
each acquisition and paid within 10 business days from such event. For acquisition transactions closed prior to the signing of the employment
agreement, the stipend shall be paid within 6 months of the signing of the employment agreement or under terms mutually agreed upon between
Mr. Estrada and us. The stipend for acquisitions is subject to review and approval by the Board of Directors of the Company on an annual
basis commencing August 1, 2019. The Company accrued for a stipend of $60,000 during the year ended July 31, 2020 associated with the
acquisitions of two additional Companies.
(3) Stipend. Mr.
Estrada is eligible to receive a one-time payment of $60,000 upon the Company listing on a primary stock exchange (e.g., NASDAQ or NYSE
American). Mr. Estrada may elect to receive Common Stock in the Company in lieu of a cash payment for this up-listing stipend or apply
the stipend towards the exercise of vested stock options in a cash-less transaction. The stipend shall be considered fully earned upon
initial listing in a primary stock exchange and paid within 10 business days from such event.
(4) Signing
Bonus Stock Options. Mr. Estrada received 520,000 stock options as of the effective date of the employment agreement. The
stock options will vest equally over a period of 12 months from the issuance date.
(5) Additional
Compensation. In the event of a Spin-Off (as defined below), Mr. Estrada is entitled to receive 1.25% of the consideration
payable to, and/or received by, the Company or its shareholders in a Spin-Off (calculated and paid from the total shares or cash to be
distributed), which payment shall be made to Employee on the closing of the Spin-Off date. A “Spin-Off’ means the sale of
a subsidiary or distribution of shares of capital stock to the shareholders of the Company that the Company owns in a subsidiary, whether
it is 100% of the ownership or a lesser amount.
Craig K. Clement, serves as
our Executive Chairman of the Board. On February 14, 2019, the Company entered into an employment agreement with Mr. Clement, the annual
salary was approved by the Board of Directors to be set at $210,000. During FY 2020, the Board of Directors approved the issuance of Common
Stock in lieu of cash compensation equivalents up to 50% of Mr. Clement’s annual salary. No other cash compensation is presently
being paid to Mr. Clement.
Below
are other compensation and benefits for Mr. Clement in accordance with the employment agreement:
(1) Stock Grant. Mr.
Clement received at the execution of this Agreement 550,000 shares of Common Stock. Mr. Clement’s stock grant shall vest upon the
earlier of the Company achieving $15 million in annualized revenue or listing on a primary stock exchange (e.g., NASDAQ or NYSE American)
and will be subject to adjustment for any forward or reverse split of the Company’s stock.
(2) Mr. Clement will receive a one-time
cash bonus of $100,000 upon the Company’s common shares reaching a $4.00 trading price per share for 10 consecutive trading days.
The $4.00 trading price per share will be adjusted for any forward or reverse split of the Company’s stock. Mr. Clement may elect
to receive Common Stock in the Company in lieu of a cash payment for the share price bonus or apply the bonus towards the exercise of
vested stock options in a cash-less transaction.
(3) Stipend. Mr. Clement
is eligible to receive a one-time payment of $35,000 upon the Company listing on a primary stock exchange (e.g., NASDAQ or NYSE American).
Mr. Clement may elect to receive Common Stock in the Company in lieu of a cash payment for this up-listing stipend or apply the stipend
towards the exercise of vested stock options in a cash-less transaction. The stipend shall be considered fully earned upon initial listing
in a primary stock exchange and paid within 10 business days from such event.
(4) Signing
Bonus Stock Options. Mr. Clement received 620,000 stock options as of the effective date of the employment agreement. The stock
options will vest equally over a period of 12 months from the issuance date.
(5) Additional
Compensation. In the event of a Spin-Off (as defined below), Mr. Clement is entitled to receive 0.75% of the consideration payable
to, and/or received by, the Company or its shareholders in a Spin-Off (calculated and paid from the total shares or cash to be distributed),
which payment shall be made to Employee on the closing of the Spin-Off date. A “Spin-Off’ means the sale of a subsidiary
or distribution of shares of capital stock to the shareholders of the Company that the Company owns in a subsidiary, whether it is 100%
of the ownership or a lesser amount.
Compensation
Discussion and Analysis
Our
compensation programs are designed to meet the following objectives:
|
●
|
Offer
compensation opportunities that attract highly qualified executives, reward outstanding initiative and achievement, and retain the
leadership and skills necessary to build long-term stockholder value;
|
|
●
|
Emphasize
pay-for-performance by maintaining a portion of executives’ total compensation at risk, tied to both our annual and long-term
financial performance and the creation of stockholder value; and
|
|
●
|
Further
our short and long-term strategic goals and values by aligning executive officer compensation with business objectives and individual
performance.
|
Our
Board of Directors believes that an executive’s compensation should be tied to the performance of the individual and the performance
of the complete executive team against both financial and non-financial goals, some of which are subjective and within the discretion
of the Board of Directors.
Our
executive compensation program is intended to be simple and clear, and consists of the following elements (depending on individual performance):
|
●
|
Annual
performance-based cash bonus;
|
|
●
|
Long-term
incentives in the form of stock options; and
|
|
●
|
Benefits
that are offered to executives on the same basis as our non-executive employees.
|
Role
of Management in Determining Compensation Decisions
At
the request of our Board of Directors, our management makes recommendations to our Board of Directors relating to executive compensation
program design, specific compensation amounts, bonus targets, incentive plan structure and other executive compensation related matters
for each of our executive officers, including our Chief Executive Officer. Our Board of Directors maintains decision-making authority
with respect to these executive compensation matters.
Our
Board of Directors reviews the recommendations of our management with respect to total executive compensation and each element of compensation
when making pay decisions. In allocating compensation among compensation elements, we emphasize incentive, not fixed compensation to
ensure that executives only receive superior pay for superior results. We equally value short- and long-term compensation because both
short- and long-term results are critical to our success. In addition, our compensation program includes various benefits provided to
all employees, including life insurance, health insurance and other customary benefits. The objectives and details of why each element
of compensation is paid are described below.
Base
Salary. Our objective for paying base salaries to executives is to reward them for performing the core responsibilities of their
positions and to provide a level of security with respect to a portion of their compensation. We consider a number of factors when setting
base salaries for executives, including:
|
●
|
Existing
salary levels;
|
|
●
|
Competitive
pay practices;
|
|
●
|
Individual
and corporate performance; and
|
|
●
|
Internal
equity among our executives, taking into consideration their relative contributions to our success.
|
Long-term
Incentive Awards. We award long-term incentive compensation to focus our executives on our long-term growth and stockholder
return, as well as to encourage our executives to remain with us for the long-term. Long-term incentive awards are primarily in the form
of grants of stock options and/or stock award pursuant to our 2015 Equity Compensation Plan (the “Plan”). We selected this
form because of the favorable accounting and tax treatment and the expectation of key employees in our industry that they would receive
stock options and/or stock grants. We do not have pre-established target award amounts for long-term incentive grants. In determining
long-term incentive awards for the Named Executive Officers, our Board of Directors relies on recommendations from our Chief Executive
Officer, who considers the individual performance of the executives, the relation of the award to base salary and annual incentive compensation,
and associated accounting expense. The terms of and amount of awards are made by our Board of Directors in accordance with the Stock
Option Plan.
Executive
Compensation
The
following table sets forth the compensation paid to each of our principal executive officers (the “Named Executive Officers”)
during the last two completed fiscal years:
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($) (1)
|
|
|
Option
Awards
($) (2)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
Arthur
L. Smith
|
|
2020
|
|
|
$
|
133,866
|
|
|
$
|
-0-
|
|
|
$
|
284,000
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
417,866
|
|
President, Chief Executive
Officer & Director
|
|
2019
|
|
|
$
|
113,410
|
|
|
$
|
-0-
|
|
|
$
|
151,500
|
|
|
$
|
73,680
|
|
|
$
|
-0-
|
|
|
$
|
338,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antonio
Estrada Jr.
|
|
2020
|
|
|
$
|
118,866
|
|
|
$
|
-0-
|
|
|
$
|
238,000
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
356,866
|
|
Chief
Financial Officer
|
|
2019
|
|
|
$
|
106,517
|
|
|
$
|
-0-
|
|
|
$
|
132,500
|
|
|
$
|
65,494
|
|
|
$
|
-0-
|
|
|
$
|
304,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craig
K. Clement
|
|
2020
|
|
|
$
|
132,000
|
|
|
$
|
-0-
|
|
|
$
|
214,000
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
346,000
|
|
Chairman
of the Board
|
|
2019
|
|
|
$
|
123,875
|
|
|
$
|
-0-
|
|
|
$
|
170,500
|
|
|
$
|
78,089
|
|
|
$
|
-0-
|
|
|
$
|
372,464
|
|
(1)
|
During
the year ended July 31, 2020 and 2019, Digerati issued common shares as part of the Company’s profit-sharing plan contribution.
In addition, during the year ended July 31, 2020 and July 31, 2019, Digerati issued Common Stock in lieu of cash compensation to
its Executive Officers.
|
|
|
(2)
|
During
the year ended July 31, 2020, Digerati did not issue any options to its Executive Officers. During the year ended July 31, 2019,
Digerati issued 1,725,000 options to its Executive Officers to acquire common shares at an exercise price of $0.19 and a fair value
at the time issuance of $217,263. The options vest ratably on a monthly basis through February 14, 2020.
|
Our
Board of Directors adopted the 2015 Equity Compensation Plan (the “Plan”). Under the Plan the Board of Directors may grant
up to 7.5 million shares of our Common Stock to our officers, Directors, employees, and consultants. Grants may be in the form of incentive
stock options, non-statutory stock options, restricted stock awards, and/or unrestricted stock awards. The number and terms of each award
is determined by the Board of Directors, subject to the limitation that the exercise price of any option may not be less than the fair
market value of the Common Stock on the date of grant.
We
currently provide a Non-Standardized Profit-Sharing Plan (the “Profit-Sharing Plan”). The Board of Directors approved the
Profit-Sharing Plan on September 15, 2006. Under the Profit-Sharing Plan our employees qualified to participate in the Profit-Sharing
Plan after one year of employment. Contribution under the Profit-Sharing Plan by us is based on 25% of the annual base salary of each
eligible employee up to $54,000 per year. Contributions under the Profit-Sharing Plan are fully vested upon funding.
OUTSTANDING
EQUITY AWARDS AS OF JULY 31, 2020
|
|
Option
Awards
|
|
Stock
Awards
|
|
Name
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable (1)
|
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
Number
of
Shares or
Units of
Stock That
Have Not
Vested
(#)
(2)
|
|
|
Market
Value
of Shares or
Units of Stock
That Have Not
Vested
($)
|
|
Arthur
L. Smith
|
|
300,000
|
|
|
|
-
|
|
|
$
|
0.24
|
|
|
11/21/2021
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
-
|
|
|
$
|
0.35
|
|
|
12/01/2022
|
|
|
-
|
|
|
|
-
|
|
|
|
585,000
|
|
|
|
-
|
|
|
$
|
0.19
|
|
|
02/14/2024
|
|
|
450,000
|
|
|
$
|
85,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antonio
Estrada Jr.
|
|
300,000
|
|
|
|
-
|
|
|
$
|
0.24
|
|
|
11/21/2021
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
-
|
|
|
$
|
0.35
|
|
|
12/01/2022
|
|
|
-
|
|
|
|
-
|
|
|
|
520,000
|
|
|
|
-
|
|
|
$
|
0.19
|
|
|
02/14/2024
|
|
|
350,000
|
|
|
$
|
66,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craig
K. Clement
|
|
300,000
|
|
|
|
-
|
|
|
$
|
0.24
|
|
|
11/21/2021
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
-
|
|
|
$
|
0.35
|
|
|
12/01/2022
|
|
|
-
|
|
|
|
-
|
|
|
|
620,000
|
|
|
|
-
|
|
|
$
|
0.19
|
|
|
02/14/2024
|
|
|
550,000
|
|
|
$
|
104,500
|
|
(1)
|
During
the year ended July 31, 2020, Digerati did not issue any options to its Executive Officers. During the year ended July 31, 2019,
Digerati issued 1,725,000 options to its Executive Officers to acquire common shares at an exercise price of $0.19 and a fair value
at the time issuance of $217,263. The options vest ratably on a monthly basis through February 14, 2020. During the year ended July
31, 2018, Digerati issued 900,000 options to its Officers to acquire common shares at an exercise price of $0.35 and a fair value
at the time issuance of $192,000. The options vested ratably on a monthly basis through December 1, 2018. During the year ended July
31, 2017, Digerati issued 900,000 options to its Officers to acquire common shares at an exercise price of $0.24 and a fair value
at the time issuance of $169,000. The options vested ratably on a monthly basis through November 21, 2017.
|
|
|
(2)
|
During
the year ended July 31, 2020, Digerati did not issue any Stock Grants to its Executive Officers. During the year ended July 31, 2019,
Digerati issued a Stock Grant of 1,350,000 shares of Common Stock to the Executive Officers, with a market value at time of issuance
of $256,500, the Stock Grant will vest upon the earlier of the Company achieving $15 million in annualized revenue or listing on
a primary stock exchange (e.g., NASDAQ or NYSE American) and will be subject to adjustment for any forward or reverse split of the
Company’s stock.
|
Compensation
of Directors
Each
Director that is not an officer is reimbursed the reasonable out-of-pocket expenses in connection with their travel to attend meetings
of the Board of Directors. Each Director that is not an officer was paid $1,000 per month.
Compensation
Committee Interlocks and Insider Participation
We
do not have a compensation committee of our Board of Directors or other committee that performs the same functions. Mr. Arthur L. Smith
is presently our Chief Executive Officer and participates in deliberations concerning executive compensation.
CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Other
than compensation arrangements for our Named Executive Officers and directors, we describe below each transaction since August 1, 2019,
to which we were a party or will be a party, in which the amount exceeds $120,000 (or, if less, 1% of the average of our total assets
amount at July 31, 2020 and 2019) and in which any “related person” (as defined in paragraph (a) of Item 404 of Regulation
S-K) had or will have a direct or indirect material interest. Compensation arrangements for our named executive officers and directors
are described above under “Executive Compensation.”
On
April 30, 2018, T3 entered into a convertible secured promissory note for $525,000 with an effective annual interest rate of 8% and a
maturity date of April 30, 2020. With a principal payment of $100,000 due on June 1, 2018 and a principal payment of $280,823 due on
April 30, 2020. Payment is based on a 60-month repayment schedule. At any time while this Note is outstanding, but only upon: (i) the
occurrence of an Event of Default under the Note or the Pledge and Escrow Agreement; or (ii) mutual agreement between the Borrower and
the Holder, the Holder may convert all or any portion of the outstanding principal, accrued and unpaid interest, Premium, if applicable,
and any other sums due and payable hereunder (such total amount, the “Conversion Amount”) into shares of Common Stock (the
“Conversion Shares”) at a price equal to: (i) the Conversion Amount (the numerator); divided by (ii) a conversion
price of $1.50 per share of Common Stock, which price shall be indicated in the conversion notice (the denominator) (the “Conversion
Price”). The Holder shall submit a Conversion Notice indicating the Conversion Amount, the number of Conversion Shares issuable
upon such conversion, and where the Conversion Shares should be delivered. The promissory note is secured by a Pledge and Escrow Agreement,
whereby T3 agreed to pledge 51% of the securities owned in its Florida operations, T3 Communications, Inc., until the principal payment
is paid in full. In conjunction with the promissory note, the Company issued 3-year warrants to purchase 75,000 shares of Common Stock
at an exercise price of $0.50 per share. Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance
was $19,267 and was recognized as a discount on the promissory note. The Company amortized $7,297 as interest expense during the year
ended July 31, 2020. The total unamortized discount as of July 31, 2020 and July 31, 2019 were $0 and $7,297, respectively. In addition,
during the year ended July 31, 2020, the Company paid in full the total outstanding balance of $332,985. In May 2020, the Company executed
a Settlement Agreement and Mutual release, whereby the lender released the Company of any pledged collateral and any other obligation
under the promissory note. One of the note holders also serves as a Board Member of T3 Communications, Inc., a Florida Corporation, one
of our operating subsidiaries.
On
May 1, 2018, T3 entered into a secured promissory note for $275,000 with an effective annual interest rate of 8.08% with an interest
and principal payment of $6,000 per month and shall continue perpetuity until the entire principal amount is paid in full. The promissory
note is guaranteed to the lender by 15% of the stock owned by T3 in its Florida operations, T3 Communications, Inc., the secured interest
will continue until the principal balance is paid in full. In conjunction with the promissory note, the Company issued 3-year warrants
to purchase 100,000 shares of Common Stock at an exercise price of $0.50 per share. Under a Black-Scholes valuation the relative fair
market value of the warrants at time of issuance was approximately $26,543 and was recognized as a discount on the promissory note. The
Company amortized as interest expense during the nine months ended April 30, 2021, and the year ended July 31, 2020, $6,300 and $10,386,
respectively. The total unamortized discount as of April 30, 2021, and July 31, 2020, were $0 and $6,300, respectively. The note holder
also serves as Board Member of T3 Communications, Inc., a Florida Corporation, one of our operating subsidiaries. During the nine months
ending April 30, 2021, the Company paid the total principal balance outstanding of $152,634. The total principal outstanding as of April
30, 2021, and July 31, 2020, were $0 and $152,634, respectively.
On
February 27, 2020, the Company entered into an unsecured promissory note for $70,000 with an effective annual interest rate of 12% and
a maturity date of May 1, 2020. Subsequently, the note holder agreed to extend the maturity date until August 31, 2020. In addition,
the Company agreed to pay the lender in services provided by the Company, and any unpaid principal and accrued interest will be paid
in cash. During the nine months ended April 30, 2020, and April 30, 2021, the Company provided VoIP Hosted and fiber services of $128,927
and $130,029, respectively. On August 3, 2020, the promissory note was paid in full. The total principal outstanding as of April 30,
2021, and July 31, 2020, were $0 and $16,298, respectively. The note holder also serves as a Board Member of T3 Communications, Inc.,
a Florida Corporation, one of our operating subsidiaries.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based
solely upon information made available to us, the following table sets forth information with respect to the beneficial ownership of
our Common Stock as of August 9, 2021 by (i) each director; (ii) each of the named executive officers listed in the summary compensation
table; (iii) all executive officers and directors as a group; and (iv) all persons known by us to beneficially own more than 5% of our
Common Stock. Except as otherwise indicated in footnotes to this table or, where applicable, to the extent authority is shared by spouses
under community property laws, to our knowledge, the holders listed below have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them.
Name of Beneficial Owner
|
|
Common
Shares
Owned
Votes
|
|
|
Vested
Warrants
and
Options (1)
|
|
|
Total
Beneficial
Ownership
|
|
|
% Of
Class (2)
|
|
|
Held
via
Warrant (3)
|
|
|
Shares
of
Series F
Super Voting
Preferred
Stock
|
|
|
Votes
from
Series F
Super Voting Preferred
Stock (4)
|
|
|
Total
Votes (5)
|
|
|
% Of
Total Votes
|
|
|
Total
Beneficial
Ownership Following the Offering
|
|
|
% of
Common Stock Owned Following the Offering
|
|
5% HOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post Road Special Opportunity
Fund II LP
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,778,273
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post Road Special Opportunity Fund
II Offshore LP
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,174,485
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INDIVIDUAL OFFICERS
AND DIRECTORS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur L. Smith
|
|
|
11,453,804
|
|
|
|
1,366,452
|
|
|
|
12,820,256
|
|
|
|
9.21
|
%
|
|
|
-
|
|
|
|
34
|
|
|
|
47,211,720
|
|
|
|
58,665,524
|
|
|
|
21.20
|
|
|
|
|
|
|
|
%
|
|
President, Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antonio Estrada Jr.
|
|
|
10,087,936
|
|
|
|
1,281,290
|
|
|
|
11,369,226
|
|
|
|
8.17
|
%
|
|
|
-
|
|
|
|
33
|
|
|
|
45,823,140
|
|
|
|
55,911,076
|
|
|
|
20.21
|
|
|
|
|
|
|
|
%
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craig K. Clement
|
|
|
9,735,794
|
|
|
|
1,220,000
|
|
|
|
10,955,794
|
|
|
|
7.88
|
%
|
|
|
-
|
|
|
|
33
|
|
|
|
45,823,140
|
|
|
|
55,558,934
|
|
|
|
20.08
|
|
|
|
|
|
|
|
%
|
|
Chairman of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maxwell A. Polinsky
|
|
|
81,594
|
|
|
|
491,666
|
|
|
|
573,260
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81,594
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALL
OFFICERS AND DIRECTORS AS A GROUP
|
|
|
31,359,128
|
|
|
|
4,359,408
|
|
|
|
35,718,536
|
|
|
|
25.26
|
%
|
|
|
|
|
|
|
100
|
|
|
|
138,858,000
|
|
|
|
170,217,129
|
|
|
|
61.49
|
|
|
|
|
|
|
|
%
|
|
(1)
|
Based
on 4,359,408 vested stock options as of August 9, 2021.
|
(2)
|
Based
on 138,138,000 shares of Common Stock outstanding as of August 9, 2021 and 4,359,408 vested stock options as of August 9, 2021.
|
(3)
|
Represents
twenty-five percent (25%) of the Company’s shares that are currently outstanding including the shares issuable to Post Road
Special Opportunity Fund II LP (the “PRG Fund”) and Post Road Special Opportunity Fund II Offshore LP (the “PRF
Offshore Fund”) pursuant to the exercise of the warrant first issued to the PRG Fund on November 17, 2020. The 107,701,179
warrant shares that PRG Fund reported it owned in the Schedule 13D it filed on November 27, 2020 (as amended on March 17, 2021 to
reflect a transfer of 24.32% of the warrant to the PRF Offshore Fund) represents twenty-five percent (25%) of the total shares of
Common Stock, calculated on a fully diluted basis, which assumes future share issuances that are not certain or not yet contractually
obligated to be issued. In addition, twenty-five percent (25%) of the 107,701,179 warrant shares are not yet vested and subject to
forfeiture if the Company achieves certain performance targets which, if achieved, would result in the warrant being exercisable
into twenty percent (20%) of the Common Stock, calculated on a fully-diluted basis as described above. If the minority stockholders
of T3 Nevada convert their T3 Nevada shares into shares of the Common Stock, the number of shares into which the warrant may be exercised
would also be decreased such that, if the Company also achieves certain performance targets, the warrant would be exercisable into
fifteen percent (15%) of the Common Stock, calculated on a fully-diluted basis as described above. T3 Nevada’s minority stockholders
have an obligation to (and may not otherwise) convert their T3 Nevada shares into shares of the Common Stock upon being asked to
do so by the Company at any time after our Common Stock has a current market price of $1.50 or more per share for 20 consecutive
trading days.
|
(4)
|
Holder
of the Series F Preferred Stock shall be entitled to vote on all matters subject to a vote or written consent of the holders of the
Corporation’s Common Stock, and on all such matters, the shares of Series F Preferred Stock shall be entitled to that number
of votes equal to the number of votes that all issued and outstanding shares of Common Stock and all other securities of the Corporation
are entitled to, as of any such date of determination, on a fully diluted basis, plus one million (1,000,000) votes.
|
|
(5)
|
Total
Votes excludes 4,359,408 vested stock options as of August 9, 2021.
|
DESCRIPTION
OF SECURITIES
General
We
are authorized to issue an aggregate of 500,000,000 shares of Common Stock, $0.001 par value per share and 50,000,000 shares of preferred
stock in one or more series and to fix the voting powers, preferences and other rights and limitations of the preferred stock. As of
August 9, 2021, we had 138,138,00 shares of Common Stock outstanding.
Common
Stock
Each
share of Common Stock shall have one (1) vote per share. Our Common Stock does not provide a preemptive, subscription or conversion rights
and there is no redemption or sinking fund provisions or rights. Our common stockholders are not entitled to cumulative voting for election
of Board of Directors.
Dividends
We
have not paid any dividends on our Common Stock since our inception and do not intend to pay any dividends in the foreseeable future.
The
declaration of any future cash dividends is at the discretion of our board of directors and depends upon our earnings, if any, our capital
requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not
to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.
Warrants
As
of April 30, 2021, we have issued warrants to purchase 109,836,1792 shares of Common Stock issuable with a weighted average
exercise price of $0.02, 82,610,885 of which are exercisable immediately, have a weighted-average remaining life of 9.40 years and a
weighted-average exercise price of $0.01.
Warrants
We Are Offering in this Offering
Overview. The
following summary of certain terms and provisions of the warrants offered hereby is not complete and is subject to, and qualified in
its entirety by, the provisions of the warrant agent agreement between us the Warrant Agent, and the form of warrant, both of which are
filed as exhibits to the registration statement of which this prospectus is a part. Prospective investors should carefully review the
terms and provisions set forth in the warrant agent agreement, including the annexes thereto, and form of warrant.
The
warrants issued in this offering entitle the registered holder to purchase one share of our Common Stock at a price equal to $[__] per
share (based on an assumed offering price of $[__]), subject to adjustment as discussed below, immediately following the issuance of
such warrant and terminating at 5:00 p.m., New York City time, five years after the closing of this offering. As described below, we
have applied to list the warrants on the Nasdaq Capital Market under the symbol “NXGYW.”
The
exercise price and number of shares of Common Stock issuable upon exercise of the warrants may be adjusted in certain circumstances,
including in the event of a stock dividend or recapitalization, reorganization, merger or consolidation. However, the warrants will not
be adjusted for issuances of Common Stock at prices below its exercise price.
|
2
|
Represents
twenty-five percent (25%) of the Company’s shares that are currently outstanding including
the shares issuable to Post Road pursuant to the exercise of the Post Road Warrant. The 107,701,179
warrant shares that Post Road reported it owned in the Schedule 13D it filed on November
27, 2020 represents twenty-five percent (25%) of the total shares of Common Stock, calculated
on a fully diluted basis, which assumes future share issuances that are not certain or not
yet contractually obligated to be issued. As described above under “Post Road Warrant,”
based on the Company’s achievement of certain performance targets, the Post Road Warrant
may be exercisable into twenty percent (20%) of the Common Stock, calculated on a fully-diluted
basis as described above. In addition, the Post Road Warrant may be exercisable into fifteen
percent (15%) of the Common Stock, calculated on a fully-diluted basis as described above,
if the minority stockholders of T3 Nevada, convert their T3 Nevada shares into shares of
the Common Stock.
|
Exercisability. The
warrants are exercisable at any time after their original issuance and at any time up to the date that is five (5) years after their original
issuance. The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of
the Warrant Agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied
by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised.
Under the terms of the Warrant Agreement, we must use our best efforts to maintain the effectiveness of the registration statement and
current prospectus relating to Common Stock issuable upon exercise of the warrants until the expiration of the warrants. If we fail to
maintain the effectiveness of the registration statement and current prospectus relating to the Common Stock issuable upon exercise of
the warrants, the holders of the warrants shall have the right to exercise the warrants solely via a cashless exercise feature provided
for in the warrants, until such time as there is an effective registration statement and current prospectus.
Exercise Limitation.
A holder may not exercise any portion of a warrant to the extent that the holder, together with its affiliates and any other person or
entity acting as a group, would own more than 4.99% of the outstanding Common Stock after exercise, as such percentage ownership is determined
in accordance with the terms of the warrant, except that upon prior notice from the holder to us, the holder may waive such limitation
up to a percentage not in excess of 9.99%.
Exercise Price. The
exercise price per whole share of Common Stock purchasable upon exercise of the warrants is $[__] per share (based on an assumed
public offering price of $[__] per Unit) or 110% of public offering price of the Common Stock. The exercise price is subject to appropriate
adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events
affecting our Common Stock and also upon any distributions of assets, including cash, stock or other property to our stockholders.
Fractional Shares.
No fractional shares of Common Stock will be issued upon exercise of the warrants. If, upon exercise of the warrant, a holder would be
entitled to receive a fractional interest in a share, we will, upon exercise, pay a cash adjustment in respect of such fraction in an
amount equal to such fraction multiplied by the exercise price. If multiple warrants are exercised by the holder at the same time, we
shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the exercise price.
Transferability. Subject
to applicable laws, the warrants may be offered for sale, sold, transferred or assigned without our consent.
Exchange
Listing. We have applied to list our warrants on the Nasdaq Capital Market under the symbol “NXGYW.” No assurance
can be given that our listing application will be approved.
Warrant
Agent; Global Certificate. The warrants will be issued in registered form under a warrant agent agreement between the Warrant
Agent and us. The warrants shall initially be represented only by one or more global warrants deposited with the Warrant Agent, as custodian
on behalf of The Depository Trust Company (DTC) and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed
by DTC.
Fundamental
Transactions. In the event of a fundamental transaction, as described in the warrants and generally including any reorganization,
recapitalization or reclassification of our Common Stock, the sale, transfer or other disposition of all or substantially all of our
properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding Common
Stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding Common Stock, the
holders of the warrants will be entitled to receive the kind and amount of securities, cash or other property that the holders would
have received had they exercised the warrants immediately prior to such fundamental transaction.
Rights
as a Stockholder. The warrant holders do not have the rights or privileges of holders of Common Stock or any voting rights until
they exercise their warrants and receive shares of Common Stock. After the issuance of shares of Common Stock upon exercise of the warrants,
each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
Governing
Law. The warrants and the warrant agent agreement are governed by New York law.
Representative’s
Warrants
The
registration statement of which this prospectus is a part also registers for sale the Representative’s Warrants, as a portion of
the underwriting compensation payable to the Representative in connection with this offering. The Representative’s Warrants will
be exercisable at any time beginning during the period commencing 180 days from the commencement of sales of the securities in this offering,
will expire five (5) years from the commencement of sales of the securities issued in this offering and will have an exercise price of
$[___] (110% of the assumed public offering price). Please see “Underwriting—Representative’s Warrants”
for a description of the warrants we have agreed to issue to the Representative in this offering, subject to the completion of the offering.
We expect to enter into a warrant agreement in respect of the Representative’s Warrants prior to the closing of this offering.
Options
As
of August 9, 2021, we have issued options to purchase 9,230,000 shares of our Common Stock issuable upon outstanding options to purchase
shares of Common Stock with a weighted average exercise price of $0.17 per share.
Securities
Authorized for Issuance Under Equity Compensation Plans
In
November 2015, Digerati adopted the Digerati Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan authorizes
the grant of up to 7.5 million stock options, restricted common shares, non-restricted common shares and other awards to employees, directors,
and certain other persons. The Plan is intended to permit Digerati to retain and attract qualified individuals who will contribute to
the overall success of Digerati. Digerati’s Board of Directors determines the terms of any grants under the Plan. Exercise prices
of all stock options and other awards vary based on the market price of the shares of Common Stock as of the date of grant. The stock
options, restricted Common Stock, non-restricted Common Stock and other awards vest based on the terms of the individual grant. On November
18, 2015, the Company filed a Registration Statement on Form S-8 to register with the U.S. Securities and Exchange Commission 7,500,000
shares of the Company’s Common Stock, which may be issued by the Company upon the exercise of options granted, or other awards
made, pursuant to the terms of the Plan. Please see the Plan filed as Exhibit 4.1 to the Company’s Registration Statement on Form
S-8 filed with the U.S. Securities and Exchange Commission on November 18, 2015.
Preferred
Stock
The
Company has authorized 50,000,000 shares of preferred stock. The board of directors has the authority to issue these shares and to set
dividends, voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions.
CONVERTIBLE
SERIES A PREFERRED STOCK
In
March 2019, the Company’s Board of Directors designated and authorized the issuance of up to 1,500,000 shares of the Series A Preferred
Stock. Each share of Series A Preferred Stock has a par value of $0.001 per share and a stated value equal to one dollar ($1.00) (the
“Stated Value”) and are entitled to a dividend at an annual rate of eight percent (8%) per share. The Company had 225,000
shares of the Convertible Series A Preferred Stock outstanding as of August 9, 2021.
The
terms of our Series A Preferred Stock allow for:
Voting
Rights. Unless otherwise required by the Nevada Revised Statutes, the shares of Series A Preferred Stock shall not be entitled
to vote on any matter presented at any annual or special meeting of stockholders of the Corporation, or through written consent.
Optional
Conversion. Each holder of shares of Series A Preferred Stock may, at holder’s option and commencing on April 30, 2020,
convert any or all such shares, on the terms and conditions set forth herein, into fully paid and non-assessable shares of the Corporation’s
Common Stock. The number of shares of Common Stock into which each share of Series A Preferred Stock may be converted shall be determined
by dividing the Original Issue Price of each share of Series A Preferred Stock, plus accrued and unpaid dividends through the Conversion
Date, to be converted by the Conversion Price (as defined below) in effect at the time of conversion. The “Conversion Price”
at which shares of Common Stock shall be issuable upon conversion of any shares of Series A Preferred Stock shall initially be the greater
of (i) $0.40 per share, (ii) a 30% discount to the offering price of the Common Stock (or Common Stock equivalent) in a $10 million or
greater equity financing that closes concurrently with an up-listing of the Company Common Stock on the NYSE American or Nasdaq, in the
event of such up-listing, and (iii) a 30% discount to the average closing price per share of the Common Stock for the 5 consecutive trading
days commencing upon the date the Common Stock is up-listed on either the NYSE American or Nasdaq in which there is no concurrent $10
million equity financing, in the event of such up-listing, subject to adjustment as provided below.
Mandatory
Conversion. Each share of Series A Preferred Stock shall automatically convert into shares of Common Stock, as described in paragraph
2a, at the then applicable Conversion Price, upon the earlier of (i) the closing of a public or private offering (or series of offerings
within a 90-day period) of Corporation equity or equity equivalent securities placed by a registered broker-dealer resulting in minimum
gross proceeds to the Corporation of $10 million, (ii) commencing on April 30, 2020, if the Common Stock shall close (or the last trade
shall be) at or above 150% of the Conversion Price per share for 20 out of 30 consecutive trading days, and (iii) the uplisting of the
Corporation’s Common Stock to a national securities exchange or the Nasdaq stock market ((i), (ii) and (iii) are collectively referred
to as “Mandatory Conversion Event”). The Corporation will provide notice to holder within 20 days of the occurrence of a
Mandatory Conversion Event (failure of the Corporation to timely give such notice does not void the mandatory conversion). Holder shall
surrender to the Corporation, within 10 days of receiving such notice, the certificate(s) representing the shares of Series A Preferred
Stock to be converted into Common Stock. In the event holder does not surrender such certificate(s) within 10 days of receiving such
notice, the Corporation shall deem such certificate(s) cancelled and void. As soon as practicable, after the certificate(s) are either
surrendered by the holder or cancelled by the Corporation, as the case may be, the Corporation will issue and deliver to holder a new
certificate for the number of full shares of Common Stock issuable upon such mandatory conversion in accordance with the provisions hereof
and cash as provided in paragraph 2(c) in respect of any fraction of a share of Common Stock otherwise issuable upon such mandatory conversion,
unless fractional shares are rounded up to the next whole share. Holder will be deemed a Common Stockholder of record as of the date
of the occurrence of a Mandatory Conversion Event. During the period ended April 30, 2021, the Company evaluated Series A Convertible
Preferred Stock and concluded that none of the mandatory conversion events occurred during the period and determined that the convertible
shares were classified as equity instruments.
CONVERTIBLE
SERIES B PREFERRED STOCK
In
April 2020, the Company’s Board of Directors designated and authorized the issuance of up to 1,000,000 shares of the Series B Preferred
Stock. The Series B Preferred Stock is only issuable to the Company’s debt holders as of March 25, 2020 (“Existing Debt Holders”)
who may purchase shares of Series B Preferred Stock at the Stated Value by converting all or part of the debt owed to them by the Company
as of March 25, 2020. Each share of Series B Preferred Stock has a par value of $0.001 per share and a stated value equal to one dollar
($1.00) (the “Stated Value”). As of August 9, 2021, we had 425,442 shares of Series B Preferred Stock outstanding.
The
terms of our Series B Preferred Stock allow for:
Voting
Rights. Except as otherwise provided by the Nevada Revised Statutes, other applicable law or as provided in this Certificate
of Designation, the Series B Preferred Stock shall have no voting rights. However, as long as any shares of Series B Preferred Stock
are outstanding, the Corporation shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares
of the Series B Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series B Preferred Stock
or alter or amend this Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner
that adversely affects any rights of the Holders, (c) increase the number of authorized shares of Series B Preferred Stock, or (d) enter
into any agreement with respect to any of the foregoing.
Mandatory
Conversion. Upon (i) an up-listing of the Corporation’s Common Stock to Nasdaq or a US national securities exchange, (ii)an
underwriting involving the sale of $5,000,000 or more of the Corporation’s Common Stock or Common Stock Equivalents (a “Material
Underwriting”), (iii) the Corporation ceases to be a public corporation as the result of a going private transaction, (iv) the
Corporation, directly or indirectly, effects any sale, lease, exclusive license, assignment, transfer, conveyance or other disposition
of all or substantially all of its assets in one or a series of related transactions (including a transaction involving the Corporation’s
spin-off of its operating subsidiary, T3 Communications, Inc.), (v) any, direct or indirect, purchase offer, tender offer or exchange
offer (whether by the Corporation or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender
or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding
Common Stock, (vi) the Corporation, directly or indirectly, in one or more related transactions, effects any reclassification, reorganization
or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted
into or exchanged for other securities, cash or property, or (vii) the Corporation, directly or indirectly, in one or more related transactions,
consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person, other than an officer or director of the Company, whereby such other Person acquires
more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or
other business combination), all shares of Series B Preferred Stock shall be automatically converted, without any further action by the
holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer
agent, into the number of fully paid and nonassessable shares of Common Stock in an amount equal, following conversion, to 18% of the
Corporation’s issued and outstanding shares of Common Stock. Each of (i)-(vii) above shall be hereafter referred to as a “Conversion
Event” and the date of a Conversion Event shall be hereafter referred to as a “Conversion Date”. Upon any such mandatory
conversion and the issuance of Conversion Shares further thereto, the shares of Series B Preferred Stock shall be deemed cancelled and
of no further force or effect. A mandatory conversion is the only means by which Series B Preferred Stock is convertible as the shares
of Series B Preferred Stock are not convertible at the option of the Holder. For purposes of the foregoing Conversion Events, conversion
will be deemed to have taken place immediately prior to the Conversion Event. By way of example, if the Corporation engages in a Material
Underwriting, the Series B Preferred Stock will be treated as having been converted immediately prior to the issuance of the securities
in the Material Underwriting.
Redemption.
At any time on or after the second anniversary of the date of issuance of shares of Series B Preferred Stock to the Holder, the Corporation,
in its sole discretion, may elect, by delivering written notice to the Holder no less than 10 days or more than 20 prior to the redemption
date set forth in such notice (the “Redemption Date”), to redeem all or any portion of the Series B Preferred Stock held
by such Holder at a price per share (the “Redemption Price”) equal to 120% of the Stated Value per share being redeemed.
The Corporation shall, unless otherwise prevented by law, redeem from such holder on the Redemption Date the number of shares of Series
B Preferred Stock identified in such notice of redemption. During the period ended April 30, 2021, the Company evaluated Series B Convertible
Preferred Stock and concluded that none of the mandatory conversion events occurred during the period and determined that the convertible
shares were classified as equity instruments. The Company will evaluate the convertible shares at each reporting balance sheet date and
determine if a re-classification is required.
CONVERTIBLE
SERIES C PREFERRED STOCK
In
July 2020, the Company’s Board of Directors designated and authorized the issuance of up to 1,000,000 shares of the Series C Preferred
Stock. Each share of Series C Preferred Stock has a par value of $0.001 per share and a stated value equal to ten dollars ($10.00) (the
“Stated Value”). As of August 9, 2021, we had 55,400 shares of Series C Preferred Stock outstanding.
The
terms of our Series C Preferred Stock allow for:
Designation,
Amount and Par Value; Eligible Recipients. The series of preferred stock shall be designated as its Series C Convertible Preferred
Stock (the “Series C Preferred Stock”) and the number of shares so designated shall be up to one million (1,000,000) (which
shall not be subject to increase without the written consent of the holders of a majority of the outstanding Series C Preferred Stock
(each, a “Holder” and collectively, the “Holders”). Series C Preferred Stock shall only be issuable to the Company’s
officers and directors as of July 1, 2020 who may from time to time purchase shares of Series C Preferred Stock at the Stated Value by
converting all or part of the compensation owed to them by the Corporation. Each share of Series C Preferred Stock shall have a par value
of $0.001 per share and a stated value equal to Ten Dollars ($10.00) (the “Stated Value”).
Dividends.
No dividends are payable on the shares of Series C Preferred Stock.
Voting
Rights. Except as otherwise provided by the Nevada Revised Statutes, other applicable law or as provided in this Certificate
of Designation, the Series C Preferred Stock shall have no voting rights. However, as long as any shares of Series C Preferred Stock
are outstanding, the Corporation shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares
of the Series C Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series C Preferred Stock
or alter or amend this Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner
that adversely affects any rights of the Holders, (c) increase the number of authorized shares of Series C Preferred Stock, or (d) enter
into any agreement with respect to any of the foregoing.
Automatic
Conversion. Upon (i) an up-listing of the Corporation’s Common Stock to Nasdaq or a US national securities exchange, (ii) a financing
or offering involving the sale of $5,000,000 or more of the Corporation’s Common Stock or Common Stock Equivalents (a “Material
Financing”), (iii) the Corporation ceases to be a public corporation as the result of a going private transaction, (iv) the Corporation,
directly or indirectly, effects any sale, lease, exclusive license, assignment, transfer, conveyance or other disposition of all or substantially
all of its assets in one or a series of related transactions (including a transaction involving the Corporation’s spin-off of its
Nevada subsidiary, T3 Communications, Inc.), (v) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by
the Corporation or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their
shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (vi)
the Corporation, directly or indirectly, in one or more related transactions, effects any reclassification, reorganization or recapitalization
of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for
other securities, cash or property, or (vii) the Corporation, directly or indirectly, in one or more related transactions, consummates
a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person, other than an officer or director of the Company, whereby such other Person acquires
more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or
other business combination), all issued shares of Series C Preferred Stock shall be automatically converted, without any further action
by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its
transfer agent, into the number of fully paid and nonassessable shares of Common Stock in an amount equal, following conversion, to 22%
of the Corporation’s issued and outstanding shares of Common Stock. Each of (i)-(vii) above shall be hereafter referred to as a
“Conversion Event” and the date of a Conversion Event shall be hereafter referred to as a “Conversion Date”.
Upon any such mandatory conversion and the issuance of Conversion Shares further thereto, the shares of Series C Preferred Stock shall
be deemed cancelled and of no further force or effect. A mandatory conversion is the only means by which Series C Preferred Stock is
convertible as the shares of Series C Preferred Stock are not convertible at the option of the Holder. For purposes of the foregoing
Conversion Events, conversion will be deemed to have taken place immediately prior to the Conversion Event. By way of example, if the
Corporation engages in a Material Financing, the Series C Preferred Stock will be treated as having been converted immediately prior
to the issuance of the securities in the Material Underwriting.
Redemption.
At any time on or after the second anniversary of the date of issuance of shares of Series C Preferred Stock to the Holder, the
Corporation, in its sole discretion, may elect, by delivering written notice to the Holder no less than 10 days or more than 20 prior
to the redemption date set forth in such notice (the “Redemption Date”), to redeem all or any portion of the Series C Preferred
Stock held by such Holder at a price per share (the “Redemption Price”) equal to 120% of the Stated Value per share being
redeemed. The Corporation shall, unless otherwise prevented by law, redeem from such holder on the Redemption Date the number of shares
of Series C Preferred Stock identified in such notice of redemption.
SERIES
F SUPER VOTING PREFERRED STOCK
In
July 2020, the Company’s Board of Directors designated and authorized the issuance of up to 100 shares of the Series F Super Voting
Preferred Stock. Each share of Series F Super Voting Preferred Stock has a par value of $0.001 per share and a stated value equal to
one cent ($0.01) (the “Stated Value”). As of August 9, 2021, the Company had 100 shares outstanding of the Series F Super
Voting Preferred Stock.
The
terms of our Series F Super Voting Preferred Stock allow for:
Designation,
Amount and Par Value; Eligible Recipients. The series of preferred stock shall be designated as its Series F Preferred Stock
(the “Series F Preferred Stock”) and the number of shares so designated shall be up to one hundred (100) (which shall not
be subject to increase without the written consent of the holders of a majority of the outstanding Series F Preferred Stock (each, a
“Holder” and collectively, the “Holders”). Series F Preferred Stock shall only be issuable to members of the
Corporation’s Board of Directors, as joint tenants, who may purchase shares of Series F Preferred Stock at the Stated Value per
share. Each share of Series F Preferred Stock shall have a par value of $0.001 per share and a stated value equal to one cent ($0.01)
(the “Stated Value”).
Voting
Rights. As long as any shares of Series F Preferred Stock are outstanding, the Corporation shall not, without the affirmative
vote of the Holders of a majority of the then outstanding shares of the Series F Preferred Stock, (a) alter or change adversely the powers,
preferences or rights given to the Series F Preferred Stock or alter or amend this Certificate of Designation, (b) amend its certificate
of incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (c) increase the number of
authorized shares of Series F Preferred Stock, (d) sell or otherwise dispose of any assets of the Corporation not in the ordinary course
of business, (e) sell or otherwise effect or undergo any change of control of the corporation, (f) effect a reverse split of its Common
Stock, or (g) enter into any agreement with respect to any of the foregoing.
Holder
of the Series F Preferred Stock shall be entitled to vote on all matters subject to a vote or written consent of the holders of the Corporation’s
Common Stock, and on all such matters, the shares of Series F Preferred Stock shall be entitled to that number of votes equal to the
number of votes that all issued and outstanding shares of Common Stock and all other securities of the Corporation are entitled to, as
of any such date of determination, on a fully diluted basis, plus one million (1,000,000) votes, it being the intention that the
Holders of the Series F Preferred Stock shall have effective voting control of the Corporation. The Holders of the Series F Preferred
Stock shall vote together with the holders of Common Stock as a single class on all matters requiring approval of the holders of the
Corporation’s Common Stock and separately on matters not requiring the approval of holders of the Corporation’s Common Stock.
Conversion.
No conversion rights apply to the Series F Preferred Stock.
Redemption.
At any time while share of Series F Preferred Stock are issued and outstanding, the Corporation, in its sole discretion, may
elect to redeem the shares of Series F Preferred Stock.
Anti-Takeover
Effects of Various Provisions of Nevada Law
Provisions
of the Nevada Revised Statutes, our articles of incorporation, as amended, and bylaws could make it more difficult to acquire us by means
of a tender offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions, summarized below, would
be expected to discourage certain types of takeover practices and takeover bids our Board may consider inadequate and to encourage persons
seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us will outweigh the disadvantages of discouraging
takeover or acquisition proposals because, among other things, negotiation of these proposals could result in an improvement of their
terms.
Blank
Check Preferred
Our
articles of incorporation permit our Board to issue preferred stock with voting, conversion and exchange rights that could negatively
affect the voting power or other rights of our Common Stockholders. The issuance of our preferred stock could delay or prevent a change
of control of our Company.
Amendments
to our Articles of Incorporation and Bylaws
Under
the Nevada Revised Statutes, our articles of incorporation may not be amended by stockholder action alone.
Nevada
Anti-Takeover Statute
We
may be subject to Nevada’s Combination with Interested Stockholders Statute (Nevada Corporation Law Sections 78.411-78.444) which
prohibits an “interested stockholder” from entering into a “combination” with the corporation, unless certain
conditions are met. An “interested stockholder” is a person who, together with affiliates and associates, beneficially owns
(or within the prior two years, did beneficially own) 10% or more of the corporation’s capital stock entitled to vote.
Limitations
on Liability and Indemnification of Officers and Directors
The
Nevada Revised Statutes limits or eliminates the personal liability of directors to corporations and their stockholders for monetary
damages for breaches of directors’ fiduciary duties as directors.
The
limitation of liability and indemnification provisions under the Nevada Revised Statutes and in our articles of incorporation and bylaws
may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. These provisions may also
have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful,
might otherwise benefit us and our stockholders. However, these provisions do not limit or eliminate our rights, or those of any stockholder,
to seek non-monetary relief such as injunction or rescission in the event of a breach of a director’s fiduciary duties. Moreover,
the provisions do not alter the liability of directors under the federal securities laws. In addition, your investment may be adversely
affected to the extent that, in a class action or direct suit, we pay the costs of settlement and damage awards against directors and
officers pursuant to these indemnification provisions.
Authorized
but Unissued Shares
Our
authorized but unissued shares of Common Stock and preferred stock will be available for future issuance without stockholder approval,
except as may be required under the listing rules of any stock exchange on which our Common Stock is then listed. We may use additional
shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions, and
employee benefit plans. The existence of authorized but unissued shares of Common Stock and preferred stock could render more difficult
or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Penny
Stock Considerations
Our
shares will be “penny stocks” as that term is generally defined in the Securities Exchange Act of 1934 to mean equity securities
with a price of less than $5.00 per share. Thus, our shares will be subject to rules that impose sales practice and disclosure requirements
on broker-dealers who engage in certain transactions involving a penny stock. Under the penny stock regulations, a broker-dealer selling
a penny stock to anyone other than an established customer must make a special suitability determination regarding the purchaser and
must receive the purchaser’s written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt.
In
addition, under the penny stock regulations, the broker-dealer is required to:
|
●
|
Deliver,
prior to any transaction involving a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission relating
to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt;
|
|
●
|
Disclose
commissions payable to the broker-dealer and our registered representatives and current bid and offer quotations for the securities;
|
|
●
|
Send
monthly statements disclosing recent price information pertaining to the penny stock held in a customer’s account, the account’s
value, and information regarding the limited market in penny stocks; and
|
|
●
|
Make
a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s
written agreement to the transaction, prior to conducting any penny stock transaction in the customer’s account.
|
Because
of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our Common Stock, which may affect
the ability of selling shareholders or other holders to sell their shares in the secondary market and have the effect of reducing the
level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale
of our securities if our securities become publicly traded. In addition, the liquidity for our securities may be decreased, with a corresponding
decrease in the price of our securities. Our shares in all probability will be subject to such penny stock rules and our shareholders
will, in all likelihood, find it difficult to sell their securities.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is therefore unenforceable.
In
the event that a claims for indemnification against such liabilities (other than our payment of expenses incurred or paid by a director,
officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
SHARES
ELIGIBLE FOR FUTURE SALE
Future
sales of substantial amounts of our Common Stock in the public market, including shares issued upon the exercise of outstanding options
or warrants, or upon debt conversion, or the anticipation of these sales, could adversely affect market prices prevailing from time to
time and could impair our ability to raise capital through sales of equity securities.
Upon
completion of this offering we estimate that we will have outstanding shares
of our Common Stock, calculated as of July , 2021, assuming no exercise of
outstanding options or warrants, and no exercise of the underwriters’ over-allotment allocation.
Lock-up
Agreements and Obligations
Our
officers and directors have agreed, subject to certain exceptions, not to offer, issue, sell, contract to sell, encumber, grant any option
for the sale of or otherwise dispose of any shares of our Common Stock or other securities convertible into or exercisable or exchangeable
for shares of our Common Stock for a period of six (6) months after this offering is completed without the prior written consent of the
Representative.
The
Representative may in its sole discretion and at any time without notice release some or all of the shares subject to lock-up agreements
prior to the expiration of the lock-up period. When determining whether or not to release shares from the lock-up agreements, the Representative
will consider, among other factors, the security holder’s reasons for requesting the release, the number of shares for which the
release is being requested and market conditions at the time.
Sale
of Restricted Securities
The
shares of our Common Stock sold pursuant to this offering will be registered under the Securities Act or 1933, as amended, and therefore
freely transferable, except for our affiliates. Our affiliates will be deemed to own “control” securities that are not registered
for resale under the registration statement covering this prospectus. Individuals who may be considered our affiliates after this offering
include individuals who control, are controlled by or are under common control with us, as those terms generally are interpreted for
federal securities law purposes. These individuals may include some or all of our directors and executive officers. Individuals who are
our affiliates are not permitted to resell their shares of our Common Stock unless such shares are separately registered under an effective
registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act is available,
such as Rule 144.
Rule
144
In
general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an affiliate, who beneficially
owns “restricted securities” (i.e. securities that are not registered by an effective registration statement) of a “reporting
company” may not sell these securities until the person has beneficially owned them for at least six months. Thereafter, affiliates
may not sell within any three-month period a number of shares in excess of the greater of: (i) 1% of the then outstanding shares of Common
Stock as shown by the most recent report or statement published by the issuer; and (ii) the average weekly reported trading volume in
such securities during the four preceding calendar weeks.
Sales
under Rule 144 by our affiliates will also be subject to restrictions relating to manner of sale, notice and the availability of current
public information about us and may be affected only through unsolicited brokers’ transactions.
Persons
not deemed to be affiliates who have beneficially owned “restricted securities” for at least six months but for less than
one year may sell these securities, provided that current public information about the Company is “available,” which means
that, on the date of sale, we have been subject to the reporting requirements of the Exchange Act for at least 90 days and are current
in our Exchange Act filings. After beneficially owning “restricted securities” for one year, our non-affiliates may engage
in unlimited re-sales of such securities.
Shares
received by our affiliates in this offering or upon exercise of stock options or upon vesting of other equity-linked awards may be “control
securities” rather than “restricted securities.” “Control securities” are subject to the same volume limitations
as “restricted securities” but are not subject to holding period requirements.
UNDERWRITING
Maxim Group LLC is acting as the lead managing underwriter and sole
book running manager of the offering (the “Representative”). We have entered into an underwriting agreement dated
, 2021 with the Representative with respect to the Units. Subject to the terms and conditions of the underwriting agreement, we have agreed
to sell to each underwriter named below and each underwriter named below has severally and not jointly agreed to purchase from us, at
the public offering price per share of Common Stock less the underwriting discounts set forth on the cover page of this prospectus, the
number of Units listed next to its name in the following table:
Name of Underwriter
|
|
Number of
Units
|
|
Maxim Group LLC
|
|
|
|
|
Total
|
|
|
|
|
The
underwriters are committed to purchase all of the Units offered by this prospectus if it purchases any Units. The underwriters are not
obligated to purchase the over-allotment Units described below. The underwriters are offering the Units, subject to prior sale, when,
as and if issued to and accepted by it, subject to approval of legal matters by its counsel, and other conditions contained in the underwriting
agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. A copy of the underwriting agreement
has been filed as an exhibit to the registration statement of which this prospectus is part. The underwriters reserve the right to withdraw,
cancel or modify offers to the public and to reject orders in whole or in part.
Over-Allotment
Option
We
have granted the underwriters an option, exercisable no later than 45 days after the date of the underwriting agreement, to purchase
from us up to an (i) additional shares of Common Stock at a price of $[__] per share and/or (ii) additional Warrants to purchase up to shares of Common Stock at a price of $0.01 per Warrant (15% of the firm shares of Common Stock and Warrants sold in this offering), in
each case, less the underwriting discounts and commissions set forth on the cover of this prospectus in any combination thereof to cover
over-allotments, if any. The underwriters may exercise this option only to cover over-allotments, if any, made in connection with this
offering. To the extent the option is exercised and the conditions of the underwriting agreement are satisfied, we will be obligated
to sell to the underwriters, and the underwriters will be obligated to purchase from us, these additional shares of Common Stock and
Warrants. The underwriters will offer these additional shares of Common Stock and Warrants on the same terms as those on which the other
shares of Common Stock and Warrants are being offered hereby.
Discounts
and Commissions; Reimbursement of Expenses
The
following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes
either no exercise or full exercise by the Representative of the over-allotment option.
|
|
Per Unit(1)
|
|
|
Total Without Over
Allotment
|
|
|
Total With Over
Allotment
|
|
Public offering price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Underwriting discounts and commissions (7.0%)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Proceeds, before expenses, to us
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Non-accountable expense allowance (1.0%)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The fees shown do not include the warrant to purchase shares of Common
Stock issuable to the Representative at closing.
|
|
(2)
|
The non-accountable expense allowance will not be payable with
respect to the representative’s exercise of the over-allotment option, if any.
|
The
Representative has advised us that the underwriters propose to offer the Units directly to the public at the public offering price set
forth on the cover of this prospectus. In addition, the underwriters may offer some of the Units to other securities dealers at such
price less a concession of up to $ per Unit. After this offering to the public, the offering price and other selling terms may be changed
by the Representative without changing the Company’s proceeds from the underwriters’ purchase of the Units.
We have agreed to pay a non-accountable
expense allowance to the representative of the underwriters equal to 1.0% of the gross proceeds received at the completion of the offering.
The non-accountable expense allowance of 1.0% is not payable with respect to any shares sold upon exercise of the representative’s
over-allotment option.
We
have also agreed to reimburse the Representative for reasonable out-of-pocket expenses not to exceed $125,000 in the aggregate. We estimate
that total expenses payable by us in connection with this Offering, other than the underwriting discount, will be approximately $ .
Discretionary
Accounts
The
underwriters do not intend to confirm sales of the Units offered hereby to any accounts over which they have discretionary authority.
Indemnification
We
have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect thereof.
Representative’s
Warrants
Upon consummation of this offering, we will issue to the Representative
(or their designees) the warrants to purchase shares of our Common Stock (the “Representative’s Warrants”) covering
a number of shares of Common Stock equal to seven percent (7.0%) of the total number of shares of Common Stock and Warrants being sold in
this offering, at an exercise price per share equal to 110% of the public offering price. The Representative’s Warrants have been
deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to FINRA Rule 5110(e)(1)(A). The Representative (or
permitted assignees under FINRA Rule 5110(e)(2)(B)) will not sell, transfer, assign, pledge, or hypothecate these warrants or the
securities underlying these warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would
result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from the commencement
of sales of securities in this offering. In addition, the warrants provide for registration rights upon request, in certain cases. The
Representative’s Warrants shall not be redeemable and shall further provide for anti-dilution protection (adjustment in the number
and price of such warrants and the shares underlying such warrants) resulting from corporate events (which would include dividends, reorganizations,
mergers, etc.) and future issuance of Common Stock or Common Stock equivalents at prices (or with exercise and/or conversion prices) below
the Offering price. The Representative’s Warrants will be exercisable at any time, and from time to time, in whole or in part, during
the period commencing 180 days from the commencement of sales of securities in this offering and will expire five (5) years from the commencement
of sales of the securities issued in this offering. In addition, we have granted the underwriters a one-time demand registration right
at our expense, an additional demand registration at the warrant holder’s expense, and unlimited “piggyback” registration
rights with respect to the underlying shares. The demand registration rights will not be greater than five (5) years from the commencement
of sales of securities in this offering in compliance with FINRA Rule 5110(g)(8)(C). The piggyback registration right will not be greater
than five (5) years from the commencement of sales of securities in this offering in compliance with FINRA Rule 5110(g)(8)(D).
Lock-Up
Agreements
We
and each of our directors and officers, and any other holder(s) of three percent (3%) or more of our outstanding shares of Common Stock
as of the effective date of the Registration Statement (and all holders of securities exercisable for or convertible into shares of Common
Stock) have agreed to enter into customary “lock-up” agreements in favor of the Representative pursuant to which such persons
and entities have agreed, for a period of six (6) months after the Offering is completed, that subject to certain exceptions, they shall
not offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any securities of the Company
without the prior written consent of the Representative, including the issuance of shares of Common Stock upon exercise of currently
outstanding options approved by the Representative.
The
Representative may in its sole discretion and at any time without notice release some or all of the shares subject to lock-up agreements
prior to the expiration of the lock-up period. When determining whether or not to release shares from the lock-up agreements, the Representative
will consider, among other factors, the security holder’s reasons for requesting the release, the number of shares for which the
release is being requested and market conditions at the time.
Right
of First Refusal
We have granted the Representative
a right of first refusal, for a period of eighteen (18) months from the closing of this offering, to act as lead managing underwriter
and/or book runner or minimally as co-lead manager and co-book runner and/or co-lead placement agent with 100% of the economics for any
and all future public or private equity, equity-linked or debt (excluding commercial bank debt) offerings, during such eighteen (18) months
period, of the Company, or any successor to or subsidiary of the Company.
OTCQB
and Nasdaq
Our Common Stock is presently quoted on the OTCQB marketplace under
the symbol “DTGI”. We have applied to have our Common Stock and warrants listed on Nasdaq under the symbols “NXGY”
and “NXGYW”, respectively. No assurance can be given that our application will be approved. Trading Quotes of securities on
an over-the-counter marketplace may not be indicative of the market price of those securities on a national securities exchange. There
is no established public trading market for the warrants. No assurance can be given that a trading market will develop for the warrants.
Price
Stabilization, Short Positions and Penalty Bids
In
connection with this Offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering
transactions and penalty bids in accordance with Regulation M under the Exchange Act:
|
●
|
Stabilizing
transactions permit bids to purchase securities so long as the stabilizing bids do not exceed
a specified maximum.
|
|
●
|
Over-allotment
involves sales by the underwriters of securities in excess of the number of securities the
underwriters are obligated to purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short position. In a covered short
position, the number of securities over-allotted by the underwriters is not greater than
the number of securities that they may purchase in the over-allotment option. In a naked
short position, the number of securities involved is greater than the number of securities
in the over-allotment option. The underwriters may close out any covered short position by
either exercising their over-allotment option and/or purchasing securities in the open market.
|
|
●
|
Syndicate
covering transactions involve purchases of the securities in the open market after the distribution
has been completed in order to cover syndicate short positions. In determining the source
of securities to close out the short position, the underwriters will consider, among other
things, the price of securities available for purchase in the open market as compared to
the price at which they may purchase securities through the over-allotment option. A naked
short position occurs if the underwriters sell more securities than could be covered by the
over-allotment option. This position can only be closed out by buying securities in the open
market. A naked short position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the securities in the open market after
pricing that could adversely affect investors who purchase in this Offering.
|
|
●
|
Penalty
bids permit the underwriters to reclaim a selling concession from a syndicate member when
securities originally sold by the syndicate member is purchased in a stabilizing or syndicate
covering transaction to cover syndicate short positions.
|
These
stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price
of our securities or preventing or retarding a decline in the market price of the securities. As a result, the price of our shares of
Common Stock and Unit Warrants may be higher than the price that might otherwise exist in the open market. These transactions may be
discontinued at any time.
Neither
we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described
above may have on the price of our shares of Common Stock and Unit Warrants. In addition, neither we nor the underwriters make any representation
that the underwriters will engage in these transactions or that any transaction, if commenced, will not be discontinued without notice.
Passive
Market Making
In
connection with this Offering, the underwriters and selling group members may also engage in passive market making transactions in our
Common Stock. Passive market making consists of displaying bids limited by the prices of independent market makers and effecting purchases
limited by those prices in response to order flow. Rule 103 of Regulation M promulgated by the SEC limits the amount of net purchases
that each passive market maker may make and the displayed size of each bid. Passive market making may stabilize the market price of the
shares of Common Stock at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued
at any time.
Electronic
Distribution
This
prospectus in electronic format may be made available on websites or through other online services maintained by the underwriters, or
by their affiliates. Other than this prospectus in electronic format, the information on the underwriters’ websites and any information
contained in any other websites maintained by the underwriters is not part of this prospectus or the registration statement of which
this prospectus forms a part, has not been approved and/or endorsed by us or the underwriters in their capacity as underwriters, and
should not be relied upon by investors.
Other
From
time to time, the underwriters and/or their affiliates have provided, and may in the future provide, various investment banking and other
financial services for us for which services it has received and, may in the future receive, customary fees. Except for the services
provided in connection with this Offering and other than as described below, the underwriters have not provided any investment banking
or other financial services during the 180-day period preceding the date of this prospectus.
Notice
to Prospective Investors in Canada
This
prospectus constitutes an “exempt offering document” as defined in and for the purposes of applicable Canadian securities
laws. No prospectus has been filed with any securities commission or similar regulatory authority in Canada in connection with the offer
and sale of the securities. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed upon
this prospectus or on the merits of the securities and any representation to the contrary is an offence.
Canadian
investors are advised that this prospectus has been prepared in reliance on section 3A.3 of National Instrument 33-105 Underwriting Conflicts
(“NI 33-105”). Pursuant to section 3A.3 of NI 33-105, this prospectus is exempt from the requirement that the Company and
the underwriter(s) provide Canadian investors with certain conflicts of interest disclosure pertaining to “connected issuer”
and/or “related issuer” relationships that may exist between the Company and the underwriter(s) as would otherwise be required
pursuant to subsection 2.1(1) of NI 33-105.
Resale
Restrictions
The
offer and sale of the securities in Canada is being made on a private placement basis only and is exempt from the requirement that the
Company prepares and files a prospectus under applicable Canadian securities laws. Any resale of securities acquired by a Canadian investor
in this Offering must be made in accordance with applicable Canadian securities laws, which may vary depending on the relevant jurisdiction,
and which may require resales to be made in accordance with Canadian prospectus requirements, pursuant to a statutory exemption from
the prospectus requirements, in a transaction exempt from the prospectus requirements or otherwise under a discretionary exemption from
the prospectus requirements granted by the applicable local Canadian securities regulatory authority. These resale restrictions may under
certain circumstances apply to resales of the securities outside of Canada.
Representations
of Purchasers
Each
Canadian investor who purchases securities will be deemed to have represented to the Company, the underwriters and to each dealer from
whom a purchase confirmation is received, as applicable, that the investor is (i) purchasing as principal, or is deemed to be purchasing
as principal in accordance with applicable Canadian securities laws, for investment only and not with a view to resale or redistribution;
(ii) an “accredited investor” as such term is defined in section 1.1 of National Instrument 45-106 Prospectus Exemptions
or, in Ontario, as such term is defined in section 73.3(1) of the Securities Act (Ontario); and (iii) is a “permitted client”
as such term is defined in section 1.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Taxation
and Eligibility for Investment
Any
discussion of taxation and related matters contained in this prospectus does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to a Canadian investor when deciding to purchase the securities and, in particular, does
not address any Canadian tax considerations. No representation or warranty is hereby made as to the tax consequences to a resident, or
deemed resident, of Canada of an investment in the securities or with respect to the eligibility of the securities for investment by
such investor under relevant Canadian federal and provincial legislation and regulations.
Rights
of Action for Damages or Rescission
Securities
legislation in certain of the Canadian jurisdictions provides certain purchasers of securities pursuant to an offering memorandum (such
as this prospectus), including where the distribution involves an “eligible foreign security” as such term is defined in
Ontario Securities Commission Rule 45-501 Ontario Prospectus and Registration Exemptions and in Multilateral Instrument 45-107 Listing
Representation and Statutory Rights of Action Disclosure Exemptions, as applicable, with a remedy for damages or rescission, or both,
in addition to any other rights they may have at law, where the offering memorandum, or other offering document that constitutes an offering
memorandum, and any amendment thereto, contains a “misrepresentation” as defined under applicable Canadian securities laws.
These remedies, or notice with respect to these remedies, must be exercised or delivered, as the case may be, by the purchaser within
the time limits prescribed under, and are subject to limitations and defenses under, applicable Canadian securities legislation. In addition,
these remedies are in addition to and without derogation from any other right or remedy available at law to the investor.
Language
of Documents
Upon
receipt of this document, each Canadian investor hereby confirms that it has expressly requested that all documents evidencing or relating
in any way to the sale of the securities described herein (including for greater certainty any purchase confirmation or any notice) be
drawn up in the English language only. Par la réception de ce document, chaque investisseur canadien confirme par les
présentes qu’il a expressément exigé que tous les documents faisant foi ou se rapportant de quelque manière
que ce soit à la vente des valeurs mobilières décrites aux présentes (incluant, pour plus de certitude,
toute confirmation d’achat ou tout avis) soient rédigés en anglais seulement.
European
Economic Area and United Kingdom
In
relation to each Member State of the European Economic Area and the United Kingdom (each a “Relevant State”), no Common Stock
has been offered or will be offered pursuant to the offering to the public in that Relevant State prior to the publication of a prospectus
in relation to the Common Stock which has been approved by the competent authority in that Relevant State or, where appropriate, approved
in another Relevant State and notified to the competent authority in that Relevant State, all in accordance with the Prospectus Regulation,
except that offers of shares may be made to the public in that Relevant State at any time under the following exemptions under the Prospectus
Regulation:
|
●
|
to
legal entities which are qualified investors as defined under the Prospectus Regulation;
|
|
●
|
by
the underwriters to fewer than 150 natural or legal persons (other than qualified investors
as defined in the Prospectus Regulation), subject to obtaining the prior consent of the representatives
of the underwriters for any such offer; or
|
|
●
|
in
any other circumstances falling within Article 1(4) of the Prospectus Regulation, provided
that no such offer of Common Stock shall result in a requirement for us or any underwriter
to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement
a prospectus pursuant to Article 23 of the Prospectus Regulation.
|
For
the purposes of this provision, the expression an “offer of Common Stock to the public” in relation to any Common Stock in
any Relevant State means the communication in any form and by any means of sufficient information on the terms of the offer and any Common
Stock to be offered so as to enable an investor to decide to purchase or subscribe for our Common Stock, and the expression “Prospectus
Regulation” means Regulation (EU) 2017/1129.
United
Kingdom
This
prospectus has only been communicated or caused to have been communicated and will only be communicated or caused to be communicated
as an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets
Act of 2000, or the FSMA) as received in connection with the issue or sale of our Common Stock in circumstances in which Section 21(1)
of the FSMA does not apply to us. All applicable provisions of the FSMA will be complied with in respect to anything done in relation
to our Common Stock in, from or otherwise involving the United Kingdom.
Offers
Outside the United States
Other
than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered
by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be
offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with
the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result
in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are
advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus.
This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in
any jurisdiction in which such an offer or a solicitation is unlawful.
LEGAL
MATTERS
The
validity of the issuance of the securities covered by this prospectus will be passed upon for us by Lucosky Brookman LLP. Gracin &
Marlow, LLP is acting as counsel for the underwriters in this offering.
EXPERTS
Our
consolidated financial statements as of and for our years ended July 31, 2020 and 2019 included in this prospectus and elsewhere in the
registration statement have been audited by MaloneBailey, LLP, an independent registered public accounting firm, as indicated in their
report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in auditing and accounting
in giving said report.
The consolidated financial
statements of ActiveServe, Inc. as of and for the year ended July 31, 2020 included in this prospectus and elsewhere in the registration
statement have been audited by MaloneBailey, LLP, an independent registered public accounting firm, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said firm as experts in auditing and accounting in giving said
report.
The consolidated financial
statements of Nexogy, Inc. as of and for the years ended July 31, 2020 and 2019 included in this prospectus and elsewhere in the registration
statement have been audited by MaloneBailey, LLP, an independent registered public accounting firm, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said firm as experts in auditing and accounting in giving said
report.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
No
named expert or counsel was hired on a contingent basis, will receive a direct or indirect interest in the issuer, or was a promoter,
underwriter, voting trustee, director, officer, or employee of Digerati.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed with the SEC, under the Securities Act, a registration statement on Form S-1 relating to the securities offered hereby. This
prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For
further information with respect to our company and the securities we are offering by this prospectus you should refer to the registration
statement, including the exhibits and schedules thereto. The SEC also maintains an Internet site that contains reports, proxy and information
statements and other information regarding registrants that file electronically with the SEC. The SEC’s website address is http://www.sec.gov.
We
file periodic reports, proxy statements and other information with the SEC in accordance with requirements of the Exchange Act. These
periodic reports, proxy statements and other information are available at the SEC’s website address referred to above. In addition,
you may request a copy of any of our periodic reports filed with the SEC at no cost, by writing or telephoning us at the following address:
Digerati
Technologies, Inc.
825
W. Bitters, Suite 104
San Antonio, Texas 78216
Tel:
(210) 775-0888
Attention:
Antonio Estrada Jr., Chief Financial Officer
Information
contained on our website is not a prospectus and does not constitute a part of this prospectus.
You
should rely only on the information contained in or incorporated by reference or provided in this prospectus. We have not authorized
anyone else to provide you with different information. We are not making an offer of these securities in any state where the offer is
not permitted. You should not assume the information in this prospectus is accurate as of any date other than the date on the front of
this prospectus.
DIGERATI
TECHNOLOGIES, INC.
INDEX
TO FINANCIAL STATEMENTS
Audited
Financial Statements of Digerati Technologies, Inc.:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
Consolidated
Balance Sheets as of July 31, 2020 and 2019
|
|
F-3
|
Consolidated
Statements of Operations for the years ended July 31, 2020 and 2019
|
|
F-4
|
Consolidated
Statements of Stockholders’ Deficit for the years ended July 31, 2020 and 2019
|
|
F-5
|
Consolidated
Statements of Cash Flows for the years ended July 31, 2020 and 2019
|
|
F-6
|
Notes
to Consolidated Financial Statements
|
|
F-7
|
|
|
|
Interim
Financial Statements for the Nine Months Ended April 30, 2021 (unaudited) for Digerati Technologies, Inc.:
|
|
|
Consolidated
Balance Sheets as of April 30, 2021 and July 31, 2020
|
|
F-46
|
Consolidated
Statements of Operations for the Three and Nine Months Ended April 30, 2021 and 2020
|
|
F-47
|
Consolidated
Statements of Stockholders’ Deficit for the Three and Nine Months Ended April 30, 2021 and 2020
|
|
F-48
|
Consolidated
Statements of Cash Flows for the Nine Months Ended April 30, 2021 and 2020
|
|
F-50
|
Notes
to Consolidated Financial Statements
|
|
F-51
|
|
|
|
Audited
Financial Statements of ActiveServe, Inc.:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-75
|
Balance
Sheet as of July 31, 2020
|
|
F-76
|
Statement
of Operations for the year ended July 31, 2020
|
|
F-77
|
Statement
of Stockholders’ Equity for the year ended July 31, 2020
|
|
F-78
|
Statement
of Cash Flows for the year ended July 31, 2020
|
|
F-79
|
Notes
to Financial Statements for the year ended July 31, 2020
|
|
F-80
|
|
|
|
Interim
Financial Statements for the Three Months Ended October 31, 2020 (unaudited) for ActiveServe, Inc.:
|
|
|
Balance
Sheets as of October 31, 2020 and July 31, 2020
|
|
F-84
|
Statements
of Operations for the Three Months Ended October 31, 2020 and 2019
|
|
F-85
|
Statements
of Stockholders’ Equity for the Three Months Ended October 31, 2020 and 2019
|
|
F-86
|
Statements
of Cash Flows for the Three Months Ended October 31, 2020 and 2019
|
|
F-87
|
Notes
to Financial Statements for the Three Months Ended October 31, 2020 and 2019
|
|
F-88
|
|
|
|
Audited
Financial Statements of Nexogy, Inc.:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-90
|
Balance
Sheets as of July 31, 2020 and 2019
|
|
F-91
|
Statements
of Operations for the years ended July 31, 2020 and 2019
|
|
F-92
|
Statement
of Stockholders’ Deficit for the years ended July 31, 2020 and 2019
|
|
F-93
|
Statements
of Cash Flows for the years ended July 31, 2020 and 2019
|
|
F-94
|
Notes
to Financial Statements for the years ended July 31, 2020 and 2019
|
|
F-95
|
|
|
|
Interim
Financial Statements for the Three Months Ended October 31, 2020 (unaudited) for Nexogy, Inc.:
|
|
|
Balance
Sheets as of October 31, 2020 and July 31, 2020
|
|
F-101
|
Statements
of Operations for the Three Months Ended October 31, 2020 and 2019
|
|
F-102
|
Statements
of Stockholders’ Deficit for the Three Months Ended October 31, 2020 and 2019
|
|
F-103
|
Statements
of Cash Flows for the Three Months Ended October 31, 2020 and 2019
|
|
F-104
|
Notes
to Financial Statements for the Three Months Ended October 31, 2020 and 2019
|
|
F-105
|
|
|
|
Digerati Technologies, Inc., ActiveServe, Inc. and Nexogy, Inc. Unaudited Pro Forma Consolidated Balance Sheet and Unaudited Pro Forma Consolidated Statements of Operations
|
|
F-109
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders
Digerati
Technologies, Inc.
San
Antonio, Texas
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Digerati Technologies, Inc. and its subsidiaries (collectively, the “Company”)
as of July 31, 2020 and July 31, 2019, and the related consolidated statements of operations, stockholders’ deficit, and cash flows
for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2020 and July
31, 2019, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Going
Concern Matter
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises
substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/
MaloneBailey, LLP
www.malonebailey.com
Houston,
Texas
We
have served as the Company’s auditor since 2018
October
29, 2020
PART
1. FINANCIAL INFORMATION3
ITEM
1. FINANCIAL STATEMENTS
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
685
|
|
|
$
|
406
|
|
Accounts
receivable, net
|
|
|
208
|
|
|
|
262
|
|
Prepaid
and other current assets
|
|
|
361
|
|
|
|
107
|
|
Total
current assets
|
|
|
1,254
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
ASSETS:
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
1,451
|
|
|
|
1,832
|
|
Goodwill,
net
|
|
|
810
|
|
|
|
810
|
|
Property
and equipment, net
|
|
|
431
|
|
|
|
579
|
|
Other
assets
|
|
|
43
|
|
|
|
58
|
|
Investment
in Itellum
|
|
|
185
|
|
|
|
185
|
|
Right-of-use
asset
|
|
|
176
|
|
|
|
-
|
|
Total
assets
|
|
$
|
4,350
|
|
|
$
|
4,239
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,487
|
|
|
$
|
1,264
|
|
Accrued
liabilities
|
|
|
1,840
|
|
|
|
1,493
|
|
Equipment
financing
|
|
|
62
|
|
|
|
65
|
|
Convertible
note payable, current, net $295 and $547, respectively
|
|
|
548
|
|
|
|
1,005
|
|
Note
payable, current, related party, net of $0 and $7, respectively
|
|
|
78
|
|
|
|
383
|
|
Note
payable, current, net $0 and $0, respectively
|
|
|
1,571
|
|
|
|
1,218
|
|
Deferred
income
|
|
|
279
|
|
|
|
285
|
|
Derivative
liability
|
|
|
606
|
|
|
|
927
|
|
Operating
lease liability, current
|
|
|
99
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
6,570
|
|
|
|
6,640
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
|
Convertible
debenture, net $0 and $29, respectively
|
|
|
-
|
|
|
|
21
|
|
Notes
payable, related party, net $6 and $17, respectively
|
|
|
85
|
|
|
|
136
|
|
Note
payable, net $0 and $0, respectively
|
|
|
193
|
|
|
|
-
|
|
Equipment
financing
|
|
|
38
|
|
|
|
100
|
|
Operating
lease liability
|
|
|
77
|
|
|
|
-
|
|
Total
long-term liabilities
|
|
|
393
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
6,963
|
|
|
|
6,897
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
DEFICIT:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001, 50,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Convertible
Series A Preferred stock, $0.001, 1,500,000 shares designated, 225,000 and 225,000 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Convertible
Series B Preferred stock, $0.001, 1,000,000 shares designated, 407,477 and 0 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Convertible
Series C Preferred stock, $0.001, 1,000,000 shares designated, 0 and 0 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Series
F Super Voting Preferred stock, $0.001, 100 shares designated, 100 and 0 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001, 150,000,000 shares authorized, 101,323,590 and 23,740,406 issued and outstanding, respectively (9,000,000 reserved
in Treasury)
|
|
|
101
|
|
|
|
24
|
|
Additional
paid in capital
|
|
|
86,364
|
|
|
|
82,972
|
|
Accumulated
deficit
|
|
|
(88,697
|
)
|
|
|
(85,320
|
)
|
Other
comprehensive income
|
|
|
1
|
|
|
|
1
|
|
Total
Digerati’s stockholders’ deficit
|
|
|
(2,231
|
)
|
|
|
(2,323
|
)
|
Noncontrolling
interest
|
|
|
(382
|
)
|
|
|
(335
|
)
|
Total
stockholders’ deficit
|
|
|
(2,613
|
)
|
|
|
(2,658
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
4,350
|
|
|
$
|
4,239
|
|
See
accompanying notes to consolidated financial statements
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
|
|
For
the Years ended
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
OPERATING
REVENUES:
|
|
|
|
|
|
|
|
|
Cloud
software and service revenue
|
|
$
|
6,279
|
|
|
$
|
6,040
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
|
6,279
|
|
|
|
6,040
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization)
|
|
|
3,035
|
|
|
|
3,128
|
|
Selling,
general and administrative expense
|
|
|
4,106
|
|
|
|
4,208
|
|
Legal
and professional fees
|
|
|
642
|
|
|
|
390
|
|
Bad
debt
|
|
|
(5
|
)
|
|
|
6
|
|
Depreciation
and amortization expense
|
|
|
613
|
|
|
|
669
|
|
Total
operating expenses
|
|
|
8,391
|
|
|
|
8,401
|
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(2,112
|
)
|
|
|
(2,361
|
)
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Gain
(loss) on derivative instruments
|
|
|
263
|
|
|
|
(74
|
)
|
Gain
on settlement of debt
|
|
|
129
|
|
|
|
-
|
|
Income
tax benefit (expense)
|
|
|
33
|
|
|
|
(47
|
)
|
Other
income
|
|
|
116
|
|
|
|
-
|
|
Interest
expense
|
|
|
(1,853
|
)
|
|
|
(2,166
|
)
|
Total
other income (expense)
|
|
|
(1,312
|
)
|
|
|
(2,287
|
)
|
|
|
|
|
|
|
|
|
|
NET
LOSS INCLUDING NONCONTROLLING INTEREST
|
|
|
(3,424
|
)
|
|
|
(4,648
|
)
|
|
|
|
|
|
|
|
|
|
Less:
Net loss attributable to the noncontrolling interests
|
|
|
47
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS
|
|
|
(3,377
|
)
|
|
|
(4,520
|
)
|
|
|
|
|
|
|
|
|
|
Deemed
dividend on Series A Convertible preferred stock
|
|
|
(19
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS
|
|
$
|
(3,396
|
)
|
|
$
|
(4,549
|
)
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE - BASIC
|
|
$
|
(0.06
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE - DILUTED
|
|
$
|
(0.06
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING - BASIC
|
|
|
53,883,966
|
|
|
|
16,650,507
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING - DILUTED
|
|
|
53,883,966
|
|
|
|
16,650,507
|
|
See
accompanying notes to consolidated financial statements
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
YEARS
ENDED JULY 31, 2019 AND 2020
(In
thousands, except for share amounts)
|
|
Equity
Digerati’s Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
Shares
|
|
|
Par
|
|
|
Series B
Shares
|
|
|
Par
|
|
|
Series F
Shares
|
|
|
Par
|
|
|
Shares
|
|
|
Par
|
|
|
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Comprehensive
Income
|
|
|
Stockholders
Equity
|
|
|
Noncontrolling
Interest
|
|
|
Totals
|
|
BALANCE,
July 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,775,143
|
|
|
$
|
13
|
|
|
$
|
79,993
|
|
|
$
|
(80,800
|
)
|
|
$
|
1
|
|
|
$
|
(793
|
)
|
|
$
|
(207
|
)
|
|
$
|
(1,000
|
)
|
Amortization
of employee stock options
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
419
|
|
|
|
-
|
|
|
|
-
|
|
|
|
419
|
|
|
|
-
|
|
|
|
419
|
|
Common
stock issued for services, to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,827,926
|
|
|
|
2
|
|
|
|
310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
312
|
|
|
|
-
|
|
|
|
312
|
|
Common
stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
925,000
|
|
|
|
1
|
|
|
|
248
|
|
|
|
-
|
|
|
|
-
|
|
|
|
249
|
|
|
|
-
|
|
|
|
249
|
|
Common
stock issued for settlement of accounts payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
138,714
|
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
|
37
|
|
Common
stock and warrants issued for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
938,621
|
|
|
|
1
|
|
|
|
264
|
|
|
|
-
|
|
|
|
-
|
|
|
|
265
|
|
|
|
-
|
|
|
|
265
|
|
Common
stock issued for investment in Itellum
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
1
|
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85
|
|
|
|
-
|
|
|
|
85
|
|
Common
stock issued for debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288,000
|
|
|
|
-
|
|
|
|
43
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43
|
|
|
|
-
|
|
|
|
43
|
|
Common
Stock issued for debt conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,592,002
|
|
|
|
5
|
|
|
|
311
|
|
|
|
-
|
|
|
|
-
|
|
|
|
316
|
|
|
|
-
|
|
|
|
316
|
|
Common
stock issued concurrent with convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,050,000
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock issued for debt extension
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
255,000
|
|
|
|
-
|
|
|
|
54
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
-
|
|
|
|
54
|
|
Common
Stock issued for accrued interest payments on debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
375,000
|
|
|
|
-
|
|
|
|
60
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
|
|
-
|
|
|
|
60
|
|
Common
stock issued, exercise of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
7
|
|
Convertible
Series A Preferred stock issued for cash
|
|
|
225,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
225
|
|
|
|
-
|
|
|
|
-
|
|
|
|
225
|
|
|
|
-
|
|
|
|
225
|
|
Derivative
liability resolved to APIC due to note conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
823
|
|
|
|
-
|
|
|
|
-
|
|
|
|
823
|
|
|
|
-
|
|
|
|
823
|
|
Debt
discount from warrants issued with debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31
|
|
|
|
-
|
|
|
|
31
|
|
Warrants
expense amortization
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
|
|
-
|
|
|
|
64
|
|
Beneficial
conversion feature on Convertible Series A Preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
|
|
29
|
|
Deemed
dividend from beneficial conversion feature on Convertible Series A Preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
(29
|
)
|
Net
Ioss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,520
|
)
|
|
|
-
|
|
|
|
(4,520
|
)
|
|
|
(128
|
)
|
|
|
(4,648
|
)
|
BALANCE,
July 31, 2019
|
|
|
225,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,740,406
|
|
|
$
|
24
|
|
|
$
|
82,972
|
|
|
$
|
(85,320
|
)
|
|
$
|
1
|
|
|
$
|
(2,323
|
)
|
|
$
|
(335
|
)
|
|
$
|
(2,658
|
)
|
Amortization
of employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
377
|
|
|
|
-
|
|
|
|
-
|
|
|
|
377
|
|
|
|
-
|
|
|
|
377
|
|
Common
stock issued for services, to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,811,100
|
|
|
|
22
|
|
|
|
780
|
|
|
|
-
|
|
|
|
-
|
|
|
|
802
|
|
|
|
-
|
|
|
|
802
|
|
Common
stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400,000
|
|
|
|
1
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
16
|
|
Common
stock issued for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,893,625
|
|
|
|
4
|
|
|
|
95
|
|
|
|
-
|
|
|
|
-
|
|
|
|
99
|
|
|
|
-
|
|
|
|
99
|
|
Common
stock issued for accrued interest payments on debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
392,912
|
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
19
|
|
Common
stock issued, settlement of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
Common
stock issued, extension of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
780,000
|
|
|
|
-
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
|
|
-
|
|
|
|
50
|
|
Common
stock issued for debt conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,936,326
|
|
|
|
36
|
|
|
|
489
|
|
|
|
-
|
|
|
|
-
|
|
|
|
525
|
|
|
|
-
|
|
|
|
525
|
|
Common
stock issued concurrent with convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
12
|
|
Convertible
Series B Preferred stock and common stock issued for debt settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
407,477
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,582,554
|
|
|
|
14
|
|
|
|
672
|
|
|
|
-
|
|
|
|
-
|
|
|
|
686
|
|
|
|
-
|
|
|
|
686
|
|
Common
stock issued for conversion of Convertible Series A Preferred stock
|
|
|
(25,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
86,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Derivative
liability resolved to APIC due to note conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
872
|
|
|
|
-
|
|
|
|
-
|
|
|
|
872
|
|
|
|
-
|
|
|
|
872
|
|
Convertible
Series A Preferred stock and warrants issued for AP settlement
|
|
|
25,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
25
|
|
Super
Voting Preferred Stock Series F
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Dividends
declared
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
(19
|
)
|
Net
Ioss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,377
|
)
|
|
|
-
|
|
|
|
(3,377
|
)
|
|
|
(47
|
)
|
|
|
(3,424
|
)
|
BALANCE,
July 31, 2020
|
|
|
225,000
|
|
|
|
-
|
|
|
|
407,477
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
101,323,590
|
|
|
$
|
101
|
|
|
$
|
86,364
|
|
|
$
|
(88,697
|
)
|
|
$
|
1
|
|
|
$
|
(2,231
|
)
|
|
$
|
(382
|
)
|
|
$
|
(2,613
|
)
|
See
accompanying notes to consolidated financial statements
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
For
the Years ended
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,424
|
)
|
|
$
|
(4,648
|
)
|
Adjustments
to reconcile net loss to cash used in by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
613
|
|
|
|
669
|
|
Stock
compensation and warrant expense
|
|
|
1,127
|
|
|
|
1,044
|
|
Bad
debt expense (recovery)
|
|
|
(5
|
)
|
|
|
6
|
|
Loss
on AP settled with stock
|
|
|
-
|
|
|
|
5
|
|
Interest
expense from stock issued for debt extension
|
|
|
-
|
|
|
|
24
|
|
Amortization
of ROU asset - operating
|
|
|
140
|
|
|
|
-
|
|
Amortization
of debt discount
|
|
|
1,228
|
|
|
|
1,466
|
|
Loss
(Gain) on derivative liabilities
|
|
|
(263
|
)
|
|
|
74
|
|
Gain
settlement of debt
|
|
|
(134
|
)
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
60
|
|
|
|
(40
|
)
|
Prepaid
expenses and other current assets
|
|
|
(23
|
)
|
|
|
18
|
|
Right
of use operating lease liability
|
|
|
(140
|
)
|
|
|
-
|
|
Accounts
payable
|
|
|
235
|
|
|
|
171
|
|
Accrued
expenses
|
|
|
646
|
|
|
|
661
|
|
Deferred
income
|
|
|
(6
|
)
|
|
|
23
|
|
Net
cash provided by (used in) operating activities
|
|
|
54
|
|
|
|
(527
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash
paid in acquisition of equipment
|
|
|
(85
|
)
|
|
|
(52
|
)
|
Cash
paid for escrow deposit related to acquisition
|
|
|
(127
|
)
|
|
|
(83
|
)
|
Net
cash used in investing activities
|
|
|
(212
|
)
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of stock and warrants
|
|
|
99
|
|
|
|
473
|
|
Borrowings
from convertible debt, net of original issuance cost and discounts
|
|
|
435
|
|
|
|
1,044
|
|
Borrowings
from related party note, net
|
|
|
70
|
|
|
|
25
|
|
Borrowings
from third party promissory notes, net
|
|
|
556
|
|
|
|
100
|
|
Principal
payments on convertible notes, net
|
|
|
(140
|
)
|
|
|
(651
|
)
|
Principal
payments on related party notes, net
|
|
|
(443
|
)
|
|
|
(153
|
)
|
Principal
payments on third party promissory notes, net
|
|
|
-
|
|
|
|
(125
|
)
|
Principal
payment on equipment financing
|
|
|
(65
|
)
|
|
|
(33
|
)
|
Payment
of debt financing cost
|
|
|
(75
|
)
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
437
|
|
|
|
680
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
279
|
|
|
|
18
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
406
|
|
|
|
388
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
685
|
|
|
$
|
406
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
547
|
|
|
$
|
541
|
|
Income
tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Debt
discount from warrants issued with debt
|
|
$
|
-
|
|
|
$
|
31
|
|
Debt
discount from common stock issued with debt
|
|
$
|
12
|
|
|
$
|
43
|
|
Debt
discount from derivative liabilities
|
|
$
|
814
|
|
|
$
|
1,044
|
|
Debt
from assignment of accrued interest
|
|
$
|
113
|
|
|
$
|
-
|
|
Capitalization
of ROU assets and liabilities - operating
|
|
$
|
316
|
|
|
$
|
-
|
|
Preferred
Stock Series A and warrants issued for AP settlement
|
|
$
|
25
|
|
|
$
|
-
|
|
Preferred
Stock Series B issued for debt conversion and settlement
|
|
$
|
408
|
|
|
$
|
-
|
|
Common
Stock issued for debt conversion
|
|
$
|
525
|
|
|
$
|
316
|
|
Common
Stock issued for interest payment
|
|
$
|
18
|
|
|
$
|
60
|
|
Common
Stock issued for debt extension
|
|
$
|
50
|
|
|
$
|
29
|
|
Deemed
dividend on Series A Convertible preferred stock
|
|
$
|
-
|
|
|
$
|
29
|
|
Dividend
declared
|
|
$
|
19
|
|
|
$
|
-
|
|
Derivative
liability resolved to APIC due to debt conversion
|
|
$
|
872
|
|
|
$
|
823
|
|
Capitalized
expense related to debt financing cost
|
|
$
|
13
|
|
|
|
|
|
Equipment
Financing on purchased assets
|
|
$
|
-
|
|
|
$
|
104
|
|
Stock
issued for investment in Itellum
|
|
$
|
-
|
|
|
$
|
85
|
|
Note
payable issued for investment in Itellum
|
|
$
|
-
|
|
|
$
|
18
|
|
See
accompanying notes to consolidated financial statements
DIGERATI
TECHNOLOGIES, INC.
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business. Digerati Technologies, Inc. (“we”, “our”, “Company” or “Digerati”)
was incorporated in the state of Nevada on May 24, 2004. Digerati is a diversified holding company that has no independent operations
apart from its subsidiaries. Through our operating subsidiaries in Texas and Florida, T3 Communications, Inc., and Shift8 Networks, Inc.,
dba, T3 Communications, we provide cloud services specializing in Unified Communications as a Service (“UCaaS”) solutions
for the business market. Our product line includes a portfolio of Internet-based telephony products and services delivered through our
cloud application platform and session-based communication network and network services including Internet broadband, fiber, mobile broadband,
and cloud WAN (SD WAN) solutions. Our services are designed to provide enterprise-class, carrier-grade services to the small-to-medium-sized
business (“SMB”) at cost-effective monthly rates. Our UCaaS or cloud communication services include fully hosted IP/PBX,
mobile applications, Voice over Internet Protocol (“VoIP”) transport, SIP trunking, and customized VoIP services all delivered
Only in the Cloud™.
Principles
of Consolidation. The consolidated financial statements include the accounts of Digerati, and its subsidiaries, which are majority
owned by Digerati In accordance with ASC 810-10-05. All significant inter-company transactions and balances have been eliminated.
Cost
Method Investment. The Company holds a minority interest in Itellum. The Company has no influence over the operating and financial
policies of Itellum. The Company has no controlling interest, is not the primary beneficiary and does not have the ability to exert significant
influence. As a result, we accounted for this investment using the cost method of accounting.
Prepaid
Acquisition costs & debt financing costs. The Company entered into a definitive agreement to acquire a service provider
in South Florida of UCaaS and managed services, offering a portfolio of cloud-based solutions to the high-growth SMB market. In
addition, the Company entered into a Letter of Intent (LOI) for an acquisition. The Company expects closing on the two acquisitions
during the quarter ending October 31, 2020. During the year ending July 31, 2020, the Company advanced $127,000 towards acquisition
costs and $75,000 as financing costs. In addition, the Company capitalized $13,000 legal costs incurred during the year as financing
costs. As of July 31, 2020, these advances are reflected as prepaids in the Company’s balance sheet. As of the date of this
filing, the Company has advanced $240,000 as part of multiple extension fees, upon closing, these amounts will be applied to the
purchase price. In addition, the Company advanced $325,000 towards the financing costs.
Gain
on settlement of debt. During the year ended July 31, 2020 the Company recognized as other income $100,000 for a settlement with
one of our vendors.
Reclassifications.
Certain amounts in the consolidated financial statements of the prior year have been reclassified to conform to the presentation
of the current year for comparative purposes.
Use
of Estimates. In preparing financial statements, management makes estimates and assumptions that affect the reported amounts
of assets and liabilities in the balance sheet and revenue and expenses in the statement of operations. Actual results could differ from
those estimates.
Beneficial
conversion features. The Company evaluates the conversion feature for whether it was beneficial as described in ASC 470-30. The
intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for
separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible
note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest
method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of
retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price,
after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value
of the shares of common stock at the commitment date to be received upon conversion.
Related
parties. The Company accounts for related party transactions in accordance with ASC 850 (“Related Party Disclosures”).
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls,
is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management,
members of the immediate families of principal owners of the Company and its management and other parties with which the Company may
deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of
the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence
the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties
and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing
its own separate interests is also a related party.
Concentration
of Credit Risk. Financial instruments that potentially subject Digerati to concentration of credit risk consist primarily of
trade receivables. In the normal course of business, Digerati provides credit terms to its customers. Accordingly, Digerati performs
ongoing credit evaluations of its customers and maintains allowances for possible losses, which, when realized, have been within the
range of management’s expectations. Digerati maintains cash in bank deposit accounts, which, at times, may exceed federally insured
limits. Digerati has not experienced any losses in such accounts and Digerati does not believe it is exposed to any significant credit
risk on cash and cash equivalents.
Revenue
Recognition. On August 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which
were not completed as of August 1, 2018. Results for reporting periods beginning after August 1, 2018 are presented under Topic 606.
There was no impact to the opening balance of accumulated deficit or revenues for the year ended July 31, 2019 as a result of applying
Topic 606.
Sources
of revenue:
Cloud-based
hosted Services. The Company recognizes cloud-based hosted services revenue, mainly from subscription services for its cloud telephony
applications that includes hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice and web conferencing,
call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and
other customized applications. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies
including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, and Ethernet over copper. We also offer remote network monitoring,
data backup and disaster recovery services. The Company applies a five-step approach in determining the amount and timing of revenue
to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining
the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue
when the performance obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the
products transfers to the customer.
Service Revenue
Service
revenue from subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over the
contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in advance
of subscription services being rendered are recorded as a deferred revenue. Usage fees, either bundled or not bundled, are recognized
when the Company has a right to invoice. Professional services for configuration, system integration, optimization, customer training
and/or education are primarily billed on a fixed-fee basis and are performed by the Company directly. Alternatively, customers may choose
to perform these services themselves or engage their own third-party service providers. Professional services revenue is recognized over
time, generally as services are activated for the customer.
Product
Revenue
The
Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is generally
upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical experience.
Disaggregation of Cloud-based
hosted revenues
Summary
of disaggregated revenue is as follows (in thousands):
|
|
For
the Years ended
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cloud
software and service revenue
|
|
$
|
6,212
|
|
|
$
|
5,847
|
|
Product
revenue
|
|
|
67
|
|
|
|
193
|
|
Total
operating revenues
|
|
$
|
6,279
|
|
|
$
|
6,040
|
|
Contract Assets
Contract
assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations are completed.
The revenue is recognized when the customer receives services or equipment for a reduced consideration at the onset of an arrangement;
for example, when the initial month’s services or equipment are discounted. Contract assets are included in prepaid and other current
assets in the consolidated balance sheets, depending on if their reduction is recognized during the succeeding 12-month period or beyond.
Contract assets as of July 31, 2020 and July 31, 2019, were $5,980 and $22,967, respectively.
Deferred Income
Deferred
income represents billings or payment received in advance of revenue recognition and is recognized upon transfer of control. Balances
consist primarily of annual plan subscription services, for services not yet provided as of the balance sheet date. Deferred revenues
that will be recognized during the succeeding 12-month period are recorded as current deferred revenues in the consolidated balance sheets,
with the remainder recorded as other noncurrent liabilities in the consolidated balance sheets. Deferred income as of July 31, 2020 and
July 31, 2019, were $148,000 and $153,000, respectively.
Customer
deposits.
The
Company in some instances requires customers to make deposits for equipment, installation charges and training. As equipment is installed
and training takes places the deposits are then applied to revenue. As of July 31, 2020, and 2019, Digerati’s customer deposits
balance was $131,000 and $132,000, respectively.
Costs to Obtain a Customer Contract
Sales
commissions are paid upon collections of related revenue and are expensed during the same period. Sales commissions for the year ended
July 31, 2020 and the year ended July 31, 2019, were $38,976 and $52,613, respectively.
Direct
Costs - Cloud-based hosted Services
We
incur bandwidth and colocation charges in connection with our UCaaS or cloud communication services. The bandwidth charges are incurred
as part of the connectivity between our customers to allow them access to our various services. We also incur costs from underlying providers
for fiber, Internet broadband, and telecommunication circuits in connection with our data and connectivity solutions.
Cash
and cash equivalents. The Company considers all bank deposits and highly liquid investments with original maturities of three
months or less to be cash and cash equivalents.
Allowance
for Doubtful Accounts.
Bad
debt expense is recognized based on management’s estimate of likely losses each year based on past experience and an estimate of
current year uncollectible amounts. As of July 31, 2020, and 2019, Digerati’s allowance for doubtful accounts balance was $124,000
and $115,000, respectively.
Property
and equipment. Property and equipment are recorded at cost. Additions are capitalized and maintenance and repairs are charged
to expense as incurred. Gains and losses on dispositions of equipment are reflected in operations. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, which are one (1) to seven (7) years.
Goodwill, Intangible
Assets, and Long-Lived Assets
Goodwill
is carried at cost and is not amortized. The Company tests goodwill for impairment on an annual basis at the end of each fiscal year,
relying on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace
data. Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests according
to specifications set forth in ASC 350. The Company completed an evaluation of goodwill at July 31, 2020 and determined that there was
no impairment.
The
fair value of the Company’s reporting unit is dependent upon the Company’s estimate of future cash flows and other factors.
The Company’s estimates of future cash flows include assumptions concerning future operating performance and economic conditions
and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from the
Company’s market capitalization plus a suitable control premium at date of the evaluation.
The
financial and credit market volatility directly impacts the Company’s fair value measurement through the Company’s weighted
average cost of capital that the Company uses to determine its discount rate and through the Company’s stock price that the Company
uses to determine its market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded.
The
Company recognizes an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal
rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either
individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their useful lives. Impairment
losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash
flows and its carrying amount exceeds its fair value.
The
Company reviews its long-lived assets, including property and equipment, identifiable intangibles, and goodwill annually or whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability
of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows will be less than the carrying
amount of the assets.
Impairment
of Long-Lived Assets. Digerati reviews the carrying value of its long-lived assets annually or whenever events or changes in
circumstances indicate that the value of an asset may no longer be appropriate. Digerati assesses recoverability of the carrying value
of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future
net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s
carrying value and fair value.
Business
combinations. Each investment in a business is being measured and determined whether the investment should be accounted for as
a cost-basis investment, an equity investment, a business combination, or a common control transaction. An investment in which the Company
do not have a controlling interest and which the Company is not the primary beneficiary but where the Company has the ability to exert
significant influence is accounted for under the equity method of accounting. For those investments that we account for in accordance
ASC 805, Business Combinations, the Company records the assets acquired and liabilities assumed at the management’s estimate of
their fair values on the date of the business combination. The assessment of the estimated fair value of each of these can have a material
effect on the reported results as intangible assets are amortized over various lives. Furthermore, according to ASC 805-50-30-5, when
accounting for a transfer of assets or exchange of shares between entities under common control, the entity that receives the net assets
or the equity interests shall initially measure the recognized assets and liabilities transferred at their carrying amounts in the accounts
of the transferring entity at the date of transfer.
Derivative
financial instruments. Digerati does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency
risks. However, Digerati analyzes its convertible instruments and free-standing instruments such as warrants for derivative liability
accounting.
For
derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at each reporting date, any changes in fair value is recorded as non-operating, non-cash income or expense for
each reporting period. For option-based derivative financial instruments, warrants and notes payable conversion options Digerati uses
the Black-Scholes option-pricing model to value the derivative instruments.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed
at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current
based on whether or not net-cash settlement of the derivative instrument is probable within the next 12 months from the balance sheet
date.
Notes
payable conversion options are recorded as debt discounts and are amortized as interest expense over the term of the related debt instrument.
Treasury
Shares. As a result of entering into various convertible debt instruments, warrants with fixed exercise price, and convertible
notes with fixed conversion price or with a conversion price floor, we reserved 9,000,000 treasury shares for consideration for future
conversions and exercise of warrants. The Company will evaluate the reserved treasury shares on a quarterly basis, and if necessary,
reserve additional treasury shares. As of July 31, 2020, we believe that the treasury share reserved are sufficient for any future conversions
of these instruments. As a result, these debt instruments and warrants are excluded from derivative consideration.
Fair
Value of Financial Instruments. Fair value is defined as the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. A fair value hierarchy is used which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy based on the three levels of inputs
that may be used to measure fair value are as follows:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level
3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values
are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant judgment or estimation.
For
certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses,
the carrying amounts approximate fair value due to the short maturity of these instruments. The carrying value of our long-term debt
approximates its fair value based on the quoted market prices for the same or similar issues or the current rates offered to us for debt
of the same remaining maturities.
Our
derivative liabilities as of July 31, 2020 and 2019 of $606,000 and $927,000, respectively.
The
following table provides the fair value of the derivative financial instruments measured at fair value using significant unobservable
inputs:
|
|
|
|
|
|
Fair value measurements at reporting
date using:
|
|
|
|
|
|
|
|
Quoted
prices
in active
markets
for
identical
liabilities
|
|
|
Significant
other
Observable
inputs
|
|
|
Significant
Unobservable
inputs
|
|
Description
|
|
Fair
Value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Convertible
promissory notes derivative liability at July 31, 2019
|
|
$
|
927,171
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
927,171
|
|
Convertible
promissory notes derivative liability at July 31, 2020
|
|
$
|
606,123
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
606,123
|
|
The
fair market value of all derivatives during the year ended July 31, 2020 was determined using the Black-Scholes option pricing model
which used the following assumptions:
Expected
dividend yield
|
|
0.00%
|
|
Expected
stock price volatility
|
|
83.28%
- 268.02%
|
|
Risk-free
interest rate
|
|
0.09%
-2.67%
|
|
Expected
term
|
|
0.01
- 1.00 years
|
|
Level
3 inputs.
The
following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value on a recurring
basis using significant unobservable inputs:
Balance
at July 31, 2018
|
|
$
|
632,268
|
|
Derivative
from new convertible promissory notes recorded as debt discount
|
|
|
1,043,834
|
|
Derivative
liability resolved to additional paid in capital due to debt conversion
|
|
|
(822,922
|
)
|
Derivative
loss
|
|
|
73,991
|
|
Balance
at July 31, 2019
|
|
$
|
927,171
|
|
Derivative
from new convertible promissory notes recorded as debt discount
|
|
|
814,180
|
|
Derivative
liability resolved to additional paid in capital due to debt conversion
|
|
|
(872,914
|
)
|
Derivative
loss
|
|
|
(262,314
|
)
|
Balance
at July 31, 2020
|
|
$
|
606,123
|
|
Income
taxes. Digerati recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases
of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to
be recovered. Digerati provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets
to be more likely than not.
Since
January 1, 2007, Digerati accounts for uncertain tax positions in accordance with the authoritative guidance issued by the Financial
Accounting Standards Board on income taxes which addresses how an entity should recognize, measure and present in the financial statements
uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to this guidance, Digerati recognizes
a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit.
To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured
as the largest amount that is greater than 50% likely of being realized upon settlement. As of July 31, 2020, we have no liability for
unrecognized tax benefits.
Stock-based
compensation. In June 2018 FASB adopted the Accounting Standards Update No. 2018-07, Compensation – Stock
Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting. This update simplifies the accounting
for non-employee share-based payment transactions by expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based
payment transactions for acquiring goods and services from non-employees. The guidance is effective for annual periods beginning after
December 15, 2018, and interim periods within that reporting period. The Company adopted the updated standard as of May 1, 2018,
adopting this guidance did not have a material effect on its consolidated financial statements. During FY 2020 and 2019, the Company
issued 21,811,100 common shares and 1,827,927 common shares, respectively to various employees as part of our profit sharing-plan contribution
and stock in lieu of cash. At the time of issuance during FY 2020 and 2019 we recognized stock-based compensation expense of approximately
$1,127,000 and $1,044,000, respectively equivalent to the market value of the shares issued calculated based on the share’s closing
price at the grant dates.
Basic
and diluted net income (loss) per share. The basic net loss per common share is computed by dividing the net loss by the weighted
average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as
if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years
ended July 31, 2020 and 2019, potential dilutive securities including options and warrants were not included in the calculation of diluted
net (loss) per common share. Potential dilutive securities, which are not included in dilutive weighted average shares are as follows:
|
|
7/31/2020
|
|
|
7/31/2019
|
|
Options
to purchase common stock
|
|
5,000,000
|
|
|
4,940,000
|
|
Warrants
to purchase common stock
|
|
2,240,000
|
|
|
2,700,000
|
|
Convertible
debt
|
|
37,304,080
|
|
|
13,113,643
|
|
Total:
|
|
44,544,080
|
|
|
20,753,643
|
|
Noncontrolling
interest. The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 810, Consolidation, which governs the accounting for and reporting of non-controlling interests (“NCIs”)
in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among
other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s
ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or
losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in
a deficit balance.
The net income (loss) attributed to the NCI is separately designated in the accompanying consolidated statements of operations and other
comprehensive income (loss). For the year ended July 31, 2020 and 2019, the Company recognized a noncontrolling deficits of $47,000
and $128,000, respectively.
Recently
issued accounting pronouncements. Recent accounting pronouncements, other than below, issued by the Financial Accounting Standards
Board (“FASB”) (including its Emerging Issues Task Force), the AICPA and the SEC did not, or are not, believed by management
to have a material effect on the Company’s present or future financial statements.
In February
2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments under this pronouncement will change the way all
leases with a duration of one year or more are treated. Under this guidance, lessees will be required to capitalize virtually all leases
on the balance sheet as a right-of-use asset and an associated financing lease liability or Operating lease liability. The right-of-use
asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability
represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain
characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions
similar to capitalized leases, are amortized like capital leases are under current accounting, as amortization expense and interest expense
in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease
expense in the statement of operations. This update is effective for annual reporting periods, and interim periods within those reporting
periods, beginning after December 15, 2018. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842,
Leases and ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provided additional implementation guidance on the previously
issued ASU. The Company adopted the new guidance on August 1, 2019, using modified retrospective transition approach and recorded $316,411
as right-of-use assets and operating lease liabilities on day 1.
In
August 2020, the FASB issued “ASU 2020-06, Debt with Conversion and Other Options (Subtopic 47020) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40)” which simplifies the accounting for convertible instruments. The guidance removes
certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. Either
a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard.
Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. The Company is currently evaluating the
potential on its financial statements.
NOTE
2 – GOING CONCERN
Financial
Condition
Digerati’s
consolidated financial statements for the year ending July 31, 2020 have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities in the normal course of business. Digerati has incurred net losses and accumulated
a deficit of approximately $88,697,000 and a working capital deficit of approximately $5,316,000 which raises substantial doubt about
Digerati’s ability to continue as a going concern.
Management
Plans to Continue as a Going Concern
Management
believes that current available resources will not be sufficient to fund the Company’s operations over the next 12 months. The
Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, among other things,
raising additional capital or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding,
the Company will seek to secure such additional funding from various possible sources, including the public equity market, private financings,
sales of assets, collaborative arrangements, and debt. If the Company raises additional capital through the issuance of equity securities
or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges
senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the
Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional
funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain
technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If
the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required
to delay or reduce the scope of its operations, and the Company may not be able to pay off its obligations, if and when they come due.
The
Company will continue to work with various funding sources to secure additional debt and equity financings. However, Digerati cannot
offer any assurance that it will be successful in executing the aforementioned plans to continue as a going concern.
Digerati’s
consolidated financial statements as of July 31, 2020 do not include any adjustments that might result from the inability to implement
or execute Digerati’s plans to improve our ability to continue as a going concern.
NOTE
3 – INTANGIBLE ASSETS
During
FY 2008, Digerati made a loan of $150,000 to NetSapiens Inc. The note receivable had a maturity date of June 26, 2008 with interest at
8% per year. The note was secured by NetSapiens’ proprietary Starter Platform License and SNAPsolution modules. On June 26, 2008
Digerati converted the outstanding interest and principal balance into a lifetime and perpetual NetSapiens’ License. The License
provides Digerati with the ability to offer Hosted PBX (Private Branch eXchange), IP Centrex application, prepaid calling, call
center, conferencing, messaging and other innovative telephony functionality necessary to offer standard and/or custom services to enterprise
markets. The NetSapiens’ License, in the amount of $150,000, is being amortized equally over a period of 10 years. For the years
ended July 31, 2020 and 2019, amortization totaled approximately $0 and $0, respectively. As of July 31, 2020, the NetSapiens’
License is fully amortized.
On
December 1, 2017, Shift8 and Synergy Telecom, Inc., a Delaware corporation (“Synergy”), closed a transaction to acquire all
the assets, assumed all customers, and critical vendor arrangements from Synergy. The total purchase price was $425,000, the acquisition
was accounted for under the purchase method of accounting, with Digerati identified as the acquirer. Under the purchase method of accounting,
the aggregate amount of consideration assumed by Digerati was allocated to customer contracts acquired, software licenses, and goodwill
based on their fair values as of December 1, 2017.
The
following information summarizes the allocation of the fair values assigned to the assets. The allocation of fair values is based on
an extensive analysis and is subject to changes in the future during the measurement period.
|
|
Synergy
|
|
|
Useful
life
(years)
|
|
Customer
relationship
|
|
$
|
40,000
|
|
|
5
|
|
License
- software
|
|
|
105,000
|
|
|
3
|
|
Goodwill
|
|
|
280,000
|
|
|
-
|
|
Total
Purchase price
|
|
$
|
425,000
|
|
|
|
|
For
the years ended July 31, 2020 and 2019, amortization expense for the acquired intangible was $25,504 and $60,500, respectively.
On
May 2, 2018, the Company closed on the Merger Agreement with T3 Communications, Inc. to increase its customer base and obtain higher
efficiency of its existing infrastructure.
The
total purchase price was $3,211,945 paid in cash at closing. The acquisition was accounted for under the purchase method of accounting,
with the Company identified as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed by
the Company was allocated to cash, customer contracts acquired, current assets, property plant and equipment and assumed payables based
on their estimated fair values as of May 2, 2018.
The
following information summarizes the allocation of the purchase price assigned to intangible assets. The allocation of fair values is
based on an extensive analysis and is subject to changes in the future during the measurement period.
|
|
T3
|
|
|
Useful
life
(years)
|
|
Customer
relationships
|
|
$
|
1,480,000
|
|
|
7
|
|
Marketing
& Non-compete
|
|
|
800,000
|
|
|
5
|
|
Goodwill
|
|
|
530,353
|
|
|
-
|
|
Total
|
|
$
|
2,810,353
|
|
|
|
|
For
the years ended July 31, 2020 and 2019, amortization expense for the acquired assets totaled approximately $371,000 and $371,000, respectively.
Intangible
assets at July 31, 2020 and 2019 are summarized in the tables below:
July
31, 2020
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
NetSapiens
- license, 10 years
|
|
$
|
150,000
|
|
|
$
|
(150,000
|
)
|
|
$
|
-
|
|
Customer
relationships, 5 years
|
|
|
40,000
|
|
|
|
(20,672
|
)
|
|
|
19,328
|
|
Customer
relationships, 7 years
|
|
|
1,480,000
|
|
|
|
(487,505
|
)
|
|
|
992,495
|
|
Marketing
& Non-compete, 5 years
|
|
|
800,000
|
|
|
|
(360,000
|
)
|
|
|
440,000
|
|
Total
Define-lived Assets
|
|
|
2,470,000
|
|
|
|
(1,018,177
|
)
|
|
|
1,451,823
|
|
Goodwill,
Indefinite
|
|
|
810,353
|
|
|
|
-
|
|
|
|
810,353
|
|
Balance,
July 31, 2020
|
|
$
|
3,280,353
|
|
|
$
|
(1,018,177
|
)
|
|
$
|
2,262,176
|
|
July
31, 2019
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
NetSapiens
- license, 10 years
|
|
$
|
150,000
|
|
|
$
|
(150,000
|
)
|
|
$
|
-
|
|
Customer
relationships, 5 years
|
|
|
40,000
|
|
|
|
(12,672
|
)
|
|
|
27,328
|
|
Customer
relationships, 7 years
|
|
|
1,480,000
|
|
|
|
(276,077
|
)
|
|
|
1,203,923
|
|
Marketing
& Non-compete, 5 years
|
|
|
800,000
|
|
|
|
(200,000
|
)
|
|
|
600,000
|
|
Total
Define-lived Assets
|
|
|
2,470,000
|
|
|
|
(638,749
|
)
|
|
|
1,831,251
|
|
Goodwill,
Indefinite
|
|
|
810,353
|
|
|
|
-
|
|
|
|
810,353
|
|
Balance,
July 31, 2019
|
|
$
|
3,280,353
|
|
|
$
|
(638,749
|
)
|
|
$
|
2,641,604
|
|
Total
amortization expense for the periods ended July 31, 2020 and 2019 was approximately $379,000 and $379,000, respectively.
NOTE
4 – PROPERTY AND EQUIPMENT
Following
is a summary of Digerati’s property and equipment at July 31, 2020 and 2019 (in thousands):
|
|
Useful
lives
|
|
2020
|
|
|
2019
|
|
Telecom
equipment & software
|
|
1-5
years
|
|
$
|
1,064
|
|
|
$
|
978
|
|
Less:
accumulated depreciation
|
|
|
|
|
(633
|
)
|
|
|
(399
|
)
|
Net–property
and equipment
|
|
|
|
$
|
431
|
|
|
$
|
579
|
|
The
Company uses straight-line depreciation, for the years ended July 31, 2020 and 2019, depreciation totaled approximately $234,000 and
$289,000, respectively.
NOTE
5 – INCOME TAXES
Digerati
files a consolidated tax return. The current tax year is subject to examination by the Internal Revenue Service and certain state taxing
authorities. As of July 31, 2020, Digerati had net operating loss carryforwards of approximately $8,157,234 to reduce future federal
income tax liabilities; the loss carryforwards will start to expire in 2020. Under the recently enacted Tax Cuts and Jobs Act (TCJA),
the new effective Corporate flat tax rate is 21% (effective for tax years beginning after December 31, 2017). Income tax benefit (provision)
for the years ended July 31, 2020 and 2019 are as follows:
The
effective tax rate for Digerati is reconciled to statutory rates as follows:
|
|
2020
|
|
|
2019
|
|
Expected
Federal benefit (provision), at statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Change
in valuation allowance
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Deferred
tax assets are comprised of the following as of July 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Net
operating loss carryover
|
|
$
|
1,713,019
|
|
|
$
|
1,805,310
|
|
Valuation
allowance
|
|
|
(1,713,019
|
)
|
|
|
(1,805,310
|
)
|
Total
deferred tax asset, net
|
|
$
|
-
|
|
|
$
|
-
|
|
At
July 31, 2020, realization of Digerati’s deferred tax assets was not considered likely to be realized. The change in the valuation
allowance for 2020 was resulted in a decrease of approximately $92,291. Management has evaluated and concluded that there are no significant
uncertain tax positions requiring recognition in Digerati’s combined financial statements. The current year remains open to examination
by the major taxing jurisdictions in which Digerati is subject to tax. The Company files a calendar year return, and the net operating
loss was adjusted for the fiscal year ended July 31, 2020.
During
the year ended July 31, 2020 the Company issued 77,583,184 common shares, and under our initial assessment this will likely result in
a change of control and the net operation loss (NOL’s) became subject to the separate return limitation year. We will evaluate
during the tax year and consider the limitations.
We
record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as
a result of the evaluate on new information not previously available. Because of the complexity of some of these uncertainties, the ultimate
resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities.
These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
NOTE
6 – STOCK-BASED COMPENSATION
In
November 2015, Digerati adopted the Digerati Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan authorizes
the grant of up to 7.5 million stock options, restricted common shares, non-restricted common shares and other awards to employees, directors,
and certain other persons. The Plan is intended to permit Digerati to retain and attract qualified individuals who will contribute to
the overall success of Digerati. Digerati’s Board of Directors determines the terms of any grants under the Plan. Exercise prices
of all stock options and other awards vary based on the market price of the shares of common stock as of the date of grant. The stock
options, restricted common stock, non-restricted common stock and other awards vest based on the terms of the individual grant.
During
the year ended July 31, 2019, we issued:
|
●
|
635,156
common shares to various employees as part of the Company’s Non-Standardized profit-sharing plan contribution. The Company
recognized stock-based compensation expense of approximately $114,000 equivalent to the value of the shares calculated based on the
share’s closing price at the grant dates.
|
|
●
|
100,000
options to purchase common shares to a member of the Board of Directors with an exercise price of $0.18 per share and a term of 5
years. The options vest equally over a period of one year. At the time of issuance the options had a fair market value of $11,406.
|
|
●
|
1,725,000
options to purchase common shares to members of the Management team with an exercise price of $0.19 per share and a term of 5 years.
The options vest equally over a period of one year. At the time of issuance the options had a fair market value of $217,263.
|
|
●
|
250,000
options to purchase common shares to an employee with an exercise price of $0.25 per share and a term of 5 years. The options vest
equally over a period of two years. At the time of issuance, the options had a fair market value of $39,175.
|
|
●
|
1,192,770
common shares to members of the Management team for services in lieu of cash compensation. The Company recognized stock-based compensation
expense of approximately $198,000 equivalent to the value of the shares calculated based on the share’s closing price at the
grant dates.
|
|
●
|
1,350,000
shares of common stock to the Executive Officers, with a market value at time of issuance of $256,500, the Stock Grant will vest
upon the earlier of the Company achieving $15 million in annualized revenue or listing on a primary stock exchange (e.g. NASDAQ or
NYSE American) and will be subject to adjustment for any forward or reverse split of the Company’s stock. The Company recognized
approximately $85,500 in stock-based compensation expense related to this issuance during the year ended July 31, 2019. Unamortized
compensation cost totaled $171,000 at July 31, 2019.
|
During
the year ended July 31, 2019 we issued the following to non-employee professionals:
|
●
|
In
November 2018, the Company issued an aggregate of 200,000 shares of common stock with a market value at time of issuance of $69,600.
The shares were issued for consulting services.
|
|
●
|
In
February 2019, the Company issued an aggregate of 325,000 shares of common stock with a market value at time of issuance of $78,000.
The shares were issued for consulting services.
|
|
●
|
In
February 2019, the Company issued an aggregate of 400,000 shares of common stock with a market value at time of issuance of $100,000.
The shares were issued for consulting services.
|
The
fair market value of all options issued was determined using the Black-Scholes option pricing model which used the following assumptions:
Expected
dividend yield
|
|
0.00%
|
|
Expected
stock price volatility
|
|
178.79%
- 260.07%
|
|
Risk-free
interest rate
|
|
1.84%
- 2.73%
|
|
Expected
term
|
|
1.0
- 2.0 years
|
|
During
the year ended July 31, 2020, we issued:
|
●
|
On
August 26, 2019, the Company issued 60,000 options to purchase common shares to an employee with an exercise price of $0.12 per share
and a term of 5 years. The options vest equally over a period of three years. At the time of issuance, the options had a fair market
value of $7,158.
|
|
●
|
October
31, 2019, the Company issued 3,952,095 common shares to the Executive Officers for services in lieu of cash compensation. The Company
recognized stock-based compensation expense of approximately $276,646 equivalent to the value of the shares calculated based on the
share’s closing price at the grant dates.
|
|
●
|
On
October 31, 2019, the Company issued 1,337,325 shares of common stock to the Executive Officers, with a market value at time of issuance
of $93,612 the stock was issued as payment for $26,612 of outstanding compensation expense and released of accrued liability of $67,000.
|
|
●
|
On
January 2, 2020, the Company issued 5,012,658 common shares to the Executive Officers for services in lieu of cash compensation.
The Company recognized stock-based compensation expense of approximately $198,000 equivalent to the value of the shares calculated
based on the share’s closing price at the grant dates.
|
|
●
|
On
February 24, 2020, the Company issued 11,509,022 common shares to various employees as part of the Company’s Non-Standardized
profit-sharing plan contribution. The Company recognized stock-based compensation expense of approximately $233,633 equivalent to
the value of the shares calculated based on the share’s closing price at the grant date.
|
During
the year ended July 31, 2020 we issued the following to non-employee professionals:
|
●
|
In
December 2019, the Company issued 400,000 shares of common stock with a market value at time of issuance of $15,240. The shares were
issued for consulting services.
|
The
fair market value of all options issued was determined using the Black-Scholes option pricing model which used the following assumptions:
Expected
dividend yield
|
|
0.00%
|
|
Expected
stock price volatility
|
|
317.52%
|
|
Risk-free
interest rate
|
|
1.47%
|
|
Expected
term
|
|
3.0
year
|
|
Digerati
recognized approximately $1,112,000 and $733,000 in stock-based compensation expense to employees during the years ended July 31, 2020
and 2019, respectively. Unamortized compensation cost totaled $63,203 and $433,608 at July 31, 2020 and July 31, 2019, respectively.
A
summary of the stock options as of July 31, 2020 and July 31, 2019 and the changes during the years ended July 31, 2020 and July 31,2019:
|
|
Options
|
|
|
Weighted-average
exercise price
|
|
|
Weighted-average
remaining
contractual
term
(years)
|
|
Outstanding
at July 31, 2018
|
|
|
3,415,000
|
|
|
$
|
0.33
|
|
|
|
4.58
|
|
Granted
|
|
|
2,075,000
|
|
|
$
|
0.20
|
|
|
|
4.58
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
and cancelled
|
|
|
(550,000
|
)
|
|
$
|
0.36
|
|
|
|
3.39
|
|
Outstanding
at July 31, 2019
|
|
|
4,940,000
|
|
|
$
|
0.27
|
|
|
|
3.65
|
|
Granted
|
|
|
60,000
|
|
|
$
|
0.12
|
|
|
|
4.07
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
and cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at July 31, 2020
|
|
|
5,000,000
|
|
|
$
|
0.27
|
|
|
|
2.66
|
|
Exercisable
at July 31, 2020
|
|
|
4,717,699
|
|
|
$
|
0.26
|
|
|
|
2.62
|
|
The
aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the
exercise price, multiplied by the number of in-the-money options) of the 5,000,000 and 4,940,000 stock options outstanding at July 31,
2020 and July 31, 2019 was $0 and $0, respectively.
The
aggregate intrinsic value of 4,717,699 and 3,452,405 stock options exercisable at July 31, 2020 and July 31, 2019 was $0 and $0, respectively.
NOTE
7 – WARRANTS
During
the year ended July 31, 2019, the Company issued the following warrants:
In
August 2018, Digerati secured $40,000 from an accredited investor under a private placement and issued 80,000 shares of its common stock
at a price of $0.50 per share and warrants to purchase an additional 15,000 shares of its common stock at an exercise price of $0.50
per share. We determined that the warrants issued in connection with the private placement were equity instruments and did not represent
derivative instruments. The Company adopted a sequencing policy and determined that the warrants with fixed exercise price were excluded
from derivative consideration.
In
October 2018, Digerati issued 200,000 warrants under an extension of payments to existing promissory notes, with a combined current principal
balance of $75,000, the warrants vested at time of issuance. The warrants have a term of 3 years, with an exercise price of $0.10. Under
a Black-Scholes valuation the relative fair market value of the warrants at time of issuance was approximately $31,000 and was recognized
as a discount on the promissory note, the company amortized the fair market value as interest expense over 3 months.
In
January 2019, Digerati cancelled 260,000 warrants with an exercise price of $0.15. Additionally, the Company issued 260,000 common shares
to replace these warrants, in conjunction with two promissory notes with a principal balance of $50,000, in addition at the time of issuance
we recognized a discount of $36,000 for the common stock issued in replacement of warrants.
In
February 2019, the Company received $1,500 for the exercise of 15,000 warrants, with an exercise price of $0.10 per warrant.
In
March 2019, the Company received $6,000 for the exercise of 60,000 warrants, with an exercise price of $0.10 per warrant.
In
April 2019, the Company secured $50,000 from accredited investors under a private placement and issued 50,000 shares of Series A Convertible
Preferred Stock at a conversion price of $0.30 per share and warrants to purchase an additional 100,000 shares of its common stock at
an exercise price of $0.20 per share. We determined that the warrants issued in connection with the private placement were equity instruments
and did not represent derivative instruments. The Company adopted a sequencing policy and determined that the warrants with fixed exercise
price were excluded from derivative consideration.
In
May 2019, the Company secured $175,000 from accredited investors under a private placement and issued 175,000 shares of Series A Convertible
Preferred Stock at a conversion price of $0.30 per share and warrants to purchase an additional 350,000 shares of its common stock at
an exercise price of $0.20 per share. We determined that the warrants issued in connection with the private placement were equity instruments
and did not represent derivative instruments. The Company adopted a sequencing policy and determined that the warrants with fixed exercise
price were excluded from derivative consideration.
The
fair market value of all warrants issued was determined using the Black-Scholes option pricing model which used the following assumptions:
Expected
dividend yield
|
|
0.00%
|
|
Expected
stock price volatility
|
|
153.99%
- 330.94%
|
|
Risk-free
interest rate
|
|
2.00%
-2.93%
|
|
Expected
term
|
|
3.0
years
|
|
During
the year ended July 31, 2020, we issued the following warrants.
In
March 2020, the Company received $25,000 in professional services and issued 25,000 shares of Series A Convertible Preferred Stock at
an conversion price of $0.30 per share and warrants to purchase an additional 50,000 shares of its common stock at an exercise price
of $0.20 per share. We determined that the warrants issued in connection with the services received were equity instruments and did not
represent derivative instruments. The Company adopted a sequencing policy and determined that the warrants with fixed exercise price
were excluded from derivative consideration.
A
summary of the warrants as of July 31, 2020 and 2019 and the changes during the years ended July 31, 2020 and 2019 are presented below:
|
|
Warrants
|
|
|
Weighted-average
exercise
price
|
|
|
Weighted-average
remaining
contractual
term
(years)
|
|
Outstanding
at July 31, 2018
|
|
|
2,370,000
|
|
|
$
|
0.28
|
|
|
|
2.90
|
|
Granted
|
|
|
665,000
|
|
|
$
|
0.18
|
|
|
|
2.61
|
|
Exercised
|
|
|
(75,000
|
)
|
|
$
|
0.10
|
|
|
|
2.15
|
|
Forfeited
and cancelled
|
|
|
(260,000
|
)
|
|
$
|
0.15
|
|
|
|
3.75
|
|
Outstanding
at July 31, 2019
|
|
|
2,700,000
|
|
|
$
|
0.32
|
|
|
|
2.19
|
|
Granted
|
|
|
50,000
|
|
|
$
|
0.20
|
|
|
|
2.25
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(510,000
|
)
|
|
$
|
0.29
|
|
|
|
-
|
|
Outstanding
at July 31, 2020
|
|
|
2,240,000
|
|
|
$
|
0.33
|
|
|
|
1.61
|
|
Exercisable
at July 31, 2020
|
|
|
1,940,000
|
|
|
$
|
0.22
|
|
|
|
1.49
|
|
The
aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the
exercise price, multiplied by the number of in-the-money warrants) of the 2,240,000 and 2,700,000 warrants outstanding at July 31, 2020
and July 31, 2019 was $6,160 and $63,602, respectively.
The
aggregate intrinsic value of 1,940,000 and 2,400,000 warrants exercisable at July 31, 2020 and July 31, 2019 was $6,160 and $63,602,
respectively.
Warrant
expense for the years ended July 31, 2020 and 2019 was $0 and $64,000, respectively. Unamortized warrant expense totaled $0 and $0 respectively
as of July 31, 2020 and July 31, 2019.
In
January 2020, 300,000 warrants expired with an exercise price pf $0.136. These warrants were issued in January 2015.
In
July 2020, 210,000 warrants expired with an exercise price pf $0.50. These warrants were issued in July 2017.
In
December 2017, the Company issued 100,000 warrants to a consultant for services, the warrants vested at time of issuance. The warrants
have a term of 5 years, with an exercise price of $0.50. Under a Black-Scholes valuation the fair market value of the warrants at time
of issuance was approximately $49,000, the Company amortized the fair market value as warrant expense over 12 months. Additionally, the
Company committed to issue 100,000 warrants if the Company’s stock price traded at $0.75 per share for 10 consecutive days, to
issue 100,000 warrants if the Company’s stock price traded at $1.00 per share for 10 consecutive days, and to issue 100,000 warrants
if the Company’s stock price traded at $1.25 per share for 10 consecutive days. Under a Black-Scholes valuation the fair market
value of the warrants at time of issuance was approximately $143,000, and the Company amortized the expense during FY2018. The 300,000
commitment warrants have not vested and have not been issued since the requirements were not achieved during the year ended July 31,
2020.
NOTE
8 – NON-STANDARDIZED PROFIT-SHARING PLAN
We
currently provide a Non-Standardized Profit-Sharing Plan, adopted September 15, 2006. Under the plan our employees qualify to participate
in the plan after one year of employment. Contributions under the plan are based on 25% of the annual base salary of each eligible employee
up to $54,000 per year. Contributions under the plan are fully vested upon funding.
During
the years ended July 31, 2020 and July 31, 2019, the Company issued 11,509,022 and 635,156 respectively, common shares to various employees
as part of the Company’s profit-sharing plan contribution. The Company recognized stock-based compensation expense for July 31,
2020 and July 31, 2019 of $233,633 and $114,000, respectively, equivalent to the value of the shares calculated based on the share’s
closing price at the grant dates.
NOTE
9 – SIGNIFICANT CUSTOMERS
During
the years ended July 31, 2020 and 2019, the Company did not derive a significant amount of revenue from one single customer.
As
of the year ended July 31, 2020, the company derived 12% of total accounts receivable from one customer. During the year ended July 31,
2019, the company did not derive a significant balance on accounts receivable from one single customer.
NOTE
10 – NOTES PAYABLE NON-CONVERTIBLE
On
April 30, 2018, T3 Communications, Inc., a Nevada corporation (“T3”), our majority owned subsidiary, entered into a secured
promissory note for $650,000 with an effective annual interest rate of 0% and a maturity date of May 14, 2018, provided, however, the
Maturity Date will automatically be extended by one (1) additional period of thirty (30) days, until June 14, 2018. In addition, T3 entered
into a Security Agreement, whereby T3 agreed to pledge one third of the outstanding shares of its Florida operations, T3 Communications,
Inc., the secured interest will continue until the principal balance is paid in full. Furthermore, a late fee of $3,000 per calendar
week was accessed beginning on May 15, 2018 and will continue until the principal balance is paid in full. On May 6, 2020, the Company
received an additional $50,000 from the lender and increased the principal of the promissory note to $700,000. On October 14, 2020, the
lender agreed to extend the maturity date until October 31, 2020, we are currently paying a $3,250 per week late fee. As of July 31,
2020, and July 31, 2019, the outstanding principal balance were $700,000 and $650,000, respectively
On
April 30, 2018, T3 entered into a credit facility under a secured promissory note of $500,000, interest payment for the first twenty-three
months with a balloon payment on the twenty-fourth month and a maturity date of April 30, 2020. Collateralized by T3’s accounts
receivables and with an effective annual interest rate of prime plus 5.25%, adjusted quarterly on the first day of each calendar quarter.
However, the rate will never be less than 9.50% per annum. In the event of default, the interest rate will be the maximum non-usurious
rate of interest per annum permitted by whichever of applicable United States federal law or Louisiana law permits the higher interest
rate. T3 agreed to pay the lender a commitment fee of 1.00% upon payment of the first interest payment under the credit facility and
1.00% on the first anniversary of the credit facility. In addition, T3 agreed to pay a monitoring fee of 0.33% of the credit facility,
payable in arrears monthly. T3 also agreed to pay an over-advance fee of 3.00% of the amount advanced in excess of the borrowing base
or maximum amount of the credit facility, payable in arrears monthly. As of July 31, 2020, the Lender agreed to waive the following financial
covenants: 1) A consolidated debt service coverage ratio, as of the last day of each fiscal quarter, of at least 1.25 to 1.00, 2) A fixed
charge coverage ratio, as of the last day of each fiscal quarter, of at least 1.25 to 1.00, and 3) A tangible net worth, at all times
of at least $100,000. On April 10, 2020, the Company increased the credit facility to $600,000 and the lender agreed to extend the maturity
date until April 10, 2022. In addition, the Company agreed to a revised effective annual interest rate of prime plus 5.75%, adjusted
quarterly on the first day of each calendar quarter. However, the rate will never be less than 11.00% per annum. During the year ended
July 31, 2020, the Company received an additional $100,000 from the lender. As of July 31, 2020, and July 31, 2019, the outstanding principal
balance were $600,000 and $500,000, respectively.
On
October 22, 2018, the Company issued a secured promissory note for $50,000, bearing interest at a rate of 8% per annum, with maturity
date of December 31, 2018. In February 2020, the maturity date was extended to December 31, 2020. In conjunction with the extension,
the Company issued 40,000 shares of common stock. At issuance, the fair market value of the shares was recorded as interest expense of
$800. The promissory note is secured by a Pledge and Escrow Agreement, whereby the Company agreed to pledge rights to a collateral due
under certain Agreement. The outstanding balance as of July 31, 2020 and July 31, 2019 was $50,000.
On
June 14, 2019, the Company, entered into a Stock Purchase Agreement (the “Agreement”) to acquire a 12% minority interest
in Itellum Comunicacions Costa Rica, S.R.L. In conjunction with this transaction, we entered into a non-recourse promissory note for
$17,500 with an effective annual interest rate of 8% and an initial maturity date of September 14, 2019. On February 15, 2020, the maturity
date was extended to July 31, 2020. In addition, the holder agreed to accept 200,000 shares of common stock as a principal payment on
the note for $10,000, at the time of issuance the Company recognized $5,400 as a gain on settlement of debt. On August 1, 2020, the lender
agreed to extend the maturity date to October 31, 2020. The outstanding balance as of July 31, 2020 and July 31, 2019, were $7,500 and
$17,500, respectively.
On
February 26, 2020, the Company entered into a secured promissory note for $30,000 with an effective annual interest rate of 12% and a
maturity date of May 1, 2020. Subsequently, the note holder agreed to extend the maturity date until August 31, 2020. As of the date
of this filing, the Company is working with the lender to extend the maturity date. The proceeds from this note were used to extend the
closing date of the acquisition of Nexogy, the funds are for the benefit of owners of Nexogy, and the funds will be credited to the purchase
price at Closing of the acquisition. The Company included the prepaid amounts in other current assets as of July 31, 2020. The promissory
note is secured by the Company’s receivables. The outstanding balance as of July 31, 2020 and 2019, were $30,000 and $0, respectively.
On
April 22, 2020, the Company, entered into two unsecured promissory notes (the “Notes”) for $62,500 and $86,000 made to the
Company under the Paycheck Protection Program (the “PPP”). In addition, on May 4, 2020, the Company, entered into a third
unsecured promissory note (the “Note”) for $213,100 made to the Company under the Paycheck Protection Program (the “PPP”).
The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered
by the U.S. Small Business Administration (the “SBA”). The loans to the Company was made through The Bank of San Antonio
(the “Lender”).
The
Notes provide for an interest rate of 1.00% per year and matures two years after the issuance date. Beginning on the seventh month following
the date of the Notes, the Company is required to make 18 monthly payments of principal and interest in the amount of $8,316 and $11,933,
respectively. The Notes may be used for payroll costs, costs related to certain group health care benefits and insurance premiums, rent
payments, utility payments, mortgage interest payments and interest payments on any other debt obligation that were incurred before February
15, 2020. The Notes contain events of default and other conditions customary for a Note of this type.
Under
the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the
PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs
and any payments of mortgage interest, rent, and utilities. The terms of any forgiveness may also be subject to further requirements
in any regulations and guidelines the SBA may adopt. While the Company currently believes that its use of the Note proceeds will meet
the conditions for forgiveness under the PPP, no assurance is provided that the Company will obtain forgiveness of the Notes in whole
or in part.
On
July 2, 2020, the Company entered into an unsecured promissory note for $15,000 with an effective annual interest rate of 10% and a maturity
date of October 31, 2020. As of July 31, 2020, and 2019, the principal balance outstanding, were $15,000 and $0, respectively.
NOTE
11 – RELATED PARTY TRANSACTIONS
On
April 30, 2018, T3 entered into a convertible secured promissory note for $525,000 with an effective annual interest rate of 8% and a
maturity date of April 30, 2020. With a principal payment of $100,000 due on June 1, 2018 and a principal payment of $280,823 due on
April 30, 2020. Payment are based on a 60-month repayment schedule. At any time while this Note is outstanding, but only upon: (i) the
occurrence of an Event of Default under the Note or the Pledge and Escrow Agreement; or (ii) mutual agreement between the Borrower and
the Holder, the Holder may convert all or any portion of the outstanding principal, accrued and unpaid interest, Premium, if applicable,
and any other sums due and payable hereunder (such total amount, the “Conversion Amount”) into shares of Common Stock (the
“Conversion Shares”) at a price equal to: (i) the Conversion Amount (the numerator); divided by (ii) a conversion
price of $1.50 per share of Common Stock, which price shall be indicated in the conversion notice (the denominator) (the “Conversion
Price”). The Holder shall submit a Conversion Notice indicating the Conversion Amount, the number of Conversion Shares issuable
upon such conversion, and where the Conversion Shares should be delivered. The promissory note is secured by a Pledge and Escrow Agreement,
whereby T3 agreed to pledge 51% of the securities owned in its Florida operations, T3 Communications, Inc., until the principal payment
is paid in full. In conjunction with the promissory note, the Company issued 3-year warrants to purchase 75,000 shares of common stock
at an exercise price of $0.50 per share. Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance
was $19,267 and was recognized as a discount on the promissory note. The Company amortized as interest expense during the year ended
July 31, 2020 and July 31, 2019, $7,297 and $6,395, respectively. The total unamortized discount as of July 31, 2020 and July 31, 2019
were $0 and $7,297, respectively. In addition, during the year ended July 31, 2020, the Company paid in full the total outstanding balance
of $332,985. In May 2020, the Company executed a Settlement Agreement and Mutual release, whereby the lender released the Company of
any pledged collateral and any other obligation under the promissory note. One of the note holders also serves as a Board Member of T3
Communications, Inc., a Florida Corporation, one of our operating subsidiaries.
On
May 1, 2018, T3 entered into a secured promissory note for $275,000 with an effective annual interest rate of 8.08% with an interest
and principal payment of $6,000 per month and shall continue perpetuity until the entire principal amount is paid in full. The promissory
note is guaranteed to the lender by 15% of the stock owned by T3 in its Florida operations, T3 Communications, Inc., the secured interest
will continue until the principal balance is paid in full. In conjunction with the promissory note, the Company issued 3-year warrants
to purchase 100,000 shares of common stock at an exercise price of $0.50 per share. Under a Black-Scholes valuation the relative fair
market value of the warrants at time of issuance was approximately $26,543 and was recognized as a discount on the promissory note. The
company amortized as interest expense during the year ended July 31, 2020 and July 31, 2019, $10,386 and $7,738, respectively. The total
unamortized discount as of July 31, 2020 and July 31, 2019 were $6,300 and $16,686, respectively. During the year ended July 31, 2020,
the Company paid $57,098, of the principal balance. The total principal outstanding as of July 31, 2020 and July 31, 2019 were $152,634
and $209,732, respectively. The note holder also serves as Board Member of T3 Communications, Inc., a Florida Corporation, one of our
operating subsidiaries.
On
February 27, 2020, the Company entered into an unsecured promissory note for $70,000 with an effective annual interest rate of 12%
and a maturity date of May 1, 2020. Subsequently, the note holder agreed to extend the maturity date until August 31, 2020. In
addition, the Company agreed to pay the lender in services provided by the Company, and any unpaid principal and accrued interest
will be paid in cash. During the years ended July 31, 2020 and July 31, 2019, the Company provided VoIP Hosted and fiber services of
$161,264 and $82,128, respectively. The proceeds from this note were used to extend the closing date of the Nexogy acquisition, the
funds are an advance to the purchase price for the benefit of Nexogy owners, the funds will be credited to the purchase price at
Closing of the Acquisition. The Company included the prepaid amounts in other current assets as of July 31, 2020. The total
principal outstanding as of July 31, 2020 was $16,298. On August 3, 2020, the promissory note was paid in full. The note holder also
serves as a Board Member of T3 Communications, Inc., a Florida Corporation, one of our operating subsidiaries.
NOTE
12 – CONVERTIBLE NOTES PAYABLE
At
July 31, 2020 and 2019, convertible notes payable consisted of the following:
|
|
July
31,
|
CONVERTIBLE
NOTES PAYABLE NON-DERIVATIVE
|
|
2020
|
|
2019
|
Two
(2) Convertible Notes payable for $250,000 each issued in March 2018, bearing interest at a rate of 12% per annum and a maturity
date of September 15, 2018, subsequently extended until December 14, 2018. In conjunction with the notes, the Company
issued 300,000 warrants, the warrants vested at time of issuance. The warrants had a term of 3 years, with an exercise price of $0.10.
Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance was approximately $126,538 and
was recognized as a discount on the promissory notes. The company amortized $84,433 as a non-cash interest during the years ended
July 31, 2019. The total unamortized discount as of July 31, 2019 was $0. The Conversion Price shall be the greater of: (i) the Variable
Conversion Price or (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall be equal to the average closing
price for Digerati’s Common Stock (the “Shares”) for the ten (10) Trading Day period immediately preceding the
Conversion Date. “Trading Day” shall mean any day on which the Common Stock is tradable for any period on the OTCQB,
or on the principal securities exchange or other securities market on which the Common Stock is then being traded. The “Fixed
Conversion Price” shall mean $0.50. On December 27, 2018, the noteholders agreed to extend the maturity date on the notes until
September 14, 2019. In addition, as part of the amendment, the Company agreed to modify the “Fixed Conversion Price”
to $0.35. In November 2019, the Company issued 110,830 shares of common stock for payment of $7,500 in accrued interest. On October
7, 2019, the holders agreed to extend the maturity date until March 30, 2020. As part of the amendments, the Company agreed to issue
400,000 shares of common stock. Under a Black-Scholes valuation the relative fair market value of the shares of common at time of
issuance was approximately $40,000 and was recognized as a discount on the promissory notes over the extended period. The Company
amortized the total discount of $40,000 during the year ended July 31, 2020. The total unamortized discount as of July 31, 2020 and
July 31, 2019 were $0 and $0, respectively. On April 30, 2020, the Company settled the total debt of $500,000 and accrued interest
of $37,500 and issued 8,958,334 shares of common stock and 268,750 shares of Convertible Series B preferred stock for the settlement.
At the time of issuance, the Company recognized a gain in settlement of debt $85,104.
|
|
$
|
-
|
|
|
$
|
500,000
|
|
|
|
|
|
|
|
|
|
|
Convertible
promissory notes for $272,000 issued on June 19, 2018, bearing interest at a rate of 10% per annum, with an initial maturity date
of April 10, 2019. In conjunction with the Notes, the Company issued 255,000 warrants under the promissory notes, the warrants vested
at time of issuance. The warrants have a term of 3 years, with an exercise price of $0.10. Under a Black-Scholes valuation the relative
fair market value of the warrants at time of issuance was approximately $118,400 and was recognized as a discount on the promissory
notes. The Company amortized $109,552 as a non-cash interest during the year ended July 31, 2019. On March 29, 2019, the Company
entered into a First Amendment to the Promissory Notes, under the amendments the note holders agreed to extend the maturity date
until June 30, 2019. In addition, as part of the amendments, the Company agreed to issue 85,000 shares of common stock. The shares
were recorded as debt discount of $17,425 and amortized over the remaining term of the notes. The Company amortized $17,425 as a
non-cash interest during the years ended July 31, 2019. The holders may elect to convert up to 50% of the principal amount outstanding
on the Notes into Common Stock of Digerati at any time after 90 days of funding the Notes. The Conversion Price shall be the greater
of: (i) the Variable Conversion Price or (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall be equal
to the average closing price for Digerati’s Common Stock (the “Shares”) for the ten (10) Trading Day period immediately
preceding the Conversion Date. “Trading Day” shall mean any day on which the Common Stock is tradable for any period
on the OTCQB, or on the principal securities exchange or other securities market on which the Common Stock is then being traded.
The “Fixed Conversion Price” shall mean $0.50. On June 30, 2019, the Company entered into a Second Amendment to the Promissory
Notes, under the amendments the note holders agreed to extend the maturity date until November 30, 2019. In addition, as part of
the amendments, the Company agreed to issue 85,000 shares of common stock. The shares were recorded as debt discount of $14,450 and
amortized over the remaining term of the notes. The Company amortized $11,560 and $2,890 as a non-cash interest during the year ended
July 31, 2020 and July 31, 2019, respectively. The total unamortized discount as July 31, 2020 and July 31, 2019 for the issuance
of the second amendment shares were $0 and $11,560, respectively. In addition, in November 2019, the Company issued 172,055 shares
of common stock for payment of $6,882 in accrued interest On February 19, 2020, the Company issued 110,027 shares of common stock
for payment of accrued interest and a fair market value of $4,401.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Also,
in November 2019 and February 2020, the holders agreed to extend the maturity date of the notes until April 30, 2020. As part of
the amendments, the Company agreed to issue 340,000 shares of common stock. The shares were recorded as debt discount of $10,090
and amortized during the note extension agreement. On April 30, 2020, the Company and the debtholder agreed to settle $240,000 of
the debt and $37,454 of accrued interest, as a result the Company issued 4,624,220 shares of common stock and 138,727 shares of Convertible
Series B Preferred Stock for the settlement. At the time of issuance, the Company recognized a gain in settlement of debt $43,930.
The gain on settlement was generated from the difference between principal and accrued interest settled and fair value of the common
stock on settlement date. In June 2020, one of the note holders for $32,000 agreed to extend the maturity date until August 31, 2020.
|
|
|
32,000
|
|
|
|
272,000
|
|
|
|
|
|
|
|
|
|
|
On
July 27, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $275,000, annual
interest rate of 8% and a maturity date of March 27, 2021. After payment of transaction-related expenses and closing fees
of $35,000, net proceeds to the Company from the Note totaled $240,000. The Company recorded these discounts and cost of $35,000
as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued
500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value
of the shares of $11,626 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until
the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of
the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock The Note Conversion Price shall
equal the greater of $0.05 (five) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company
listing on Nasdaq or NYSE American., subject to adjustment as provided in this Note. If an Event of Default occurs, the Conversion
Price shall be the lesser of (a). $0.05 (five) cents or (b). 75% of the lowest traded price in the prior fifteen trading days immediately
preceding the Notice of Conversion. The Company analyzed the Note for derivative accounting consideration and determined that since
the note has a fix conversion price at issuance, it does not require to be accounted as a derivative instrument. The Company will
evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price
and if the note needs to be classified as a derivative instrument. The total unamortized discount on the Note as of July 31, 2020
was $46,626. The total principal balance outstanding as of July 31, 2020 was $275,000.
|
|
|
275,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
convertible notes payables non-derivative:
|
|
|
307,000
|
|
|
|
772,000
|
|
CONVERTIBLE
NOTES PAYABLE - DERIVATIVE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
January 16, 2019, the Company entered into various Securities Purchase Agreements (the SPAs”) with four (4) different
investors (each an “Investor”, and together the “Investors”) pursuant to which each Investor purchased a 10%
unsecured convertible promissory note (each a “Note”, and together the “Notes”) from the Company. Three of
the notes are in the aggregate principal amount of $140,000 each and a maturity date of October 16, 2019. One of the notes is in the
aggregate principal amount of $57,750 and a maturity date of January 24, 2020. The purchase price of $140,000 of each of three Notes
were paid in cash on January 16, 2019. After payment of transaction-related expenses of $51,000, net proceeds to the Company from
the three Notes totaled $369,000. The purchase price of $57,750 Note was paid in cash on January 24, 2019. After payment of
transaction-related expenses of $7,750, net proceeds to the Company from Note totaled $50,000. The Company recorded these discounts
and cost of $58,750 as a discount to the Notes and fully amortized as interest expense during the period. In connection with the
execution of the Notes, we issued 500,000 shares of our common stock to the Note holders, the shares were recorded with a relative
fair value of $0 as the notes were fully discounted by derivative liability. The Company analyzed the Notes for derivative
accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the
variable conversion price. As a result, at the time of issuance, the Company recognized derivative liability for the four (4) new
convertible notes of $655,345, of which $419,000 was recorded as debt discount and will be amortized during the term of the Notes,
and $236,345 was recorded as day 1 derivative loss. On July 12, 2019, the Company redeemed the full outstanding principal balance on
two of the convertible notes for $280,000, at a redemption price of $382,726. The Company recognized the difference between the
redemption price and principal balance paid as interest expense of $102,726. On July 12, 2019, the Company redeemed $70,000 of the
principal outstanding on one of the convertible notes, at a redemption price of $91,000. The Company recognized the difference
between the redemption price and principal balance paid as interest expense of $21,000. On July 19, 2019, the Company issued 156,202
shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of the convertible
notes. On July 25, 2019, the Company issued 312,500 shares of common stock. The shares were issued in conjunction with a conversion
of $20,000 of the principal outstanding under a convertible debenture. On August 6, 2019, the Company entered into an Assignment
Agreement whereby Jefferson Street Capital LLC (the “Assignor”) assigned a principal amount of $25,000, representing a
portion of a Convertible Promissory Note dated January 24, 2019 to Armada Investment Fund LLC (the
“Assignee”). The note is in the aggregate principal amount of $25,000 and a maturity date of January 24,
2020. During the year ended July 31, 2020, the Company issued 2,658,888 shares of common stock for the conversion of $73,250 of the
principal outstanding and $14,796 in accrued interest and fees. The total unamortized discount on the Notes as of July 31, 2020 and
July 31, 2019 were $0 and $29,765, respectively. The total principal balance outstanding as of July 31, 2020 and July 31, 2019, were
$0 and $98,250. During the years ended July 31, 2020 and 2019, the Company amortized $29,765 and $389,235, respectively, of debt
discount as interest expense. The notes are immediately convertible into shares of the Company’s Common Stock, at any time, at
a conversion price for each share of Common Stock. (See below Variable Conversion terms No.1)
|
|
|
-
|
|
|
|
98,250
|
|
|
|
|
|
|
|
|
|
|
On
February 22, 2019, the Company entered into a variable convertible note for $57,750 with net proceeds of $50,000, maturity date of February
22, 2020 and effective interest rate of 10%. The Company recorded a discount of $7,750 and amortized as interest expense during the period
of the note. The Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option
qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company
recognized derivative liability for the convertible note of $79,729, of which $50,000 was recorded as debt discount and amortized during
the term of the Note, and $29,729 was recorded as day 1 derivative loss. During the year ended July 31, 2020, the Company issued 3,430,700
shares of common stock for the conversion of $57,750 of the principal outstanding and $6,962 in accrued interest and fees. The total
unamortized discount on the Notes as of July 31, 2020 and July 31, 2019 were $0 and $29,166, respectively. The total principal balance
outstanding as of July 31, 2020 and July 31, 2019, were $0 and $57,750. During the years ended July 31, 2020 and 2019, the Company amortized
$29,166 and $20,834, respectively, of debt discount as interest expense. The notes are immediately convertible into shares of the Company’s
Common Stock, at any time, at a conversion price for each share of Common Stock. (See below variable conversion terms No.1)
|
|
|
-
|
|
|
|
57,750
|
|
On April 20, 2019, the Company entered into a
variable convertible note for $44,000, with net proceeds of $40,000, maturity date of January 19,2020 and effective interest rate of
10%. The Company recorded $4,000 as a discount and amortized as interest expense during the period of the note. In
connection with the execution of the Note, we issued 50,000 shares of our common stock to the Note holder, the shares were
recorded with a relative fair value of $0 as the notes were fully discounted by derivative liability. The Company analyzed the Note
for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due
to the variable conversion price. As a result, at the time of issuance, the Company recognized derivative liability for the
convertible note of $55,592, of which $40,000 was recorded as debt discount and will be amortized during the term of the Note, and
$15,592 was recorded as day 1 derivative loss. During the year ended July 31, 2020, the Company issued 2,529,562 shares
of common stock for the conversion of $44,000 of the principal outstanding and $5,854 in accrued interest and fees. The total
unamortized discount on the Notes as of July 31, 2020 and July 31, 2019 were $0 and $26,668, respectively. The total principal
balance outstanding as of July 31, 2020 and July 31, 2019, were $0 and $44,000. During the years ended July 31, 2020 and 2019, the
Company amortized $26,668 and $13,332, respectively, of debt discount as interest expense. The notes are immediately convertible
into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock. (See below
variable conversion terms No.1)
|
|
|
-
|
|
|
|
44,000
|
|
|
|
|
|
|
|
|
|
|
In July 2019, the Company
entered into multiple variable convertible notes with four (4) different investors. Three of the notes are in the aggregate principal
amount of $146,625 each, 3% interest rate and a maturity date of April 11, 2020. After payment of transaction-related expenses of $57,375,
net proceeds to the Company from the three Notes totaled $382,500. The Company also secured an additional variable convertible note in
the aggregate principal amount of $140,000, interest rate of 10% and a maturity date of April 10, 2020. After payment of transaction-related
expenses of $17,000, net proceeds to the Company from the Note totaled $123,000. The Company recorded these discounts and cost of $74,375
as a discount to the Notes and fully amortized as interest expense during the period. In connection with the execution of
the Notes, we issued 450,000 shares of our common stock to the Note holders, the shares were recorded with a relative fair value
of $0 as the notes were fully discounted by derivative liability. The Company analyzed the Notes for derivative accounting consideration
and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As
a result, at the time of issuance, the Company recognized derivative liability for the four (4) new convertible notes of $959,180, of
which $505,500 was recorded as debt discount and will be amortized during the term of the Notes, and $453,680 was recorded as day 1 derivative
loss. On January 9, 2020, the Company issued 200,000 shares of common stock for the conversion of $1,328 of the principal outstanding
and accrued interest of $2,212 under one of the convertible notes. On January 10, 2020, the Company assigned a convertible note with
a $145,297 principal and accrued interest of $13,500 and a second convertible note with a $35,750 principal balance and accrued interest
of $15,453 for $210,000. On January 22, 2020, the Company assigned two promissory notes with a $293,250 principal balance outstanding
and accrued interest of $66,750. The total assignment was for $360,000. On July 30, 2020, the Company paid the total principal outstanding
in one of the notes for $140,000, plus a redemption interest of $46,000. The total unamortized discount on the Notes as of July 31, 2020
and July 31, 2019 were $0 and $449,332, respectively. The total principal balance outstanding as of July 31, 2020 and July 31, 2019 were
$0 and $579,875, respectively. During the years ended July 31, 2020 and 2019, the Company amortized $449,332 and $56,168, respectively,
of debt discount as interest expense. The notes are immediately convertible into shares of the Company’s Common Stock, at any time,
at a conversion price for each share of Common Stock. (See below variable conversion terms No.1)
|
|
|
-
|
|
|
|
579,875
|
|
On
August 6, 2019, the Company entered into an Assignment Agreement whereby Jefferson Street Capital LLC assigned a principal amount of
$25,000, representing a portion of a Convertible Promissory Note dated January 24, 2019 to Armada Investment Fund LLC. The note is in
the aggregate principal amount of $25,000, bearing interest at a rate of 10% and a maturity date of January 24, 2020.The Company analyzed
the Note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument,
due to the variable conversion price. During the year ended July 31, 2020, the Company issued 555,859 shares of common stock for the
conversion of $25,000 principal balance and accrued interest and administrative fees of $1,579. The total unamortized discount on the
Note as of July 31, 2020 was $0. The total principal balance outstanding as of July 31, 2020 was $0. The notes are immediately convertible
into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock. (See below variable
conversion terms No.1)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On
August 30, 2019, the Company entered into variable convertible note for $93,500, bearing interest at a rate of 10% per annum and
a maturity date of May 30, 2020. On August 10, 2020, the noteholder agreed to extend the maturity date until October 31, 2020. After
payment of transaction-related expenses of $8,500, net proceeds to the Company from the Note totaled $85,000. The Company recorded
these discounts and cost of $8,500 as a discount to the Note and fully amortized as interest expense during the period. The Company
analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative
instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized derivative liability
for the convertible note of $100,978, of which $85,000 was recorded as debt discount and will be amortized during the term of the
Note, and $15,978 was recorded as day 1 derivative loss. The total unamortized discount on the Note as of July 31, 2020 was $0. The
total principal balance outstanding as of July 31, 2020 was $93,500. The Company amortized $93,500 of debt discount as interest expense
during the year ending July 31, 2020. The notes are immediately convertible into shares of the Company’s Common Stock, at any
time, at a conversion price for each share of Common Stock. (See below variable conversion terms No.1)
|
|
|
93,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
In
October 2019, the Company entered into two variable convertible notes are in the aggregate principal amount of $71,500, bearing interest
at a rate of 8% and a maturity date of July 18, 2020. After payment of transaction-related expenses of $6,500, net proceeds to the
Company from the notes totaled $65,000. The Company recorded these discounts and cost of $6,500 as a discount to the notes and fully
amortized as interest expense during the period. The Company analyzed the notes for derivative accounting consideration and determined
that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the
time of issuance, the Company recognized derivative liability for the convertible notes of $82,462 of which $65,000 was recorded
as debt discount and will be amortized during the term of the notes, and $17,462 was recorded as day 1 derivative loss. On January
10, 2020, the Company entered into an Assignment Agreement whereby Armada Investment Fund LLC assigned the principal amount of $35,750
and accrued interest of $627, representing the balance outstanding on the Convertible Promissory Note dated October 2019 to Platinum
Point Capital LLC. The total assignment for note was for $36,377. On July 28, 2020, the Company entered into an Assignment Agreement
whereby Jefferson Street Capital LLC assigned the principal amount of $35,750 and accrued interest and penalty of $17,081, representing
the balance outstanding on the Convertible Promissory Note dated October 2019 to Platinum Point Capital LLC. The total assignment
for note was for $52,831. The total unamortized discount on the Notes as of July 31, 2020 was $0. The total principal balance outstanding
as of July 31, 2020 was $0. The Company amortized $71,500 of debt discount as interest expense during the year ending July 31, 2020.
The notes are immediately convertible into shares of the Company’s Common Stock, at any time, at a conversion price for each
share of Common Stock. (See below variable conversion terms No.1)
|
|
|
-
|
|
|
|
-
|
|
On
January 10, 2020, the Company entered into an Assignment Agreement whereby Armada Investment Fund LLC (the “Assignor”)
assigned to Platinum Point Capital LLC (the “Assignee”) a principal amount of $145,297 and $35,750, representing the
outstanding principal balance on the Convertible Promissory Notes dated July 11, 2019 and October 18, 2019, respectively,
plus accrued interest of $28,953. The new notes are is in the aggregate principal amount of $210,000, annual interest
rate of 3% and a maturity date of January 10, 2021. On January 22, 2020, the Company entered into an Assignment Agreement whereby
BHP Capital NY Inc. (the “Assignor”) assigned to Platinum Point Capital LLC (the “Assignee”) a principal
amount of $146,625, representing the outstanding principal balance on the Convertible Promissory Note dated July 11, 2019,
plus accrued interest of $33,375. The new note is in the aggregate principal amount of $180,000, annual interest rate of 3% and a
maturity date of January 22, 2021. On January 22, 2020, the Company entered into an Assignment Agreement whereby Jefferson Street
Capital LLC (the “Assignor”) assigned to Platinum Point Capital LLC (the “Assignee”) a principal amount of
$146,625, representing the outstanding principal balance on the Convertible Promissory Note dated July 11, 2019, plus
accrued interest of $33,375. The new note is in the aggregate principal amount of $180,000, annual interest rate of 3% and a maturity
date of January 22, 2021. The Company analyzed the notes for derivative accounting consideration and determined that the embedded
conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time
of the assignment, the Company recognized derivative liability for the new convertible notes of $784,565, of which $570,000 was recorded
as debt discount and amortized over the term of the notes, and $214,565 was recorded as day 1 derivative loss. During the year ended
July 31, 2020, the Company issued 25,312,983 shares of common stock for the conversion of $230,000 of the principal outstanding and
$12,000 in accrued interest and fees. The total unamortized discount on the Notes as of July 31, 2020 was $172,611, and the total
principal balance outstanding as of July 31, 2020 was $340,000. The Company amortized $397,389 of debt discount as interest expense
during the year ended July 31, 2020. The notes are immediately convertible into shares of the Company’s Common Stock, at any
time, at a conversion price for each share of Common Stock. (See below variable conversion terms No.1)
|
|
|
340,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On
February 13, 2020, the Company entered into a variable convertible note. The note is in the aggregate principal amount of $33,500,
annual interest rate of 10% and a maturity date of February 13, 2021. After payment of transaction-related expenses of
$3,500, net proceeds to the Company from the note totaled $30,000. The Company recorded these discounts and cost of $3,500 as a discount
to the note and fully amortized as interest expense during the period. The Company analyzed the note for derivative accounting consideration
and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As
a result, at the time of issuance, the Company recognized derivative liability for the convertible note of $42,976, of which $30,000
was recorded as debt discount and will be amortized during the term of the Note, and $12,976 was recorded as day 1 derivative loss.
The total unamortized discount on the Note as of July 31, 2020 was $15,000. The total principal balance outstanding as of July 31,
2020 was $33,500. The Company amortized $18,500 of debt discount as interest expense during the year ended July 31, 2020. The notes
are immediately convertible into shares of the Company’s Common Stock, at any time, at a conversion price for each share of
Common Stock. (See below variable conversion terms No.1)
|
|
|
33,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On
April 28, 2020, the Company entered into a variable convertible note. The note is in the principal amount of $15,000, annual interest
rate of 10% and a maturity date of April 28, 2021. The Company analyzed the Note for derivative accounting consideration and determined
that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the
time of issuance, the Company recognized derivative liability for the convertible note of $26,629, of which $15,000 was recorded
as debt discount and will be amortized during the term of the Note, and $11,629 was recorded as day 1 derivative loss. The total
unamortized discount on the Note as of July 31, 2020 was $11,250. The total principal balance outstanding as of July 31, 2020 was
$15,000. The Company amortized $3,750 of debt discount as interest expense during the year ended July 31, 2020. The notes are immediately
convertible into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock. (See
below variable conversion terms No.1)
|
|
|
15,000
|
|
|
|
-
|
|
On
July 28, 2020, the Company entered into an Assignment Agreement whereby one of the variable noteholders assigned a principal amount of
$35,750 and accrued interest and penalties of $17,081. The new variable convertible note is for $52,831, annual interest rate of 10%
and a maturity date of July 28, 2021. The Company analyzed the assignment of the note for derivative accounting consideration and determined
that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time
of issuance, the Company recognized derivative liability for the convertible note of $70,888, of which $49,180 was recorded as debt discount
and will be amortized during the term of the Note, and $21,708 was recorded as day 1 derivative loss. The total unamortized discount
on the Note as of July 31, 2020 was $49,180. The total principal balance outstanding as of July 31, 2020 was $52,831. The notes are immediately
convertible into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock. (See
below variable conversion terms No.1)
|
|
|
52,831
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible
debenture issued on July 31, 2018 in the principal amount of $220,000 for a purchase price of $198,000 and 0% percent stated interest
rate. At issuance, the Company incurred $5,000 in legal and compliance fees, these fees were deducted from the proceeds at time of
issuance. The Company recorded these discounts and cost of $22,000 as a discount to the debenture and amortized to interest expense.
The Company analyzed the Debenture for derivative accounting consideration and determined that the embedded conversion option qualified
as a derivative instrument, due to the variable conversion price. Therefore, the Company recognized derivative liability of $189,171.
In connection with the execution of the Debenture, we issued 130,000 shares of our common stock, the shares were recorded with a
relative fair value of $3,627 and $192,798 was recorded as debt discount and amortized during the term of the note. During the year
ending July 31, 2019, the Company issued 2,615,309 shares of common stock for the conversion of $170,000 of the principal outstanding
under the convertible debenture. During the year ending July 31, 2020, the Company issued 1,248,335 shares of common stock for the
conversion of $50,000 of the principal outstanding under the convertible debenture. During the years ended July 31, 2020 and 2019,
the Company amortized $29,214 and $163,584, respectively of the debt discount as interest expense. The total unamortized discount
as July 31, 2020 and July 31, 2019, were $0 and $29,214, respectively. The total principal outstanding balance as of July 31, 2020
and July 31, 2019 were $0 and $50,000, respectively.
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Total
convertible notes payable - derivative:
|
|
$
|
534,831
|
|
|
$
|
829,875
|
|
|
|
|
|
|
|
|
|
|
Total
convertible notes payable derivative and non-derivative
|
|
|
841,831
|
|
|
|
1,601,875
|
|
Less:
discount on convertible notes payable
|
|
|
(294,667
|
)
|
|
|
(575,681
|
)
|
Total
convertible notes payable, net of discount
|
|
|
547,164
|
|
|
|
1,026,194
|
|
Less:
current portion of convertible notes payable
|
|
|
(547,164
|
)
|
|
|
(1,005,408
|
)
|
Long-term
portion of convertible notes payable
|
|
$
|
-
|
|
|
$
|
20,786
|
|
Variable
Conversion No.1: The notes are immediately convertible into shares of the Company’s Common Stock, at any time, at a conversion
price for each share of Common Stock equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on
the National Quotations Bureau OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive
Trading Day period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common
Stock during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice
of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with
the terms of the Notes.at a discount of 35% to the average of the three lowest trading closing prices of the stock for ten days prior
to conversion.
The
total unamortized discount on the convertible notes as of July 31, 2020 and 2019 were $294,667 and $575,681, respectively, and the total
principal balance outstanding as of July 31, 2020 and 2019, were $841,831 and $1,601,875, respectively. During the years ended July 31,
2020 and 2019, the Company amortized $1,228,000 and $1,466,000, respectively, of debt discount as interest expense.
Fair
Value of Financial Instruments. Fair value is defined as the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. A fair value hierarchy is used which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy based on the three levels of inputs
that may be used to measure fair value are as follows:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level
3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values
are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant judgment or estimation.
For
certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses,
the carrying amounts approximate fair value due to the short maturity of these instruments. The carrying value of our long-term debt
approximates its fair value based on the quoted market prices for the same or similar issues or the current rates offered to us for debt
of the same remaining maturities.
Our
derivative liabilities as of July 31, 2020 and 2019 of $606,000 and $927,000, respectively.
The
following table provides the fair value of the derivative financial instruments measured at fair value using significant unobservable
inputs:
|
|
|
|
|
|
Fair
value measurements at reporting
date using:
|
|
|
|
|
|
|
|
Quoted
prices in
active
markets
for
identical
liabilities
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
Description
|
|
Fair
Value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Convertible
promissory notes derivative liability at July 31, 2019
|
|
$
|
927,171
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
927,171
|
|
Convertible
promissory notes derivative liability at July 31, 2020
|
|
$
|
606,123
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
606,123
|
|
The
fair market value of all derivatives during the year ended July 31, 2020 was determined using the Black-Scholes option pricing model
which used the following assumptions:
Expected
dividend yield
|
|
0.00%
|
|
Expected
stock price volatility
|
|
83.28%
- 268.02%
|
|
Risk-free
interest rate
|
|
0.09%
-2.67%
|
|
Expected
term
|
|
0.01
- 1.00 years
|
|
Level
3 inputs.
The
following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value on a recurring
basis using significant unobservable inputs:
Balance
at July 31, 2018
|
|
$
|
632,268
|
|
Derivative
from new convertible promissory notes recorded as debt discount
|
|
|
1,043,834
|
|
Derivative
liability resolved to additional paid in capital due to debt conversion
|
|
|
(822,922
|
)
|
Derivative
loss
|
|
|
73,991
|
|
Balance
at July 31, 2019
|
|
$
|
927,171
|
|
Derivative
from new convertible promissory notes recorded as debt discount
|
|
|
814,180
|
|
Derivative
liability resolved to additional paid in capital due to debt conversion
|
|
|
(872,914
|
)
|
Derivative
loss
|
|
|
(262,314
|
)
|
Balance
at July 31, 2020
|
|
$
|
606,123
|
|
The
future principal payments for the Company’s convertible debt is as follows:
FY
|
|
Payments
|
|
2021
|
|
$
|
2,501,809
|
|
2022
|
|
|
251,957
|
|
2023
|
|
|
23,596
|
|
2024
|
|
|
-
|
|
Total
principal payments
|
|
$
|
2,777,362
|
|
NOTE
13 – EQUIPMENT FINANCING
The
Company entered into three financing agreements for equipment purchased. Under the terms of these transactions, assets with a cost of
approximately $37,255, $60,408, and $103,509, were financed under three separate financing agreements as of the May 2018, June 2018,
and July 2019, respectively. The equipment financing is net of costs associated with the assets such as maintenance, insurance and property
taxes are for the account of the Company. The equipment financing agreements are for 36 months, with the first payments starting June
20, 2018, July 20, 2018, and July 12, 2019, respectively and monthly principal and interest payments of $1,176, $1,856, and $3,172, respectively.
The interest rate under the financing agreements range from 6.50% to 8.50% per annum. During the years ended July 31, 2020 and 2019,
the Company made total principal payments of $65,465 and $32,943, respectively.
The
future payments under the equipment financing agreements are as follows:
Year
|
|
Amount
|
|
2021
|
|
|
70,233
|
|
2022
|
|
|
34,897
|
|
|
|
|
|
|
Total
future payments:
|
|
$
|
105,130
|
|
|
|
|
|
|
Less:
amounts representing interest
|
|
|
5,635
|
|
|
|
|
|
|
Present
value of net minimum equipment financing payments
|
|
$
|
99,495
|
|
|
|
|
|
|
Less
current maturities
|
|
|
61,850
|
|
|
|
|
|
|
Long-term
equipment financing obligation
|
|
$
|
37,645
|
|
|
|
|
|
|
Lease
cost:
|
|
|
|
|
Amortization
of ROU assets
|
|
$
|
65,465
|
|
Interest
on lease liabilities
|
|
|
9,201
|
|
|
|
|
|
|
Cash
paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating
cashflow from financing leases:
|
|
$
|
9,201
|
|
Financing
cashflows from finance leases
|
|
|
65,465
|
|
|
|
|
|
|
Weighted-average
remaining lease term - finance lease:
|
|
|
1.52
years
|
|
|
|
|
|
|
Weighted-average
discount rate:
|
|
|
6.76
|
%
|
NOTE
14 – LEASES
Digerati
leases its corporate facilities, sales office and network facilities in Texas and Florida. The annual rent expense under the operating
leases was $160,574 and $141,546, for 2020 and 2019, respectively. Below is a list of our primary operating leases:
Location
|
|
Lease
Expiration Date
|
|
Annual
Rent
|
|
|
Business
Use
|
|
Approx. Sq.
Ft.
|
|
825
W. Bitters, Suite 104, San Antonio, TX 78216
|
|
Jul-22
|
|
$
|
23,654
|
|
|
Executive
offices
|
|
1,546
|
|
2401
First Street, Suite 300, Ft. Myers,
FL 34901
|
|
Nov-20
|
|
$
|
107,534
|
|
|
Lease
of network facilities and office
space
|
|
6,800
|
|
7218
McNeail Dr, Austin, TX 78729
|
|
Apr-21
|
|
$
|
14,222
|
|
|
Lease
of network facilities
|
|
25
|
|
6606
Lyndon B. Johnson, Fwy., FL1, Suite 125, Dallas, TX 75240
|
|
Apr-21
|
|
$
|
25,161
|
|
|
Lease
of network facilities
|
|
25
|
|
9701
S. John Young Parkway, Orlando, FL 32819
|
|
May-23
|
|
$
|
30,528
|
|
|
Lease
of network facilities
|
|
540
|
|
Effective
August 1, 2019, the Company adopted ASC 842, “Leases” (“ASC 842”) on a modified retrospective basis. Accordingly,
information presented for periods prior to FY2019 have not been recast. In addition, the Company elected the optional practical expedient
permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment for existing lease
upon adoption. No impact was recorded to the income statement or beginning retained earnings for Topic 842.
The
leased properties have a remaining lease term of sixteen to forty-six months as of August 1, 2019. At the option of the Company, it can
elect to extend the term of the leases. As of the date of this filing, the Company is working on finalizing a new office lease agreement.
The new lease will commence on January 1, 2021, the initial term will of 5 years, at an annual base rent of $57,000. The Company will
have the option to renew the lease for an additional 5 years. The Company is working with the landlord on the final buildout of the office
space. From October 1, 2020 through December 31, 2020, the Company entered into a Sublease Agreement with the current tenant, for a monthly
rate of $4,791.
Beginning
August 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments, including
annual rent increases, over the lease term at commencement date. Operating leases in effect prior to August 1, 2019 were recognized at
the present value of the remaining payments on the remaining lease term as of August 1, 2019. Because none of our leases included an
implicit rate of return, we used our incremental secured borrowing rate based on lease term information available as of the adoption
date or lease commencement date in determining the present value of lease payments. The incremental borrowing rate on the leases is 8.0%.
The
Company has not entered into any sale and leaseback transactions during the year ended July 31, 2020.
The
impact of ASU No. 2016-02 (“Leases (Topic 842)” on our consolidated balance sheet beginning August 1, 2019 was through the
recognition of ROU assets and lease liabilities for operating leases. Amounts recognized on August 1, 2019 and July 31, 2020 for operating
leases are as follows:
ROU
Asset
|
|
August
1, 2019
|
|
$
|
316,411
|
|
Amortization
|
|
|
|
$
|
(140,314
|
)
|
ROU
Asset
|
|
July
31, 2020
|
|
$
|
176,097
|
|
|
|
|
|
|
|
|
Lease
Liability
|
|
August
1, 2019
|
|
$
|
316,411
|
|
Amortization
|
|
|
|
$
|
(140,314
|
)
|
Lease
Liability
|
|
July
31, 2020
|
|
$
|
176,097
|
|
|
|
|
|
|
|
|
Lease
Liability
|
|
Short
term
|
|
$
|
99,443
|
|
Lease
Liability
|
|
Long
term
|
|
$
|
76,654
|
|
Lease
Liability
|
|
Total:
|
|
$
|
176,097
|
|
|
|
|
|
|
|
|
Operating lease cost:
|
|
$
|
160,574
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease labilities
|
|
|
|
|
|
|
|
|
|
|
|
Operating cashflow from operating leases:
|
|
$
|
160,574
|
|
|
|
|
|
|
|
|
Weighted-average remain lease term-operating lease:
|
|
|
1.88
years
|
|
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
8
|
%
|
For
the year ended July 31, 2020 amortization of operating ROU assets was $140,314.
For
the year ended July 31, 2020 amortization of operating lease liabilities was $140,314.
The
future minimum lease payment under the operating leases are as follows:
Years
Ending July 31,
|
|
Lease
Payments
|
|
2021
|
|
|
108,409
|
|
2022
|
|
|
57,057
|
|
2023
|
|
|
25,440
|
|
Total:
|
|
$
|
190,906
|
|
NOTE
15 – NONCONTROLLING INTEREST
On
May 1, 2018, T3 Communications, Inc. (“T3”), a Nevada Corporation, entered into a Stock Purchase Agreement (“SPA”),
whereby in an exchange for $250,000, T3 agreed to sell to the buyers 199,900 shares of common stock equivalent to 19.99% of the issued
and outstanding common share of T3 Communications, Inc. The $250,000 of the cash received under this transaction was recognized as an
adjustment to the carrying amount of the noncontrolling interest and as an increase in additional paid-in capital in T3. At the option
of the Company, and for a period of five years following the date of the SPA, the 199,900 shares of common stock in T3 may be converted
into Common Stock of Digerati at a ratio of 3.4 shares of DTGI Common stock for every one (1) share of Shift8 at any time after the DTGI
Common Stock has a current market price of $1.50 or more per share for 20 consecutive trading days.
For
the years ending July 31, 2020 and 2019, the Company accounted for a noncontrolling interest of $47,000 and $128,000, respectively. Additionally,
one of the buyers serves as a Board Member of T3 Communications, Inc., a Florida Corporation, one of our operating subsidiaries.
NOTE
16 – INVESTMENT IN ITELLUM
On
June 14, 2019, the Company, entered into a Stock Purchase Agreement (the “Agreement”) to acquire a 12% minority interest
in Itellum Comunicacions Costa Rica, S.R.L. The Company paid $82,500 upon execution of the agreement, issued 500,000 shares of common
stock with a market value of $85,000, and entered into a promissory note for $17,500 with an effective annual interest rate of 8% and
an initial maturity date of September 14, 2019, subsequentially the maturity date was extended until October 31, 2020. The outstanding
balance as of July 31, 2020 was $7,500.
The
minority interest in Itellum was accounted for as a cost-basis investment, and based on the agreed cash and stock issued, the Company
accounted for an initial investment value of $185,000.
NOTE
17 – PREFERRED STOCK
CONVERTIBLE
SERIES A PREFERRED STOCK
In March 2019, the Company’s Board of Directors designated and
authorized the issuance of up to 1,500,000 shares of the Series A Preferred Stock. Each share of Series A Preferred Stock has a par value
of $0.001 per share and a stated value equal to one dollar ($1.00) (the “Stated Value”) and are entitled to a dividend at
an annual rate of eight percent (8%) per share. The Company had 225,000 shares of Series A Preferred Stock outstanding as of July 31,
2020. During the year ending July 31, 2020 the Company declared a dividend of $19,000.
The
terms of our Series A Preferred Stock allow for:
Voting
Rights. Unless otherwise required by the Nevada Revised Statutes, the shares of Series A Preferred Stock shall not be entitled
to vote on any matter presented at any annual or special meeting of stockholders of the Corporation, or through written consent.
Optional
Conversion. Each holder of shares of Series A Preferred Stock may, at holder’s option and commencing on April 30, 2020,
convert any or all such shares, on the terms and conditions set forth herein, into fully paid and non-assessable shares of the Corporation’s
Common Stock. The number of shares of Common Stock into which each share of Series A Preferred Stock may be converted shall be determined
by dividing the Original Issue Price of each share of Series A Preferred Stock, plus accrued and unpaid dividends through the Conversion
Date, to be converted by the Conversion Price (as defined below) in effect at the time of conversion. The “Conversion Price”
at which shares of Common Stock shall be issuable upon conversion of any shares of Series A Preferred Stock shall initially be the greater
of (i) $0.40 per share, (ii) a 30% discount to the offering price of the Common Stock (or Common Stock equivalent) in a $10 million or
greater equity financing that closes concurrently with an up-listing of the Company Common Stock on the NYSE American or Nasdaq, in the
event of such up-listing, and (iii) a 30% discount to the average closing price per share of the Common Stock for the 5 consecutive trading
days commencing upon the date the Common Stock is up-listed on either the NYSE American or Nasdaq in which there is no concurrent $10
million equity financing, in the event of such up-listing, subject to adjustment as provided below.
Mandatory
Conversion. Each share of Series A Preferred Stock shall automatically convert into shares of Common Stock, as described in paragraph
2a, at the then applicable Conversion Price, upon the earlier of (i) the closing of a public or private offering (or series of offerings
within a 90-day period) of Corporation equity or equity equivalent securities placed by a registered broker-dealer resulting in minimum
gross proceeds to the Corporation of $10 million, (ii) commencing on April 30, 2020, if the Common Stock shall close (or the last trade
shall be) at or above 150% of the Conversion Price per share for 20 out of 30 consecutive trading days, and (iii) the uplisting of the
Corporation’s Common Stock to a national securities exchange or the Nasdaq stock market ((i), (ii) and (iii) are collectively referred
to as “Mandatory Conversion Event”). The Corporation will provide notice to holder within 20 days of the occurrence of a
Mandatory Conversion Event (failure of the Corporation to timely give such notice does not void the mandatory conversion). Holder shall
surrender to the Corporation, within 10 days of receiving such notice, the certificate(s) representing the shares of Series A Preferred
Stock to be converted into Common Stock. In the event holder does not surrender such certificate(s) within 10 days of receiving such
notice, the Corporation shall deem such certificate(s) cancelled and void. As soon as practicable, after the certificate(s) are either
surrendered by the holder or cancelled by the Corporation, as the case may be, the Corporation will issue and deliver to holder a new
certificate for the number of full shares of Common Stock issuable upon such mandatory conversion in accordance with the provisions hereof
and cash as provided in paragraph 2(c) in respect of any fraction of a share of Common Stock otherwise issuable upon such mandatory conversion,
unless fractional shares are rounded up to the next whole share. Holder will be deemed a Common Stockholder of record as of the date
of the occurrence of a Mandatory Conversion Event.
CONVERTIBLE
SERIES B PREFERRED STOCK
In
April 2020, the Company’s Board of Directors designated and authorized the issuance up to 1,000,000 shares of the Series B Preferred
Stock. The Series B Preferred Stock is only issuable to the Company’s debt holders as of March 25, 2020 (“Existing Debt Holders”)
who may purchase shares of Series B Preferred Stock at the Stated Value by converting all or part of the debt owed to them by the Corporation
as of March 25, 2020. Each share of Series B Preferred Stock has a par value of $0.001 per share and a stated value equal to one dollar
($1.00) (the “Stated Value”). In April 2020, the Company issued a total of 407,477 shares of Series B Preferred Stock for
settlement of debt of $370,000 on various promissory notes and $37,477 in accrued interest. No dividends are payable on the Series B
Preferred Stock.
The
terms of our Series B Preferred Stock allow for:
Voting
Rights. Except as otherwise provided by the Nevada Revised Statutes, other applicable law or as provided in this Certificate
of Designation, the Series B Preferred Stock shall have no voting rights. However, as long as any shares of Series B Preferred Stock
are outstanding, the Corporation shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares
of the Series B Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series B Preferred Stock
or alter or amend this Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner
that adversely affects any rights of the Holders, (c) increase the number of authorized shares of Series B Preferred Stock, or (d) enter
into any agreement with respect to any of the foregoing.
Mandatory
Conversion. Upon (i) an up-listing of the Corporation’s Common Stock to Nasdaq or a US national securities exchange,
(ii)an underwriting involving the sale of $5,000,000 or more of the Corporation’s Common Stock or Common Stock Equivalents (a
“Material Underwriting”), (iii) the Corporation ceases to be a public corporation as the result of a going private
transaction, (iv) the Corporation, directly or indirectly, effects any sale, lease, exclusive license, assignment, transfer,
conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions (including a
transaction involving the Corporation’s spin-off of its operating subsidiary, T3 Communications, Inc.), (v) any, direct or
indirect, purchase offer, tender offer or exchange offer (whether by the Corporation or another Person) is completed pursuant to
which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has
been accepted by the holders of 50% or more of the outstanding Common Stock, (vi) the Corporation, directly or indirectly, in one or
more related transactions, effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory
share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property,
or (vii) the Corporation, directly or indirectly, in one or more related transactions, consummates a stock or share purchase
agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person, other than an officer or director of the Company, whereby such other Person acquires more than 50%
of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making
or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other
business combination), all shares of Series B Preferred Stock shall be automatically converted, without any further action by the
holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its
transfer agent, into the number of fully paid and nonassessable shares of Common Stock in an amount equal, following conversion, to
18% of the Corporation’s issued and outstanding shares of Common Stock. Each of (i)-(vii) above shall be hereafter referred to
as a “Conversion Event” and the date of a Conversion Event shall be hereafter referred to as a “Conversion
Date”. Upon any such mandatory conversion and the issuance of Conversion Shares further thereto, the shares of Series B
Preferred Stock shall be deemed cancelled and of no further force or effect. A mandatory conversion is the only means by which
Series B Preferred Stock is convertible as the shares of Series B Preferred Stock are not convertible at the option of the Holder.
For purposes of the foregoing Conversion Events, conversion will be deemed to have taken place immediately prior to the Conversion
Event. By way of example, if the Corporation engages in a Material Underwriting, the Series B Preferred Stock will be treated as
having been converted immediately prior to the issuance of the securities in the Material Underwriting.
Redemption. At
any time on or after the second anniversary of the date of issuance of shares of Series B Preferred Stock to the Holder, the
Corporation, in its sole discretion, may elect, by delivering written notice to the Holder no less than 10 days or more than 20
prior to the redemption date set forth in such notice (the “Redemption Date”), to redeem all or any portion of the
Series B Preferred Stock held by such Holder at a price per share (the “Redemption Price”) equal to 120% of the Stated
Value per share being redeemed. The Corporation shall, unless otherwise prevented by law, redeem from such holder on the Redemption
Date the number of shares of Series B Preferred Stock identified in such notice of redemption. During the period ended July 31,
2020, the Company evaluated Series B Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred
during the period and determined that the convertible shares were classified as equity instruments. The Company will evaluate the
convertible shares at each reporting balance sheet date and determine if a re-classification is required.
CONVERTIBLE
SERIES C PREFERRED STOCK
In
July 2020, the Company’s Board of Directors designated and authorized the issuance up to 1,000,000 shares of the Series C Preferred
Stock. Each share of Series C Preferred Stock has a par value of $0.001 per share and a stated value equal to ten dollars ($10.00) (the
“Stated Value”). As of July 31, 2020, the Company has not issued any shares of Series C Preferred Stock.
The
terms of our Series C Preferred Stock allow for:
Designation,
Amount and Par Value; Eligible Recipients. The series of preferred stock shall be designated as its Series C Convertible Preferred
Stock (the “Series C Preferred Stock”) and the number of shares so designated shall be up to one million (1,000,000) (which
shall not be subject to increase without the written consent of the holders of a majority of the outstanding Series C Preferred Stock
(each, a “Holder” and collectively, the “Holders”). Series C Preferred Stock shall only be issuable to the Company’s
officers and directors as of July 1, 2020 who may from time to time purchase shares of Series C Preferred Stock at the Stated Value by
converting all or part of the compensation owed to them by the Corporation. Each share of Series C Preferred Stock shall have a par value
of $0.001 per share and a stated value equal to Ten Dollars ($10.00) (the “Stated Value”).
Dividends.
No dividends are payable on the shares of Series C Preferred Stock.
Voting
Rights. Except as otherwise provided by the Nevada Revised Statutes, other applicable law or as provided in this Certificate
of Designation, the Series C Preferred Stock shall have no voting rights. However, as long as any shares of Series C Preferred Stock
are outstanding, the Corporation shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares
of the Series C Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series C Preferred Stock
or alter or amend this Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner
that adversely affects any rights of the Holders, (c) increase the number of authorized shares of Series C Preferred Stock, or (d) enter
into any agreement with respect to any of the foregoing.
Automatic
Conversion. Upon (i) an up-listing of the Corporation’s Common Stock to Nasdaq or a US national securities exchange, (ii) a financing
or offering involving the sale of $5,000,000 or more of the Corporation’s Common Stock or Common Stock Equivalents (a “Material
Financing”), (iii) the Corporation ceases to be a public corporation as the result of a going private transaction, (iv) the Corporation,
directly or indirectly, effects any sale, lease, exclusive license, assignment, transfer, conveyance or other disposition of all or substantially
all of its assets in one or a series of related transactions (including a transaction involving the Corporation’s spin-off of its
Nevada subsidiary, T3 Communications, Inc.), (v) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by
the Corporation or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their
shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (vi)
the Corporation, directly or indirectly, in one or more related transactions, effects any reclassification, reorganization or recapitalization
of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for
other securities, cash or property, or (vii) the Corporation, directly or indirectly, in one or more related transactions, consummates
a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person, other than an officer or director of the Company, whereby such other Person acquires
more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or
other business combination), all issued shares of Series C Preferred Stock shall be automatically converted, without any further action
by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its
transfer agent, into the number of fully paid and nonassessable shares of Common Stock in an amount equal, following conversion, to 22%
of the Corporation’s issued and outstanding shares of Common Stock. Each of (i)-(vii) above shall be hereafter referred to as a
“Conversion Event” and the date of a Conversion Event shall be hereafter referred to as a “Conversion Date”.
Upon any such mandatory conversion and the issuance of Conversion Shares further thereto, the shares of Series C Preferred Stock shall
be deemed cancelled and of no further force or effect. A mandatory conversion is the only means by which Series C Preferred Stock is
convertible as the shares of Series C Preferred Stock are not convertible at the option of the Holder. For purposes of the foregoing
Conversion Events, conversion will be deemed to have taken place immediately prior to the Conversion Event. By way of example, if the
Corporation engages in a Material Financing, the Series C Preferred Stock will be treated as having been converted immediately prior
to the issuance of the securities in the Material Underwriting.
Redemption. At
any time on or after the second anniversary of the date of issuance of shares of Series C Preferred Stock to the Holder, the
Corporation, in its sole discretion, may elect, by delivering written notice to the Holder no less than 10 days or more than 20
prior to the redemption date set forth in such notice (the “Redemption Date”), to redeem all or any portion of the
Series C Preferred Stock held by such Holder at a price per share (the “Redemption Price”) equal to 120% of the Stated
Value per share being redeemed. The Corporation shall, unless otherwise prevented by law, redeem from such holder on the Redemption
Date the number of shares of Series C Preferred Stock identified in such notice of redemption.
SERIES
F SUPER VOTING PREFERRED STOCK
In
July 2020, the Company’s Board of Directors designated and authorized the issuance up to 100 shares of the Series F Super Voting
Preferred Stock. Each share of Series F Super Voting Preferred Stock has a par value of $0.001 per share and a stated value equal to
one cent ($0.01) (the “Stated Value”). As of July 31, 2020, the Company has 100 shares outstanding of the Series F Super
Voting Preferred Stock.
The
terms of our Series F Super Voting Preferred Stock allow for:
Designation,
Amount and Par Value; Eligible Recipients. The series of preferred stock shall be designated as its Series F Preferred Stock
(the “Series F Preferred Stock”) and the number of shares so designated shall be up to one hundred (100) (which shall not
be subject to increase without the written consent of the holders of a majority of the outstanding Series F Preferred Stock (each, a
“Holder” and collectively, the “Holders”). Series F Preferred Stock shall only be issuable to members of the
Corporation’s Board of Directors, as joint tenants, who may purchase shares of Series F Preferred Stock at the Stated Value per
share. Each share of Series F Preferred Stock shall have a par value of $0.001 per share and a stated value equal to one cent ($0.01)
(the “Stated Value”).
Voting
Rights. As long as any shares of Series F Preferred Stock are outstanding, the Corporation shall not, without the affirmative
vote of the Holders of a majority of the then outstanding shares of the Series F Preferred Stock, (a) alter or change adversely the powers,
preferences or rights given to the Series F Preferred Stock or alter or amend this Certificate of Designation, (b) amend its certificate
of incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (c) increase the number of
authorized shares of Series F Preferred Stock, (d) sell or otherwise dispose of any assets of the Corporation not in the ordinary course
of business, (e) sell or otherwise effect or undergo any change of control of the corporation, (f) effect a reverse split of its Common
Stock, or (g) enter into any agreement with respect to any of the foregoing.
Holder
of the Series F Preferred Stock shall be entitled to vote on all matters subject to a vote or written consent of the holders of the Corporation’s
Common Stock, and on all such matters, the shares of Series F Preferred Stock shall be entitled to that number of votes equal to the
number of votes that all issued and outstanding shares of Common Stock and all other securities of the Corporation are entitled to, as
of any such date of determination, on a fully diluted basis, plus one million (1,000,000) votes, it being the intention that the
Holders of the Series F Preferred Stock shall have effective voting control of the Corporation. The Holders of the Series F Preferred
Stock shall vote together with the holders of Common Stock as a single class on all matters requiring approval of the holders of the
Corporation’s Common Stock and separately on matters not requiring the approval of holders of the Corporation’s Common Stock.
Conversion.
No conversion rights apply to the Series F Preferred Stock.
Redemption.
At any time while share of Series F Preferred Stock are issued and outstanding, the Corporation, in its sole discretion, may
elect to redeem the shares of Series F Preferred Stock.
NOTE
18 – EQUITY
During
the year ended July 31, 2019, the Company issued the following shares of common stock that are not disclosed in other footnotes:
On
September 28, 2018, the Company issued an aggregate of 21,672 shares of common stock with a market value at time of issuance of $5,794.
The shares were issued to settle accounts payables of $5,287 to a professional, the Company recognized a loss of $507 upon issuance of
the shares.
On
November 5, 2018, the Company issued an aggregate of 16,883 shares of common stock with a market value at time of issuance of $5,875.
The shares were issued to settle accounts payables of $5,287 to a professional, the Company recognized a loss of $588 upon issuance of
the shares.
On
November 14, 2018, the Company secured $75,000 from an accredited investor under a Securities Purchase Agreement and issued 258,621 shares
of its common stock at a price of $0.29.
On
November 29, 2018, the Company issued an aggregate of 39,444 shares of common stock with a market value at time of issuance of $11,833.
The shares were issued to settle accounts payables of $10,545 to a professional, the Company recognized a loss of $1,288 upon issuance
of the shares.
On
February 5, 2019, the Company issued an aggregate of 60,715 shares of common stock with a market value at time of issuance of $13,357.
The shares were issued to settle accounts payables of $10,382 to a professional, the Company recognized a loss of $2,975 upon issuance
of the shares.
On
February 8, 2019, the Company secured $150,000 from an accredited investor under a Securities Purchase Agreement and issued 600,000 shares
of its common stock at a price of $0.25.
On
February 8, 2019, the Company issued an aggregate of 400,000 shares of common stock with a market value at time of issuance of $100,000
and recognized the total fair market value as stock-based compensation expense at the time of issuance. The shares were issued for consulting
services.
During
the year ending July 31, 2020, the Company issued the following shares of common stock that are not disclosed in other footnotes:
In
November 2019, the Company issued 86,667 shares of common stock in conjunction to the conversion of 25,000 shares of the Series A Convertible
Preferred stock and $1,189 in accrued dividends.
On
July 13, 2020, the Company issued 2,073,925 shares of common stock for cash proceeds of $51,629, net of administration fees of $2,500.
On
July 29, 2020, the Company issued 1,819,700 shares of common stock for cash proceeds of $42,337, net of administration fees of $2,500.
NOTE
19 – SUBSEQUENT EVENTS
Equity
Issuance
On
August 1, 2020, the Company issued 2,000,000 common shares for professional services. The Company recognized as stock-based compensation
expense of approximately $58,000 equivalent to the value of the shares calculated based on the share’s closing price at the time
of issuance.
On
August 4, 2020, the Company issued 5,000,000 shares of common stock for the conversion of $75,000 of the principal outstanding and accrued
interest of $1,500 under one of the convertible notes.
On
August 7, 2020, the Company issued 7,608,820 common shares to various employees as part of the Company’s Non-Standardized profit-sharing
plan contribution. The Company recognized stock-based compensation expense of approximately $247,287 equivalent to the value of the shares
calculated based on the share’s closing price at the grant date.
On
August 14, 2020, the Company issued 5,000,000 shares of common stock for the conversion of $80,000 of the principal outstanding under
one of the convertible notes.
On
October 13, 2020, the Company entered into a $330,000 promissory note, in conjunction with the promissory note, we issued 1,000,000 shares
of common stock. At the time of issuance, the Company recognized the relative fair market value of the shares of $36,244 as debt discount,
and it will be amortized to interest expense during the term of the promissory note.
Convertible
Promissory Notes
On
October 13, 2020, the Company entered into a convertible promissory note with an aggregate principal amount of $330,000, annual interest
rate of 8% and a maturity date of October 31, 2021. After payment of transaction-related expenses and legal fees of $32,000, net proceeds
to the Company from the Note totaled $298,000. The Company recorded these discounts and cost of $32,000 as a discount to the note and
will amortize over the term of the note. In connection with the execution of the note, we issued 1,000,000 shares of our common
stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $36,244 as
debt discount, and it will be amortized to interest expense during the term of the promissory note. The Company analyzed the Note for
derivative accounting consideration and determined that since the note has a fix conversion price at issuance, it does not require to
be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and
other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument.
On
October 15, 2020, the Company entered into a convertible promissory note with an aggregate principal amount of $27,500, annual interest
rate of 8% and a maturity date of October 31, 2021. On July 2, 2020, the Company received a $15,000 advance on this note. The Company
accounted for the advance as a current note payable as of July 31, 2020. On August 12, 2020, the Company received an additional advance
of $10,000. After payment of transaction-related expenses and legal fees of $2,500, net proceeds to the Company from the Note totaled
$25,000. The Company recorded these discounts and cost of $2,500 as a discount to the note and will amortize over the term of the note.
The Company analyzed the Note for derivative accounting consideration and determined that since the note has a fix conversion price at
issuance, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify
if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative
instrument.
Other
Terms October 2020 Convertible Notes
Notes
shall bear interest at a rate of eight percent (8%) per annum (the “Interest Rate”), which interest shall be paid by the
Company to the Investor in shares of Common Stock at any time the Investor sends a notice of conversion to the Company. The Investor
is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest of the Note into
shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock shall equal (1) $0.05;
provided however that in the event the Borrower fails to close on the acquisition of Nexogy Inc., for any reason, or none at all,
by February 11, 2021, the Conversion Price shall equal (2) the Variable Conversion Price (as defined herein). The “Variable Conversion
Price” shall mean eighty-five percent (85%) multiplied by the Market Price (as defined herein) (representing a discount rate of
fifteen percent (15%)). “Market Price” means the lowest Trading Price (as defined below) for the Common Stock during the
ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means,
for any security as of any date, the lesser of: (i) the lowest trade price on the OTC Pink, OTCQB or applicable trading market as reported
by a reliable reporting service (“Reporting Service”) designated by the Holder or, if the OTC Pink is not the principal trading
market for such security, the trading price of such security on the principal securities exchange or trading market where such security
is listed or traded or, if no trading price of such security is available in any of the foregoing manners, the average of the trading
prices of any market makers for such security that are listed in the “pink sheets” by the National Quotation Bureau, Inc.,
or (ii) the closing bid price on the OTC Pink, OTCQB or applicable trading market as reported by a Reporting Service designated by the
Holder or, if the OTC Pink is not the principal trading market for such security, the closing bid price of such security on the principal
securities exchange or trading market where such security is listed or traded or, if no closing bid price of such security is available
in any of the foregoing manners, the average of the closing bid prices of any market makers for such security that are listed in the
“pink sheets” by the National Quotation Bureau, Inc.
At
any time, the Company shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of
the Note, to prepay up to fifty percent (50%) of the outstanding Note (principal and accrued interest), in full by making a payment to
the Holder of an amount in cash equal to one hundred twenty (120%) multiplied by the sum of: (w) the then outstanding principal amount
of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note plus (y) Default Interest, if any. Subject
to the terms of this Note, the Company may prepay the amounts outstanding, less any amounts paid under the Company’s right to prepay
up to the fifty percent (50%), hereunder at any time, subject to the consent of the Holder. Such consent by the Holder may be withheld
for any reason in its discretion, or for no reason at all.
Pay-off
of Convertible Notes
On
October 15, 2020, the Company paid in full the Convertible Note with Platinum Point Capital LLC with a principal balance outstanding
of $52,831and accrued interest and penalty of $13,639.
On
October 15, 2020, the Company paid in full the Convertible Note with Platinum Point Capital LLC with a principal balance outstanding
of $50,000 and accrued interest and penalty of $22,530.
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, unaudited)
|
|
April 30,
|
|
|
July 31,
|
|
|
|
2021
|
|
|
2020
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,125
|
|
|
$
|
685
|
|
Accounts receivable, net
|
|
|
572
|
|
|
|
208
|
|
Prepaid and other current assets
|
|
|
303
|
|
|
|
361
|
|
Total current assets
|
|
|
3,000
|
|
|
|
1,254
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
9,359
|
|
|
|
1,451
|
|
Goodwill, net
|
|
|
3,513
|
|
|
|
810
|
|
Property and equipment, net
|
|
|
580
|
|
|
|
431
|
|
Other assets
|
|
|
76
|
|
|
|
43
|
|
Investment in Itellum
|
|
|
185
|
|
|
|
185
|
|
Right-of-use asset
|
|
|
335
|
|
|
|
176
|
|
Total assets
|
|
$
|
17,048
|
|
|
$
|
4,350
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,868
|
|
|
$
|
1,487
|
|
Accrued liabilities
|
|
|
2,063
|
|
|
|
1,840
|
|
Equipment financing
|
|
|
41
|
|
|
|
62
|
|
Convertible note payable, current, net $492 and $295, respectively
|
|
|
866
|
|
|
|
548
|
|
Note payable, current, related party, net of $0 and $0, respectively
|
|
|
859
|
|
|
|
78
|
|
Note payable, current, net $1,143 and $0, respectively
|
|
|
2,639
|
|
|
|
1,571
|
|
Deferred income
|
|
|
174
|
|
|
|
279
|
|
Derivative liability
|
|
|
17,340
|
|
|
|
606
|
|
Operating lease liability, current
|
|
|
74
|
|
|
|
99
|
|
Total current liabilities
|
|
|
25,924
|
|
|
|
6,570
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Notes payable, related party, net $0 and $6, respectively
|
|
|
409
|
|
|
|
85
|
|
Note payable, net $4,989 and $0, respectively
|
|
|
5,828
|
|
|
|
193
|
|
Equipment financing
|
|
|
8
|
|
|
|
38
|
|
Operating lease liability
|
|
|
261
|
|
|
|
77
|
|
Total long-term liabilities
|
|
|
6,506
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
32,430
|
|
|
|
6,963
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001, 50,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Convertible Series A Preferred stock, $0.001, 1,500,000 shares designated, 225,000 and 225,000 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Convertible Series B Preferred stock, $0.001, 1,000,000 shares designated, 425,442 and 0 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Convertible Series C Preferred stock, $0.001, 1,000,000 shares designated, 55,400 and 0 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Series F Super Voting Preferred stock, $0.001, 100 shares designated, 100 and 0 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001, 500,000,000 shares authorized, 137,858,000 and 101,323,590 issued and outstanding, respectively (25,000,000 reserved in Treasury)
|
|
|
138
|
|
|
|
101
|
|
Additional paid in capital
|
|
|
89,250
|
|
|
|
86,364
|
|
Accumulated deficit
|
|
|
(104,166
|
)
|
|
|
(88,697
|
)
|
Other comprehensive income
|
|
|
1
|
|
|
|
1
|
|
Total Digerati’s stockholders’ deficit
|
|
|
(14,777
|
)
|
|
|
(2,231
|
)
|
Noncontrolling interest
|
|
|
(605
|
)
|
|
|
(382
|
)
|
Total stockholders’ deficit
|
|
|
(15,382
|
)
|
|
|
(2,613
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
17,048
|
|
|
$
|
4,350
|
|
See
accompanying notes to consolidated unaudited financial statements
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts, unaudited)
|
|
Three months ended
April 30,
|
|
|
Nine months ended
April 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud software and service revenue
|
|
$
|
3,751
|
|
|
$
|
1,566
|
|
|
$
|
8,629
|
|
|
$
|
4,712
|
|
Total operating revenues
|
|
|
3,751
|
|
|
|
1,566
|
|
|
|
8,629
|
|
|
|
4,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
|
|
1,526
|
|
|
|
764
|
|
|
|
3,708
|
|
|
|
2,343
|
|
Selling, general and administrative expense
|
|
|
1,993
|
|
|
|
1,047
|
|
|
|
4,969
|
|
|
|
3,357
|
|
Legal and professional fees
|
|
|
204
|
|
|
|
98
|
|
|
|
717
|
|
|
|
408
|
|
Bad debt
|
|
|
5
|
|
|
|
(19
|
)
|
|
|
9
|
|
|
|
(19
|
)
|
Depreciation and amortization expense
|
|
|
611
|
|
|
|
148
|
|
|
|
1,204
|
|
|
|
465
|
|
Total operating expenses
|
|
|
4,339
|
|
|
|
2,038
|
|
|
|
10,607
|
|
|
|
6,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(588
|
)
|
|
|
(472
|
)
|
|
|
(1,978
|
)
|
|
|
(1,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivative instruments
|
|
|
(10,878
|
)
|
|
|
(249
|
)
|
|
|
(10,860
|
)
|
|
|
69
|
|
Gain (loss) on settlement of debt
|
|
|
150
|
|
|
|
134
|
|
|
|
347
|
|
|
|
134
|
|
Income tax benefit (expense)
|
|
|
(63
|
)
|
|
|
(10
|
)
|
|
|
(122
|
)
|
|
|
22
|
|
Interest expense
|
|
|
(1,577
|
)
|
|
|
(511
|
)
|
|
|
(3,079
|
)
|
|
|
(1,513
|
)
|
Total other income (expense)
|
|
|
(12,368
|
)
|
|
|
(636
|
)
|
|
|
(13,714
|
)
|
|
|
(1,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS INCLUDING NONCONTROLLING INTEREST
|
|
|
(12,956
|
)
|
|
|
(1,108
|
)
|
|
|
(15,692
|
)
|
|
|
(3,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to the noncontrolling interests
|
|
|
158
|
|
|
|
1
|
|
|
|
223
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS
|
|
|
(12,798
|
)
|
|
|
(1,107
|
)
|
|
|
(15,469
|
)
|
|
|
(3,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend on Series A Convertible preferred stock
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS
|
|
$
|
(12,803
|
)
|
|
$
|
(1,107
|
)
|
|
$
|
(15,484
|
)
|
|
$
|
(3,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE - BASIC
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE - DILUTED
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
|
|
|
136,719,871
|
|
|
|
61,624,640
|
|
|
|
126,524,312
|
|
|
|
41,445,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED
|
|
|
136,719,871
|
|
|
|
61,624,640
|
|
|
|
126,524,312
|
|
|
|
41,445,900
|
|
See
accompanying notes to consolidated unaudited financial statements
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
For
the Nine Months Ended April 30, 2021
(In
thousands, except for share amounts, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Digerati’s
Shareholders
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
Shares
|
|
|
Par
|
|
|
Series B
Shares
|
|
|
Par
|
|
|
Series C
Shares
|
|
|
Par
|
|
|
Series F
Shares
|
|
|
Par
|
|
|
Shares
|
|
|
Par
|
|
|
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Comprehensive
Income
|
|
|
Stockholders
Deficit
|
|
|
Noncontrolling
Interest
|
|
|
Totals
|
|
BALANCE,
July 31, 2020
|
|
|
225,000
|
|
|
|
-
|
|
|
|
407,477
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
101,323,590
|
|
|
$
|
101
|
|
|
$
|
86,364
|
|
|
$
|
(88,697
|
)
|
|
$
|
1
|
|
|
$
|
(2,231
|
)
|
|
$
|
(382
|
)
|
|
$
|
|
|
Amortization
of employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
|
|
Common
stock issued for services, to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,858,820
|
|
|
|
8
|
|
|
|
257
|
|
|
|
-
|
|
|
|
-
|
|
|
|
265
|
|
|
|
-
|
|
|
|
|
|
Common
stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
2
|
|
|
|
56
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
-
|
|
|
|
|
|
Common
stock issued for debt conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000,000
|
|
|
|
10
|
|
|
|
147
|
|
|
|
-
|
|
|
|
-
|
|
|
|
157
|
|
|
|
-
|
|
|
|
|
|
Common
stock issued concurrent with convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
1
|
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45
|
|
|
|
-
|
|
|
|
|
|
Beneficial
conversion feature on convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
111
|
|
|
|
-
|
|
|
|
-
|
|
|
|
111
|
|
|
|
-
|
|
|
|
|
|
Derivative
liability resolved to APIC due to note conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
205
|
|
|
|
-
|
|
|
|
-
|
|
|
|
205
|
|
|
|
-
|
|
|
|
|
|
Dividends
declared
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
|
|
Net
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(721
|
)
|
|
|
-
|
|
|
|
(721
|
)
|
|
|
(35
|
)
|
|
|
|
|
BALANCE,
October 31, 2020
|
|
|
225,000
|
|
|
|
-
|
|
|
|
407,477
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
122,182,410
|
|
|
$
|
122
|
|
|
$
|
87,199
|
|
|
$
|
(89,418
|
)
|
|
$
|
1
|
|
|
$
|
(2,096
|
)
|
|
$
|
(417
|
)
|
|
$
|
|
|
Amortization
of employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
|
|
Common
stock issued for settlement of accounts payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
1
|
|
|
|
59
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
|
|
-
|
|
|
|
|
|
Common
stock issued for debt conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,676,765
|
|
|
|
11
|
|
|
|
243
|
|
|
|
-
|
|
|
|
-
|
|
|
|
254
|
|
|
|
-
|
|
|
|
|
|
Common
stock issued concurrent with convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
|
|
-
|
|
|
|
|
|
Beneficial
conversion feature on convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
|
|
Derivative
liability resolved to APIC due to note conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
383
|
|
|
|
-
|
|
|
|
-
|
|
|
|
383
|
|
|
|
-
|
|
|
|
|
|
Dividends
declared
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
|
|
Net
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,950
|
)
|
|
|
-
|
|
|
|
(1,950
|
)
|
|
|
(30
|
)
|
|
|
|
|
BALANCE,
January 31, 2021
|
|
|
225,000
|
|
|
|
-
|
|
|
|
407,477
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
134,359,175
|
|
|
$
|
134
|
|
|
$
|
87,966
|
|
|
$
|
(91,368
|
)
|
|
$
|
1
|
|
|
$
|
(3,267
|
)
|
|
$
|
(447
|
)
|
|
$
|
|
|
Amortization
of employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57
|
|
|
|
-
|
|
|
|
|
|
Preferred
Stock Series B issued for debt settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
17,965
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
-
|
|
|
|
|
|
Preferred
Stock Series C issued for debt settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
554
|
|
|
|
-
|
|
|
|
-
|
|
|
|
554
|
|
|
|
-
|
|
|
|
|
|
Common
stock issued for debt conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
598,825
|
|
|
|
1
|
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
-
|
|
|
|
|
|
Common
stock issued concurrent with convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
|
|
1
|
|
|
|
77
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78
|
|
|
|
-
|
|
|
|
|
|
Common
stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
2
|
|
|
|
123
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125
|
|
|
|
-
|
|
|
|
|
|
Common
stock issued for exercise of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
|
|
Beneficial
conversion feature on convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
413
|
|
|
|
-
|
|
|
|
-
|
|
|
|
413
|
|
|
|
-
|
|
|
|
|
|
Dividends
declared
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
|
|
Net
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,798
|
)
|
|
|
-
|
|
|
|
(12,798
|
)
|
|
|
(158
|
)
|
|
|
|
|
BALANCE,
April 30, 2021
|
|
|
225,000
|
|
|
|
-
|
|
|
|
425,442
|
|
|
|
-
|
|
|
|
55,400
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
137,858,000
|
|
|
$
|
138
|
|
|
$
|
89,250
|
|
|
$
|
(104,166
|
)
|
|
$
|
1
|
|
|
$
|
(14,777
|
)
|
|
$
|
(605
|
)
|
|
$
|
|
|
See
accompanying notes to consolidated unaudited financial statements
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
For
the Nine Months Ended April 30, 2020
(In
thousands, except for share amounts, unaudited)
|
|
Equity
Digerati’s Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Noncontrolling
|
|
|
|
|
|
|
A
Shares
|
|
|
Par
|
|
|
B
Shares
|
|
|
Par
|
|
|
Shares
|
|
|
Par
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Deficit
|
|
|
Interest
|
|
|
Totals
|
|
BALANCE,
July 31, 2019
|
|
|
225,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,740,406
|
|
|
$
|
24
|
|
|
$
|
82,972
|
|
|
$
|
(85,320
|
)
|
|
$
|
1
|
|
|
$
|
(2,323
|
)
|
|
$
|
(335
|
)
|
|
$
|
(2,658
|
)
|
Stock issued for services,
to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,289,420
|
|
|
|
5
|
|
|
|
365
|
|
|
|
-
|
|
|
|
-
|
|
|
|
370
|
|
|
|
-
|
|
|
|
370
|
|
Amortization of employee stock
options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141
|
|
|
|
-
|
|
|
|
141
|
|
Stock issued for convertible
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,782,881
|
|
|
|
4
|
|
|
|
153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
157
|
|
|
|
-
|
|
|
|
157
|
|
Derivative liability resolved
to APIC due to note conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
240
|
|
|
|
-
|
|
|
|
-
|
|
|
|
240
|
|
|
|
-
|
|
|
|
240
|
|
Stock issued, extension of
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400,000
|
|
|
|
-
|
|
|
|
40
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
-
|
|
|
|
40
|
|
Dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
(8
|
)
|
Net
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,508
|
)
|
|
|
-
|
|
|
|
(1,508
|
)
|
|
|
(13
|
)
|
|
|
(1,521
|
)
|
BALANCE,
October 31, 2019
|
|
|
225,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,212,707
|
|
|
$
|
33
|
|
|
$
|
83,903
|
|
|
$
|
(86,828
|
)
|
|
$
|
1
|
|
|
$
|
(2,891
|
)
|
|
$
|
(348
|
)
|
|
$
|
(3,239
|
)
|
Stock issued for services,
to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
5,012,658
|
|
|
|
5
|
|
|
|
193
|
|
|
|
-
|
|
|
|
-
|
|
|
|
198
|
|
|
|
-
|
|
|
|
198
|
|
Amortization of employee stock
options
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
110
|
|
|
|
-
|
|
|
|
-
|
|
|
|
110
|
|
|
|
-
|
|
|
|
110
|
|
Stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
1
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
16
|
|
Stock issued for convertible
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
8,539,179
|
|
|
|
9
|
|
|
|
144
|
|
|
|
-
|
|
|
|
-
|
|
|
|
153
|
|
|
|
-
|
|
|
|
153
|
|
Derivative liability resolved
to APIC due to note conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
145
|
|
|
|
-
|
|
|
|
-
|
|
|
|
145
|
|
|
|
-
|
|
|
|
145
|
|
Stock issued for accrued interest
payments on debt
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
282,885
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
Stock issued, extension of
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
Stock issued for conversion
of Series A convertible preferred stock
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Dividends declared
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
Net
Ioss
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(457
|
)
|
|
|
-
|
|
|
|
(457
|
)
|
|
|
(44
|
)
|
|
|
(501
|
)
|
BALANCE,
January 31, 2020
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
47,614,096
|
|
|
$
|
48
|
|
|
$
|
84,524
|
|
|
$
|
(87,285
|
)
|
|
$
|
1
|
|
|
$
|
(2,712
|
)
|
|
$
|
(392
|
)
|
|
$
|
(3,104
|
)
|
Stock issued for services,
to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,509,022
|
|
|
|
12
|
|
|
|
222
|
|
|
|
-
|
|
|
|
-
|
|
|
|
234
|
|
|
|
-
|
|
|
|
234
|
|
Amortization of employee stock
options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63
|
|
|
|
-
|
|
|
|
63
|
|
Preferred Stock Series A and
warrants issued for AP settlement
|
|
|
25,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
25
|
|
Preferred Stock Series B issued
for debt settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
424,165
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
424
|
|
|
|
-
|
|
|
|
-
|
|
|
|
424
|
|
|
|
-
|
|
|
|
424
|
|
Stock issued for convertible
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,110,999
|
|
|
|
25
|
|
|
|
352
|
|
|
|
-
|
|
|
|
-
|
|
|
|
377
|
|
|
|
-
|
|
|
|
377
|
|
Derivative liability resolved
to APIC due to note conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
139
|
|
|
|
-
|
|
|
|
-
|
|
|
|
139
|
|
|
|
-
|
|
|
|
139
|
|
Stock issued for accrued interest
payments on debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
110,027
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
Stock issued, extension of
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
7
|
|
Stock issued, settlement of
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
Dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
Net
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,107
|
)
|
|
|
-
|
|
|
|
(1,107
|
)
|
|
|
(1
|
)
|
|
|
(1,108
|
)
|
BALANCE,
April 30, 2020
|
|
|
225,000
|
|
|
|
-
|
|
|
|
424,165
|
|
|
|
-
|
|
|
|
84,844,144
|
|
|
$
|
85
|
|
|
$
|
85,762
|
|
|
$
|
(88,392
|
)
|
|
$
|
1
|
|
|
$
|
(2,544
|
)
|
|
$
|
(393
|
)
|
|
$
|
(2,937
|
)
|
See
accompanying notes to consolidated unaudited financial statements
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands, unaudited)
|
|
Nine months ended
April 30,
|
|
|
|
2021
|
|
|
2020
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,692
|
)
|
|
$
|
(3,130
|
)
|
Adjustments to reconcile net loss to cash used in by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,204
|
|
|
|
465
|
|
Stock compensation and warrant expense
|
|
|
558
|
|
|
|
1,132
|
|
Bad debt
|
|
|
9
|
|
|
|
(18
|
)
|
Amortization of ROU - operating
|
|
|
95
|
|
|
|
159
|
|
Amortization of debt discount
|
|
|
1,827
|
|
|
|
1,046
|
|
Loss (Gain) on derivative liabilities
|
|
|
10,860
|
|
|
|
(69
|
)
|
(Gain) on settlement of debt
|
|
|
(347
|
)
|
|
|
(134
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(96
|
)
|
|
|
(116
|
)
|
Prepaid expenses and other current assets
|
|
|
(141
|
)
|
|
|
18
|
|
Inventory
|
|
|
26
|
|
|
|
-
|
|
Right of use operating lease liability
|
|
|
(95
|
)
|
|
|
(159
|
)
|
Accounts payable
|
|
|
97
|
|
|
|
277
|
|
Accrued expenses
|
|
|
1,397
|
|
|
|
532
|
|
Deferred income
|
|
|
(105
|
)
|
|
|
33
|
|
Net cash (used in) / provided by operating activities
|
|
|
(403
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash paid in acquisition of equipment
|
|
|
(228
|
)
|
|
|
(57
|
)
|
Cash paid for escrow deposit related to acquisition
|
|
|
-
|
|
|
|
(102
|
)
|
Acquisitions of VoIP assets, net of cash received
|
|
|
(10,108
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(10,336
|
)
|
|
|
(159
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings from convertible debt, net of original issuance cost and discounts
|
|
|
1,078
|
|
|
|
195
|
|
Proceed from the exercise of warrants
|
|
|
30
|
|
|
|
-
|
|
Borrowings from related party note, net
|
|
|
-
|
|
|
|
70
|
|
Borrowings from 3rd party promissory notes, net
|
|
|
-
|
|
|
|
322
|
|
Borrowings from debt, net of original issuance cost and discounts
|
|
|
13,036
|
|
|
|
-
|
|
Principal payments on debt, net
|
|
|
(1,330
|
)
|
|
|
-
|
|
Principal payments on convertible notes, net
|
|
|
(266
|
)
|
|
|
-
|
|
Principal payments on related party notes, net
|
|
|
(316
|
)
|
|
|
(376
|
)
|
Principal payment on equipment financing
|
|
|
(53
|
)
|
|
|
(49
|
)
|
Net cash provided by financing activities
|
|
|
12,179
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
1,440
|
|
|
|
39
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
685
|
|
|
|
406
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
2,125
|
|
|
$
|
445
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
753
|
|
|
$
|
323
|
|
Income tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Accrued interest rolled into principal
|
|
$
|
328
|
|
|
$
|
-
|
|
Stock issued with convertible debt - debt discount
|
|
$
|
146
|
|
|
$
|
-
|
|
Beneficial conversion feature on convertible debt
|
|
$
|
554
|
|
|
$
|
-
|
|
Preferred Stock Series B issued for debt conversion
|
|
$
|
18
|
|
|
|
|
|
Preferred Stock Series C issued for debt conversion
|
|
$
|
554
|
|
|
|
|
|
Debt discount from derivative liabilities
|
|
$
|
6,462
|
|
|
$
|
765
|
|
Debt from assignment of accrued interest
|
|
$
|
-
|
|
|
$
|
99
|
|
Promissory note reclassed to convertible debt
|
|
$
|
15
|
|
|
$
|
-
|
|
Capitalization of ROU assets and liabilities - operating
|
|
$
|
254
|
|
|
$
|
372
|
|
Preferred Stock Series A and warrants issued for AP settlement
|
|
$
|
-
|
|
|
$
|
25
|
|
Preferred Stock Series B issued for debt conversion and settlement
|
|
$
|
-
|
|
|
$
|
424
|
|
Common Stock issued for debt conversion
|
|
$
|
429
|
|
|
$
|
692
|
|
Common Stock issued for interest payment
|
|
$
|
-
|
|
|
$
|
19
|
|
Common Stock issued for accounts payable
|
|
$
|
60
|
|
|
$
|
-
|
|
Common Stock issued for debt extension
|
|
$
|
-
|
|
|
$
|
50
|
|
Dividend declared
|
|
$
|
15
|
|
|
$
|
15
|
|
Derivative liability resolved to APIC due to debt conversion
|
|
$
|
588
|
|
|
$
|
524
|
|
See
accompanying notes to consolidated unaudited financial statements
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, 2020 contained in the Company’s Form 10-K filed on October 29, 2020
have been omitted.
Treasury Shares
As a result of entering into various convertible
debt instruments which contained a variable conversion feature with no floor, warrants with fixed exercise price, and convertible notes
with fixed conversion price or with a conversion price floor, we reserved 25,000,000 treasury shares for consideration for future conversions
and exercise of warrants, for convertible notes with fixed conversion price, notes with variable conversion feature with a floor and warrants
with a conversion price floor. The Company will evaluate the reserved treasury shares on a quarterly basis, and if necessary, reserve
additional treasury shares. As of April 30, 2021, we believe that the treasury share reserved are sufficient for any future conversions
of these instruments. As a result, these debt instruments and warrants are excluded from derivative consideration.
Customers and Suppliers
We rely on various suppliers to provide services
in connection with our VOIP and UCaaS offerings. Our customers include businesses in various industries including Healthcare, Banking,
Financial Services, Legal, Real Estate, and Construction. We are not dependent upon any single supplier or customer.
During the nine months ended April 30, 2021, and
2020, the Company did not derive a significant amount of revenue from one single customer.
As of the nine months ended April 30, 2021, and
2020, the Company did not derive a significant number of accounts receivable from one single customer.
Sources of revenue:
Cloud Software and Service Revenue. The Company
recognizes cloud software and service revenue, mainly from subscription services for its cloud telephony applications that includes hosted
IP/PBX services, SIP trunking, call center applications, auto attendant, voice and web conferencing, call recording, messaging, voicemail
to email conversion, integrated mobility applications that are device and location agnostic, and other customized applications. Other
services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN
(Software-defined Wide Area Network), fiber, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster
recovery services. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying
the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4)
allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation
is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
Service Revenue
Service revenue from
subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over the contractual subscription
term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription services
being rendered are recorded as a deferred revenue. Usage fees, either bundled or not bundled, are recognized when the Company has a right
to invoice. Professional services for configuration, system integration, optimization, customer training and/or education are primarily
billed on a fixed-fee basis and are performed by the Company directly. Alternatively, customers may choose to perform these services themselves
or engage their own third-party service providers. Professional services revenue is recognized over time, generally as services are activated
for the customer.
Product Revenue
The
Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is generally
upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical experience.
Disaggregation of Cloud software
and service revenue
Summary of disaggregated revenue is as follows (in thousands):
|
|
Three months ended
April 30,
|
|
|
Nine months ended
April 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Cloud software and service revenue
|
|
$
|
3,666
|
|
|
$
|
1,556
|
|
|
$
|
8,440
|
|
|
$
|
4,653
|
|
Product revenue
|
|
|
85
|
|
|
|
10
|
|
|
|
189
|
|
|
|
59
|
|
Total operating revenues
|
|
$
|
3,751
|
|
|
$
|
1,566
|
|
|
$
|
8,629
|
|
|
$
|
4,712
|
|
Contract Assets
Contract assets are recorded
for those parts of the contract consideration not yet invoiced but for which the performance obligations are completed. The revenue is
recognized when the customer receives services or equipment for a reduced consideration at the onset of an arrangement; for example, when
the initial month’s services or equipment are discounted. Contract assets are included in prepaid and other current assets in the
consolidated balance sheets, depending on if their reduction is recognized during the succeeding 12-month period or beyond. Contract assets
as of April 30, 2021, and July 31, 2020, were $13,260 and $5,980, respectively.
Deferred Income
Deferred income represents
billings or payment received in advance of revenue recognition and is recognized upon transfer of control. Balances consist primarily
of annual plan subscription services, for services not yet provided as of the balance sheet date. Deferred revenues that will be recognized
during the succeeding 12-month period are recorded as current deferred revenues in the consolidated balance sheets, with the remainder
recorded as other noncurrent liabilities in the consolidated balance sheets. Deferred income as of April 30, 2021, and July 31, 2020,
were $43,000 and $148,000, respectively.
Customer deposits
The Company in some instances requires customers
to make deposits for equipment, installation charges and training. As equipment is installed and training takes places the deposits are
then applied to revenue. As of April 30, 2021, and July 31, 2020, Digerati’s customer deposits balance was $131,000 and $131,000,
respectively.
Costs to Obtain a Customer Contract
Sales commissions are
paid upon collections of related revenue and are expensed during the same period. Sales commissions for the nine months ended April 30,
2021, and April 30, 2020, were $576,476 and $51,953, respectively.
Direct Costs - Cloud software and service
We incur bandwidth and colocation charges in connection
with our UCaaS or cloud communication services. The bandwidth charges are incurred as part of the connectivity between our customers to
allow them access to our various services. We also incur costs from underlying providers for fiber, Internet broadband, and telecommunication
circuits in connection with our data and connectivity solutions.
Noncontrolling interest. The Company
follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, which
governs the accounting for and reporting of non-controlling interests (“NCIs”) in partially owned consolidated subsidiaries
and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate
component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact
be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated
subsidiary be allocated to the NCI even when such allocation might result in a deficit balance.
The net income (loss)
attributed to the NCI is separately designated in the accompanying consolidated statements of operations and other comprehensive income
(loss). For the nine months ended April 30, 2021, and 2020, the Company recognized a net loss attributable to the noncontrolling interest
of $223,000 and $58,000, respectively.
Recently issued accounting pronouncements.
Recent accounting pronouncements, other than below, issued by the Financial Accounting Standards Board (“FASB”) (including
its Emerging Issues Task Force), the AICPA and the SEC did not, or are not, believed by management to have a material effect on the Company’s
present or future financial statements.
In August 2020, the FASB issued “ASU 2020-06,
Debt with Conversion and Other Options (Subtopic 47020) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40)” which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate
the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition
or a fully retrospective method of transition is permissible for the adoption of this standard. Update No. 2020-06 is effective for fiscal
years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than
the fiscal year beginning after December 15, 2020. The Company is currently evaluating the potential on its financial statements.
NOTE 2 – GOING CONCERN
Financial Condition
The Company’s consolidated financial statements
for the nine months ending April 30, 2021, have been prepared on a going concern basis, which contemplates the realization of assets and
the settlement of liabilities in the normal course of business. Since the Company’s inception in 1993, the Company has incurred
net losses and accumulated a deficit of approximately $104,166,000, a working capital deficit of approximately $22,924,000 and total liabilities
of $32,430,000, which includes $17,340,000 in derivative liabilities, which raises substantial doubt about Digerati’s ability to
continue as a going concern.
Management Plans to Continue as a Going
Concern
Management believes that available resources as
of April 30, 2021, will not be sufficient to fund the Company’s operations and corporate expenses over the next 12 months. The Company’s
ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional
capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient
revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts
funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company
raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience
dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible
senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through
debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners,
the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able
to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may
be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay
off its obligations, if and when they come due.
We are currently taking initiatives to reduce
our overall cash deficiencies on a monthly basis. During fiscal 2021 certain members of our management team have taken a significant portion
of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best
practices from our recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue; we anticipate
utilizing our value-added resellers and channel partners to tap into new sources of revenue streams, we have also secured numerous agent
agreements through our recent acquisitions that we anticipate will accelerate revenue growth. In addition, we will continue to focus on
selling a greater number of comprehensive services to our existing customer base. Further, in an effort to increase our revenues, we will
continue to evaluate the acquisition of various assets with emphasis in VoIP Services and Cloud Communication Services. As a result, during
the due diligence process we anticipate incurring significant legal and professional fees.
We have been successful in raising debt and equity
capital in the past and as described in Notes 6, 7, and 8. We have financing efforts in place to continue to raise cash through debt and
equity offerings. Although we have successfully completed financings and reduced expenses in the past, we cannot assure you that our plans
to address these matters in the future will be successful.
The Company’s consolidated financial statements
as of April 30, 2021, do not include any adjustments that might result from the inability to implement or execute the Company’s
plans to improve our ability to continue as a going concern.
On November 17, 2020, the Company and T3 Communications,
Inc (“T3 Nevada”), a majority owned subsidiary entered into a credit agreement (the “Credit Agreement”) with Post
Road Administrative LLC and its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post Road”). Pursuant
to the Credit Agreement, Post Road provided T3 Nevada with a secured loan of up to $20,000,000, with initial loans of $10,500,000 pursuant
to the issuance of a Term Loan A Note and $3,500,000 pursuant to the issuance of a Term Loan B Note, each funded on November 17, 2020.
The Company used $14,000,000 of the credit facility
for the payment of approximately $9.452 million for the purchase price for the merger of Nexogy, $1.190 million for the purchase price
and transaction fees of certain assets of ActiveServe, Inc., $1.487 million for the payment in full of outstanding debts owed and accrued
interest to three creditors, including the secured creditor Thermo Communication, Inc., the payment of approximately $464,000 paid to
Post Road, and recognized as deferred financing cost, and will be amortized over the terms of the notes. In addition, the Company expensed
$430,000 in legal fees associated to the acquisitions and financing.
The Company can draw additional loans in increments
of $1,000,000, before the 18 month anniversary of the initial funding date. The current Credit Agreement will allow the Company to continue
acquiring UCaaS service providers that meet the Company’s acquisition criteria. Management anticipates that future acquisitions
will provide additional operating revenues to the Company as it continues to execute on its consolidation strategy. There can be no guarantee
that the planned acquisitions will close or that they will produce the anticipated revenues on the schedule anticipated by management.
NOTE
3 – INTANGIBLE ASSETS
Below
are summarized changes in intangible assets at April 30, 2021, and July 31, 2020:
Total
amortization expense for the nine months ended April 30, 2021, and 2020 was $962,429 and $284,571, respectively.
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
April 30, 2021
|
|
Value
|
|
|
Amortization
|
|
|
Amount
|
|
NetSapiens - license, 10 years
|
|
$
|
150,000
|
|
|
$
|
(150,000
|
)
|
|
$
|
-
|
|
Customer relationships, 5 years
|
|
|
40,000
|
|
|
|
(26,672
|
)
|
|
|
13,328
|
|
Customer relationships, 7 years
|
|
|
1,480,000
|
|
|
|
(646,077
|
)
|
|
|
833,923
|
|
Customer relationships 7 years
|
|
|
5,710,000
|
|
|
|
(407,857
|
)
|
|
|
5,302,143
|
|
Trademarks, 7 years
|
|
|
2,870,000
|
|
|
|
(205,000
|
)
|
|
|
2,665,000
|
|
Non-compete, 2 & 3 years
|
|
|
290,000
|
|
|
|
(65,000
|
)
|
|
|
225,000
|
|
Marketing & Non-compete, 5 years
|
|
|
800,000
|
|
|
|
(480,000
|
)
|
|
|
320,000
|
|
Total Define-lived Assets
|
|
|
11,340,000
|
|
|
|
(1,980,606
|
)
|
|
|
9,359,394
|
|
Goodwill, Indefinite
|
|
|
3,512,533
|
|
|
|
-
|
|
|
|
3,512,533
|
|
Balance, April 30, 2021
|
|
$
|
14,852,533
|
|
|
$
|
(1,980,606
|
)
|
|
$
|
12,871,927
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
July 31, 2020
|
|
Value
|
|
|
Amortization
|
|
|
Amount
|
|
NetSapiens - license, 10 years
|
|
$
|
150,000
|
|
|
$
|
(150,000
|
)
|
|
$
|
-
|
|
Customer relationships, 5 years
|
|
|
40,000
|
|
|
|
(20,672
|
)
|
|
|
19,328
|
|
Customer relationships, 7 years
|
|
|
1,480,000
|
|
|
|
(487,505
|
)
|
|
|
992,495
|
|
Marketing & Non-compete, 5 years
|
|
|
800,000
|
|
|
|
(360,000
|
)
|
|
|
440,000
|
|
Total Define-lived Assets
|
|
|
2,470,000
|
|
|
|
(1,018,177
|
)
|
|
|
1,451,823
|
|
Goodwill, Indefinite
|
|
|
810,353
|
|
|
|
-
|
|
|
|
810,353
|
|
Balance, July 31, 2020
|
|
$
|
3,280,353
|
|
|
$
|
(1,018,177
|
)
|
|
$
|
2,262,176
|
|
NOTE
4 – STOCK-BASED COMPENSATION
In November 2015, the Company adopted the Digerati
Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan authorizes the grant of up to 7.5 million stock options,
restricted common shares, non-restricted common shares and other awards to employees, directors, and certain other persons. The Plan is
intended to permit the Company to retain and attract qualified individuals who will contribute to the overall success of the Company.
The Company’s Board of Directors determines the terms of any grants under the Plan. Exercise prices of all stock options and other
awards vary based on the market price of the shares of common stock as of the date of grant. The stock options, restricted common stock,
non-restricted common stock, and other awards vest based on the terms of the individual grant.
During the nine months ended April 30, 2021, we
issued:
|
●
|
7,608,820 common shares to various employees as part of the Company’s Non-Standardized profit-sharing plan contribution. The Company recognized stock-based compensation expense of $247,287 equivalent to the value of the shares calculated based on the share’s closing price at the grant dates.
|
|
●
|
250,000 common shares to a former member of the Management team for services in lieu of cash compensation. The Company recognized stock-based compensation expense of approximately $17,500 equivalent to the value of the shares calculated based on the share’s closing price at the grant dates.
|
|
●
|
500,000 options to purchase common shares to one of our members of the Board of Directors with an exercise price of $0.1475 per share and a term of 5 years. At issuance, 166,666 of the options vested, 333,334 of the options will vest equally over a period of two years. At the time of issuance, the options had a fair market value of $52,531.
|
|
●
|
3,730,000 options to purchase common shares to various employees with an exercise price of $0.04 per share and a term of 5 years. At issuance, 33,333 of the options vested, 66,667 of the options will vest equally over a period of two years, and 3,630,000 of the options will vest equally over a period of three years. The options have a fair market value of $214,812.
|
During the nine months ended April 30, 2020, we
issued:
|
●
|
7,313,827 common shares to the Executive Officers for services in lieu of cash compensation. The Company recognized stock-based compensation expense of approximately $410,044 equivalent to the value of the shares calculated based on the share’s closing price at the grant dates.
|
|
●
|
2,988,251 shares of common stock to the Executive Officers, with a market value at time of issuance of $158,216 the stock was issued as payment for outstanding compensation.
|
|
●
|
60,000 options to purchase common shares to an employee with an exercise price of $0.12 per share and a term of 5 years. The options vest equally over a period of three years. The options have a fair market value of $7,158.
|
The fair market value of all options issued during
the nine months ended April 30, 2021, were determined using the Black-Scholes option pricing model which used the following assumptions:
Expected dividend yield
|
|
0.00%
|
Expected stock price volatility
|
|
197.71% - 317.52%
|
Risk-free interest rate
|
|
0.22% - 1.47%
|
Expected term
|
|
2.0 - 3.0 years.
|
The Company recognized approximately $109,685
and $315,000 in stock-based compensation expense for stock options to employees for the nine months ended April 30, 2021, and 2020, respectively.
Unamortized compensation stock option cost totaled $220,861 and $126,182 at April 30, 2021, and April 30, 2020, respectively.
A summary of the stock options as of April 30,
2021, and July 31, 2020, and the changes during the nine months ended April 30, 2021, are presented below:
|
|
|
|
|
Weighted
average
|
|
|
Weighted
average
remaining contractual
|
|
|
|
Options
|
|
|
exercise price
|
|
|
term (years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2020
|
|
|
5,000,000
|
|
|
$
|
0.27
|
|
|
|
2.66
|
|
Granted
|
|
|
4,230,000
|
|
|
$
|
0.05
|
|
|
|
4.65
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited and cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at April 30, 2021
|
|
|
9,230,000
|
|
|
$
|
0.17
|
|
|
|
3.18
|
|
Exercisable at April 30, 2021
|
|
|
5,666,908
|
|
|
$
|
0.24
|
|
|
|
2.28
|
|
The aggregate intrinsic value (the difference
between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number
of in-the-money options) of the 9,230,000 and 5,000,000 stock options outstanding at April 30, 2021, and July 31, 2020, was $427,340 and
$0, respectively.
The aggregate intrinsic value of 5,666,908 and
4,717,699 stock options exercisable at April 30, 2021, and July 31, 2020, was $65,173 and $0, respectively.
NOTE 5 –
WARRANTS
During the nine months ended April 30, 2021, the
Company issued the following warrants:
On November 17, 2020, the Company issued 107,701,179
Warrants to Post Road Special Opportunity Fund II LP (the “Warrant”) to purchase, initially, twenty-five percent (25%) of
the Company’s total shares (the “Warrant”), calculated on a fully-diluted basis as of the date of issuance (the “Warrant
Shares”) and subject to a reduction to fifteen percent (15%) as described below.
The number of Warrant Shares is adjustable to
allow the holder to maintain, subject to certain share issuances that are exceptions, the right to purchase twenty-five percent (25%)
of the Company’s total shares, calculated on a fully-diluted basis. The Warrant has an exercise price of $0.01 per share and the
Warrant expires on November 17, 2030. Seventy-five percent (75%) of the Warrant Shares are immediately fully vested and not subject to
forfeiture at any time for any reason. The remaining twenty-five percent (25%) of the Warrant Shares are subject to forfeiture based on
the Company achieving certain performance targets which, if achieved, would result in twenty percent (20%) warrant coverage. If the minority
shareholders of T3 Nevada convert their T3 Nevada shares into shares of the Company’s common stock, par value $0.001 per share (the
“Common Stock”), the Warrant Shares percentage shall also be lowered such that when combined with the achievement of the performance
targets, the warrant coverage could be reduced to fifteen percent (15%).
In connection with the issuance of the Warrant,
the three executives of the Company, Art Smith, Antonio Estrada, and Craig Clement entered into a Tag-Along Agreement (the “Tag-Along
Agreement”) whereby they agreed that the holder of the Warrant or Warrant Share will have the right to participate or “tag-along”
in any agreements to sell any shares of their Common Stock that such executives enter into. The Company also agreed, in connection with
the issuance of the Warrant and pursuant to a Board Observer Agreement (the “Board Observer Agreement”), to grant Post Road
the right to appoint a representative to each of the boards of directors of the Company and each of its subsidiaries, to attend all board
meeting in a non-voting observer capacity. In addition, at issuance the Company recognized $6,462,050 in Derivative liability associated
with these warrants.
A summary of the warrants as of April 30, 2021,
and July 31, 2020, and the changes during the nine months ended April 30, 2021, are presented below:
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
Weighted average
|
|
|
remaining contractual
|
|
|
|
Warrants
|
|
|
exercise price
|
|
|
term (years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2020
|
|
|
2,540,000
|
|
|
$
|
0.33
|
|
|
|
1.61
|
|
Granted
|
|
|
107,701,179
|
|
|
$
|
0.01
|
|
|
|
9.50
|
|
Exercised
|
|
|
(300,000
|
)
|
|
$
|
0.10
|
|
|
|
-
|
|
Forfeited and cancelled
|
|
|
(105,000
|
)
|
|
$
|
0.50
|
|
|
|
-
|
|
Outstanding at April 30, 2021
|
|
|
109,836,179
|
|
|
$
|
0.02
|
|
|
|
9.39
|
|
Exercisable at April 30, 2021
|
|
|
82,610,885
|
|
|
$
|
0.01
|
|
|
|
9.40
|
|
The aggregate intrinsic value (the difference
between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number
of in-the-money warrants) of the 109,836,179 and 2,540,000 warrants outstanding at April 30, 2021, and July 31, 2020, was $15,677,051
and $6,160, respectively.
The aggregate intrinsic value of 82,610,885 and 1,940,000 warrants
exercisable at April 30, 2021, and July 31, 2020, was $11,772,883 and $6,160, respectively.
During the nine months ended April 30, 2020, we
issued the following warrants.
In March 2020, the Company received $25,000 in
professional services and issued 25,000 shares of Series A Convertible Preferred Stock at a conversion price of $0.30 per share and warrants
to purchase an additional 50,000 shares of its common stock at an exercise price of $0.20 per share. We determined that the warrants issued
in connection with the services received were equity instruments and did not represent derivative instruments. The Company adopted a sequencing
policy and determined that the warrants with fixed exercise price were excluded from derivative consideration.
During the
nine months ended April 30, 2021, the Company extended the expiration date for 300,000 warrants that previously set to expired in fiscal
year ended July 31, 2020. The extended expiration date is to October 12, 2022.
During the nine months ended April 30, 2021, 105,000
warrants expired with an exercise price of $0.50. These warrants were issued in August and October 2017.
During the nine months ended April 30, 2021, the
Company received $30,000 in proceeds from the exercise of 300,000 warrants, with an exercise price of $0.10. These warrants were issued
in March 2018.
In December 2017, the Company issued 100,000 warrants
to a consultant for services, the warrants vested at time of issuance. The warrants have a term of 5 years, with an exercise price of
$0.50. Additionally, the Company committed to issue 100,000 warrants if the Company’s stock price traded at $0.75 per share for
10 consecutive days, to issue 100,000 warrants if the Company’s stock price traded at $1.00 per share for 10 consecutive days, and
to issue 100,000 warrants if the Company’s stock price traded at $1.25 per share for 10 consecutive days. The 300,000 commitment
warrants have not been issued since the requirements were not achieved during the nine months ending April 30, 2021.
NOTE 6 – NOTES PAYABLE NON-CONVERTIBLE
Notes Payable Non-convertible
On April 30, 2018, T3 Communications, Inc., a
Nevada corporation (“T3”), our majority owned subsidiary, entered into a secured promissory note for $650,000 with an effective
annual interest rate of 0% and an initial maturity date of May 14, 2018. The lender subsequentially continued to extend the maturity date
on the note. On October 14, 2020, the lender agreed to extend the maturity date until October 31, 2020, the Company continued to pay $3,250
per week in late fees. In conjunction with the note, T3 entered into a Security Agreement, whereby T3 agreed to pledge one third of the
outstanding shares of its Florida operations, T3 Communications, Inc. On November 17, 2020, the Company paid the total principal balance
outstanding of $700,000. As of April 30, 2021, and July 31, 2020, the outstanding principal balance were $0 and $700,000, respectively.
On April 30, 2018, T3 entered into a credit facility
under a secured promissory note of $500,000, interest payment for the first twenty-three months with a balloon payment on the twenty-fourth
month and a maturity date of April 30, 2020. The note was collateralized by T3’s accounts receivables. On April 10, 2020, the Company
increased the credit facility to $600,000 and the lender agreed to extend the maturity date until April 10, 2022. In addition, the Company
agreed to a revised effective annual interest rate of prime plus 5.75%, adjusted quarterly on the first day of each calendar quarter.
On November 17, 2020, the Company paid the total principal balance outstanding of $600,000 and $11,115 in accrued interest and fees. As
of April 30, 2021, and July 31, 2020, the outstanding principal balance were $0 and $600,000, respectively.
On October 22, 2018, the Company issued a secured
promissory note for $50,000, bearing interest at a rate of 8% per annum, with maturity date of December 31, 2018.In February 2020, the
maturity date was extended until December 31, 2020. In March 2021, the maturity date was extended until July 31, 2021. The promissory
note is secured by a Pledge and Escrow Agreement, whereby the Company agreed to pledge rights to a collateral due under certain Agreement.
The outstanding balance as of April 30, 2021, and July 31, 2020, was $50,000.
On June 14, 2019, the Company, entered into a
Stock Purchase Agreement (the “Agreement”) to acquire a 12% minority interest in Itellum Comunicacions Costa Rica, S.R.L.
In conjunction with this transaction, we entered into a non-recourse promissory note for $17,500 with an effective annual interest rate
of 8% and an initial maturity date of September 14, 2019. On February 15, 2020, the maturity date was extended to July 31, 2020. On August
1, 2020, the lender agreed to extend the maturity date to October 31, 2020. Subsequentially, the lender agreed to extend the maturity
date to January 31, 2021. Additionally, the lender agreed to extend the maturity date to April 30, 2021. The outstanding balance as of
April 30, 2021, and July 31, 2020, was $7,500. Subsequently, on May 7, 2021, the Company paid the total principal balance outstanding
of $7,500 and $1,136 in accrued interest.
On February 26, 2020, the Company entered into
a secured promissory note for $30,000 with an effective annual interest rate of 12% and a maturity date of May 1, 2020. Subsequently,
the note holder agreed to extend the maturity date until August 31, 2020. The promissory note was secured by the Company’s receivables.
On November 17, 2020, the Company paid the total principal balance outstanding of $30,000 and $2,604 in accrued interest. The outstanding
balance as of April 30, 2021, and July 31, 2020, were $0 and $30,000, respectively.
On April 22, 2020, the
Company, entered into two unsecured promissory notes (the “Notes”) for $62,500 and $86,000 made to the Company under the Paycheck
Protection Program (the “PPP”). In addition, on May 4, 2020, the Company, entered into a third unsecured promissory note (the
“Note”) for $213,100 made to the Company under the Paycheck Protection Program (the “PPP”). The PPP was established
under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business
Administration (the “SBA”). The loans to the Company were made through The Bank of San Antonio (the “Lender”).
On April 15, 2021, the SBA informed the Company that the total outstanding balance of $62,500 and accrued interest of $608 were forgiven.
As a result, the Company recognized a gain on settlement of debt of $63,108. In addition, on April 15, 2021, the SBA informed the Company
that the total outstanding balance of $86,000 and accrued interest of $836 were forgiven. At the time of the forgiveness, the Company
recognized a gain on settlement of debt of $86,836. Subsequently, on May 13, 2021, the SBA informed the Company that the total outstanding
balance of $213,100 and accrued interest of $2,172 were forgiven. Subsequentially, on May 13, 2021, the Company recognized a gain on settlement
of debt of $215,272.
The Notes provide for
an interest rate of 1.00% per year and matures two years after the issuance date. Beginning on the seventh month following the date of
the Notes, the Company is required to make 18 monthly payments of principal and interest in the amount of $8,316 and $11,933, respectively.
The Notes may be used for payroll costs, costs related to certain group health care benefits and insurance premiums, rent payments, utility
payments, mortgage interest payments and interest payments on any other debt obligation that were incurred before February 15, 2020. The
Notes contain events of default and other conditions customary for a Note of this type.
As of April 30, 2021,
the principal balance on the various notes were $0, $0, and $213,100, respectively. As of July 31, 2020, the principal balance on the
various notes were $62,500, $86,000, and $213,100, respectively.
Credit Agreement and Notes
On November 17, 2020, T3 Communications, Inc.,
a Nevada corporation (“T3 Nevada”), a majority owned subsidiary of Digerati Technologies, Inc. (the “Company”)
and the Company’s other subsidiaries entered into a credit agreement (the “Credit Agreement”) with Post Road. The Company
is a party to certain sections of the Credit Agreement. Pursuant to the Credit Agreement, Post Road will provide T3 Nevada with a secured
loan of up to $20,000,000 (the “Loan”), with initial loans of $10,500,000 pursuant to the issuance of a Term Loan A Note and
$3,500,000 pursuant to the issuance of a Term Loan B Note, each funded on November 17, 2020, and an additional $6,000,000 on loans, in
increments of $1,000,000 as requested by T3 Nevada before the 18 month anniversary of the initial funding date to be lent pursuant to
the issuance of a Delayed Draw Term Note. After payment of transaction-related expenses and closing fees of $964,000, net proceeds to
the Company from the Note totaled $13,036,000. The Company recorded these discounts and cost of $964,000 as a discount to the Notes and
will be amortized over the term of the notes.
The Company used $14,000,000 of the credit facility
for the payment of approximately $9.452 million for the purchase price for the merger of Nexogy, $1.190 million for the purchase price
and transaction fees of certain assets of ActiveServe, Inc., $1.487 million for the payment in full of outstanding debts owed and accrued
interest to three creditors, including the secured creditor Thermo Communication, Inc., the payment of approximately $464,000 paid to
Post Road, and recognized as deferred financing cost, and will be amortized over the terms of the notes. In addition, the Company expensed
$430,000 in legal fees associated to the acquisitions and financing.
During the nine months ending April 30, 2021,
the Company amortized $1,294,000 of the total debt discount as interest expense for the Term Loan A Note and the Term Loan B Note. The
total debt discount outstanding on the notes as of April 30, 2021, was $6,132,000.
The Term Loan A and Delayed Draw Term Notes have
maturity dates of November 17, 2024, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%). Term Loan
A is non-amortized (interest only payments) through the maturity date and contains an option for the Company to pay interest in kind (PIK)
for up to five percent (5%) of the interest rate in year one, four percent (4%) in year two and three percent (3%) in year three. The
principal balance and accrued PIK interest outstanding on the note were $10,500,000 and $245,881, respectively as of April 30, 2021.
Term Loan B has a maturity date of December 31,
2021, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%). Term Loan B is non-amortized (interest only
payments) through the maturity date and contains an option for the Company to pay interest in kind (PIK) for up to five percent (5%) of
the interest rate in year one, four percent (4%) in year two and three percent (3%) in year three. The principal balance and accrued PIK
interest outstanding on the note were $3,500,000 and $81,960, respectively as of April 30, 2021.
The Credit Agreement contains customary representations,
warranties, and indemnification provisions. The Credit Agreement also contains affirmative and negative covenants with respect to operation
of the business and properties of the loan parties as well as financial performance. Below are key covenants requirements, (measured quarterly):
|
1.
|
Maximum
Allowed - Senior Leverage Ratio of 5.08 to 1.00
|
|
2.
|
Minimum
Allowed - EBITDA of $703,091
|
|
3.
|
Minimum
Allowed - Liquidity of $1,250,000
|
|
4.
|
Maximum
Allowed - Capital Expenditures of $94,798
|
|
5.
|
Minimum
Allowed – Fixed Charge Coverage Ratio of 1.5 to 1.00
|
As of April 30, 2021, the Company is in compliance
of the financial covenants mentioned above.
T3 Nevada’s obligations under the Credit
Agreement are secured by a first-priority security interest in all of the assets of T3 Nevada and guaranteed by the other subsidiaries
of the Company pursuant to the Guaranty and Collateral Agreement, dated November 17, 2020, by and among T3 Nevada, the Company’s
other subsidiaries, and Post Road Administrative LLC (the “Guaranty and Collateral Agreement”). In addition, T3 Nevada’s
obligations under the Credit Agreement are, pursuant to a Pledge Agreement (the “Pledge Agreement”), secured by a pledge of
a first priority security interest in T3 Nevada’s 100% equity ownership of each of T3 Nevada’s operating companies.
NOTE 7 – RELATED PARTY PROMISORY NOTES
On May 1, 2018, T3 entered into a secured promissory
note for $275,000 with an effective annual interest rate of 8.08% with an interest and principal payment of $6,000 per month and shall
continue perpetuity until the entire principal amount is paid in full. The promissory note is guaranteed to the lender by 15% of the stock
owned by T3 in its Florida operations, T3 Communications, Inc., the secured interest will continue until the principal balance is paid
in full. In conjunction with the promissory note, the Company issued 3-year warrants to purchase 100,000 shares of common stock at an
exercise price of $0.50 per share. Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance
was approximately $26,543 and was recognized as a discount on the promissory note. The company amortized as interest expense during the
periods ended April 30, 2021, and July 31, 2020, $6,300 and $10,386, respectively. The total unamortized discount as of April 30, 2021,
and July 31, 2020, were $0 and $6,300, respectively. The note holder also serves as Board Member of T3 Communications, Inc., a Florida
Corporation, one of our operating subsidiaries. During the nine months ending April 30, 2021, the Company paid the total principal balance
outstanding of $152,634. The total principal outstanding as of April 30, 2021, and July 31, 2020, were $0 and $152,634, respectively.
On February 27, 2020, the Company entered into
an unsecured promissory note for $70,000 with an effective annual interest rate of 12% and a maturity date of May 1, 2020. Subsequently,
the note holder agreed to extend the maturity date until August 31, 2020. In addition, the Company agreed to pay the lender in services
provided by the Company, and any unpaid principal and accrued interest will be paid in cash. During the nine months ended April 30, 2020,
and April 30, 2021, the Company provided VoIP Hosted and fiber services of $128,927 and $130,029, respectively. On August 3, 2020, the
promissory note was paid in full. The total principal outstanding as of April 30, 2021, and July 31, 2020, were $0 and $16,298, respectively.
The note holder also serves as a Board Member of T3 Communications, Inc., a Florida Corporation, one of our operating subsidiaries.
ActivePBX Asset Purchase
On November 17, 2020, our indirect, wholly owned
subsidiary, T3 Communications, Inc., a Florida corporation (“T3 Florida”), executed and closed on an Asset Purchase Agreement
(the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation (“Seller”). Pursuant to the Purchase
Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software
and other licenses and miscellaneous assets used in connection with the operation of Seller’s telecommunications business known
as ActivePBX (collectively, the “Purchased Assets”).
The aggregate purchase price for the Purchased
Assets was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase Price”). $1,190,000 of the
Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover
part of potential future indemnification obligations of Seller to T3 Florida due to Seller’s breaches, if any, of any
representations and warranties made to T3 Florida by Seller under the Purchase Agreement, and $40,000 of such amount being
credited to T3 Florida against a payment in that amount made by T3 Florida to Seller pursuant to the Second Amendment to Letter of Intent
between Seller and T3 Florida dated as of October 15, 2020.
Part of the Purchase Price is payable in
8 equal quarterly payments of $136,250, subject to T3 Florida achieving quarterly post-purchase recurring
revenues under monthly contracts or subscriptions from the acquired customer base, excluding charges for taxes, regulatory fees,
additional set-up fees, equipment purchases or lease, and consulting fees. To the extent that a quarterly revenue threshold is not reached,
the amount of the corresponding quarterly payment shall be reduced on a proportional basis. T3 Florida’s $1,140,000 payment obligation
is represented by a promissory note of T3 Florida in the form included as an exhibit to the Purchase Agreement. The note, in turn, is
subject to the Subordination Agreement, included as an Exhibit to the Purchase Agreement, among Seller, the Company’s parent, T3
Nevada, and Post Road Administrative, LLC, in its capacity as administrative agent for the Post Road lenders. $275,000 of the
Purchase Price (the “Customer Renewal Value”) represents an incentive earn-out to be paid with respect to Seller’s
customer accounts which are transferred to T3 Florida at closing, that are renewed, expanded and/or revised with T3 Florida for a minimum
term of twelve months with an auto-renewal for 12 months. During the period ended April 30, 2021, the Company made one of the quarterly
principal payments of $136,250, and a payment of $11,000 towards the Holdback amount, the total principal outstanding on the notes as
of April 30, 2021, was $1,267,750.
In connection with the Purchase Agreement, the
Company entered with the Note Holders into Consulting Agreements and a Non-Compete Agreement with each of Alex Gonzalez and Jose Gonzalez,
the Chief Executive Officer and Chief Technology Officer of ActivePBX. Under the Consulting Agreements, the Company will pay on an annual
basis $90,000 to each the consultants.
NOTE
8 – CONVERTIBLE NOTES PAYABLE
At April 30, 2021, and July 31, 2020, convertible notes payable consisted of the following:
|
|
|
|
April 30,
|
|
|
July 31,
|
|
CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE
|
|
2021
|
|
|
2020
|
|
In November 2019 and February 2020, the holder agreed to extend the maturity date of the notes until April 30, 2020. In June 2020, the note holder agreed to extend the maturity date until August 31, 2020, which was again extended until January 31, 2021. The holder agreed to extend the Maturity date until February 15, 2021. On February 12, 2021, the promissory note was settled under a debt exchange agreement in which the holder received payment in full for the outstanding balance of $32,000 and $3,929.50 in accrued interest. On March 11, 2021, the Company issued a total of 17,965 shares of Series B Preferred Stock for settlement of debt of $16,000 on a promissory note and $1,965 in accrued interest. In addition, the Company issued a total of 598,825 shares of Common Stock for settlement of debt of $16,000 on a promissory note and $1,965 in accrued interest.
|
|
$
|
-
|
|
|
$
|
32,000
|
|
|
|
|
|
|
|
|
|
|
On
October 13, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $330,000,
annual interest rate of 8% and a maturity date of October 13, 2021. After payment of transaction-related expenses and closing fees
of $32,000, net proceeds to the Company from the Note totaled $298,000. The Company recorded $32,000 as a discount to the Note and
amortized over the term of the note. In connection with the execution of the note, the Company issued 1,000,000 shares of our common
stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $45,003 as
debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company
recognized $134,423 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense
during the term of the promissory note. The Company analyzed the Note for derivative accounting consideration and determined that
since the note has a fix conversion price at issuance, it does not require to be accounted as a derivative instrument. The Company
will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion
price and if the note needs to be classified as a derivative instrument. The Company amortized as interest expense during the period
ended April 30, 2021, $167,379. The total unamortized discount on the Note as of April 30, 2021, was $44,047. On April 16, 2021, the
Company paid $165,000 of the principal outstanding, $13,381 of the accrued interest and $35,676 in redemption
premium. The total principal balance outstanding as of April 30, 2021, was $165,000. (See below variable
conversion terms No.1)
|
|
|
165,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On
October 15, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $27,500,
annual interest rate of 8% and a maturity date of October 15, 2021. After payment of transaction-related expenses and closing fees
of $2,500, net proceeds to the Company from the Note totaled $25,000. Additionally, the Company recorded $6,075 as a discount to the
Note and amortized over the term of the note. The Company analyzed the Note for derivative accounting consideration and determined
that since the note has a fix conversion price at issuance, it does not require to be accounted as a derivative instrument. The
Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable
conversion price and if the note needs to be classified as a derivative instrument. The Company amortized as interest expense during
the nine months ended April 30, 2021, $8,575. The total unamortized discount on the Note as of April 30, 2021, was $0. On January
31, 2021, the holder agreed to roll over to a new consolidated note the principal balance outstanding of $27,500 and $982 of accrued
interest. The total principal balance outstanding as of April 30, 2021, was $0. (See new consolidated note dated January
31, 2021, for $80,235) (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. The Company amortized as interest expense during the nine months ended April 30, 2021, $17,184. The total unamortized discount on the Note as of April 30, 2021, was $51,552. The total principal balance outstanding as of April 30, 2021, was $250,000.
|
|
|
250,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On April 14, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, annual interest rate of 8% and a maturity date of April 14, 2022. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $63,433 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $96,766 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized as interest expense during the nine months ended April 30, 2021, $13,350. The total unamortized discount on the Note as of April 30, 2021, was $146,849. The total principal balance outstanding as of April 30, 2021, was $250,000.
|
|
|
250,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payables non-derivative:
|
|
$
|
665,000
|
|
|
$
|
32,000
|
|
CONVERTIBLE NOTES PAYABLE - DERIVATIVE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On August 30, 2019, the Company entered into variable convertible note for $93,500, bearing interest at a rate of 10% per annum and a maturity date of May 30, 2020. On August 10, 2020, the noteholder agreed to extend the maturity date until October 31, 2020. After payment of transaction-related expenses of $8,500, net proceeds to the Company from the Note totaled $85,000. The Company recorded these discounts and cost of $8,500 as a discount to the Note and fully amortized as interest expense during the period. The Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized derivative liability for the convertible note of $100,978, of which $85,000 was recorded as debt discount and will be amortized during the term of the Note, and $15,978 was recorded as day 1 derivative loss. During the nine months ended April 30, 2021, the Company issued 5,000,000 shares of common stock for the conversion of $80,000 of the principal balance outstanding. The total unamortized discount on the Note as of April 30, 2021, and July 31, 2020, was $0. The Company amortized $0 and $93,500 of debt discount as interest expense during the periods ended April 30, 2021and July 31, 2020, respectively. On January 31, 2021, the holder agreed to roll over to a new consolidated note the principal balance outstanding of $13,500 and $9,300 of accrued interest. The total principal balance outstanding as of April 30, 2021, and July 31, 2020, were $0 and $93,500, respectively. (See new consolidated note dated January 31, 2021, for $80,235) (See below variable conversion terms No.2)
|
|
|
-
|
|
|
|
93,500
|
|
|
|
|
|
|
|
|
|
|
On
January 10, 2020, the Company entered into an Assignment Agreement whereby Armada Investment Fund LLC (the “Assignor”)
assigned to Platinum Point Capital LLC (the “Assignee”) a principal amount of $145,297 and $35,750, representing the
outstanding principal balance on the Convertible Promissory Notes dated July 11, 2019, and October 18, 2019, respectively, plus
accrued interest of $28,953. The new notes are in the aggregate principal amount of $210,000, annual interest rate of 3% and a
maturity date of January 10, 2021. On January 22, 2020, the Company entered into an Assignment Agreement whereby BHP Capital NY Inc.
(the “Assignor”) assigned to Platinum Point Capital LLC (the “Assignee”) a principal amount of $146,625,
representing the outstanding principal balance on the Convertible Promissory Note dated July 11, 2019, plus accrued interest of
$33,375. The new note is in the aggregate principal amount of $180,000, annual interest rate of 3% and a maturity date of January
22, 2021. On January 22, 2020, the Company entered into an Assignment Agreement whereby Jefferson Street Capital LLC (the
“Assignor”) assigned to Platinum Point Capital LLC (the “Assignee”) a principal amount of $146,625,
representing the outstanding principal balance on the Convertible Promissory Note dated July 11, 2019, plus accrued interest of
$33,375. The new note is in the aggregate principal amount of $180,000, annual interest rate of 3% and a maturity date of January
22, 2021. The Company analyzed the notes for derivative accounting consideration and determined that the embedded conversion option
qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of the assignment, the Company
recognized derivative liability for the new convertible notes of $784,565, of which $570,000 was recorded as debt discount and
amortized over the term of the notes, and $214,565 was recorded as day 1 derivative loss. During the year ended July 31, 2020, the
Company issued 25,312,983 shares of common stock for the conversion of $230,000 of the principal outstanding and $12,000 in accrued
interest and fees. During the period ended April 30, 2021, the Company issued 11,371,125 shares of common stock for the conversion
of $211,769 of the principal outstanding. In addition, during the period ended April 30, 2021, the Company paid $101,203 of the
outstanding principal and $37,797 in accrued interest and fees. The total unamortized discount on the Notes as of April 30, 2021,
and July 31, 2020, were $0 and $172,611, respectively. The Company amortized $397,389 and $172,611 of debt discount as interest
expense during the year ended July 31, 2020, and the period ended April 30, 2021, respectively. On January 31, 2021, the holder
agreed to roll over to a new consolidated note the principal balance outstanding of $27,028 and $1,925 of accrued interest. The
total principal balance outstanding as of April 30, 2021, and July 31, 2020, were $0 and $340,000, respectively. (See new
consolidated note dated January 31, 2021, for $80,235) (See below variable conversion terms No.2)
|
|
|
-
|
|
|
|
340,000
|
|
On
February 13, 2020, the Company entered into a variable convertible note. The note is in the aggregate principal amount of $33,500,
annual interest rate of 10% and a maturity date of February 13, 2021. After payment of transaction-related expenses of $3,500, net
proceeds to the Company from the note totaled $30,000. The Company recorded these discounts and cost of $3,500 as a discount to the
note and fully amortized as interest expense during the period. The Company analyzed the note for derivative accounting
consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable
conversion price. As a result, at the time of issuance, the Company recognized derivative liability for the convertible note of
$42,976, of which $30,000 was recorded as debt discount and will be amortized during the term of the Note, and $12,976 was recorded
as day 1 derivative loss. The total unamortized discount on the Note as of April 30, 2021, and July 31, 2020, were $0 and $15,000,
respectively. During the period ended April 30, 2021, the Company issued 1,465,920 shares of common stock for the conversion of
$33,500 of the principal outstanding and $3,148 of accrued interest. The total principal balance outstanding as of April 30, 2021,
and July 31, 2020, were $0 and $33,500, respectively. The Company amortized $15,000 and $15,000 of debt discount as interest expense
during the period ended April 30, 2021, and the year ended July 31, 2020, respectively. The notes were immediately convertible into
shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock. (See below
variable conversion terms No.2)
|
|
|
-
|
|
|
|
33,500
|
|
|
|
|
|
|
|
|
|
|
On
April 28, 2020, the Company entered into a variable convertible note. The note is in the principal amount of $15,000, annual
interest rate of 10% and a maturity date of April 28, 2021. The Company analyzed the Note for derivative accounting consideration
and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a
result, at the time of issuance, the Company recognized derivative liability for the convertible note of $26,629, of which $15,000
was recorded as debt discount and will be amortized during the term of the Note, and $11,629 was recorded as day 1 derivative loss.
The total unamortized discount on the Note as of April 30, 2021, and July 31, 2020, were $0 and $11,250. During the period ended
April 30, 2021, the Company issued 644,040 shares of common stock for the conversion of $15,000 of the principal outstanding and
$1,101 of accrued interest. The total principal balance outstanding as of April 30, 2021, and July 31, 2020, were $0 and $15,000,
respectively. The Company amortized $11,250 and $3,750 of debt discount as interest expense during the period ended April 30, 2021,
and the year ended July 31, 2020, respectively. The note was immediately convertible into shares of the Company’s Common
Stock, at any time, at a conversion price for each share of Common Stock. (See below variable conversion terms
No.2)
|
|
|
-
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
On July 27, 2020, the
Company entered into a variable convertible promissory note with an aggregate principal amount of $275,000, annual interest rate of
8% and a maturity date of March 27, 2021. After payment of transaction-related expenses and closing fees of $35,000, net proceeds to
the Company from the Note totaled $240,000. The Company recorded these discounts and cost of $35,000 as a discount to the Note and
amortized over the term of the note. In connection with the execution of the note, the Company issued 500,000 shares of our common
stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $11,626 as
debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or
the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid
Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of
$0.05 (five) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq
or NYSE American., subject to adjustment as provided in this Note. If an Event of Default occurs, the Conversion Price shall be the
lesser of (a). $0.05 (five) cents or (b). 75% of the lowest traded price in the prior fifteen trading days immediately preceding the
Notice of Conversion. The Company analyzed the note for derivative accounting consideration and determined that the embedded
conversion option qualified as a derivative instrument, due to the variable conversion price. On January 28, 2021, the holder agreed
to extend the maturity date until August 1, 2021. In conjunction with the amendment, the Company agreed to add to the outstanding
balance $50,000 as consideration for the extension of the maturity date. The total principal balance outstanding as of April 30,
2021, and July 31, 2020, were $325,000 and $275,000, respectively.
|
|
|
325,000
|
|
|
|
275,000
|
|
On
July 28, 2020, the Company entered into an Assignment Agreement whereby one of the variable noteholders assigned a principal amount of
$35,750 and accrued interest and penalties of $17,081. The new variable convertible note is for $52,831, annual interest rate of 10%
and a maturity date of July 28, 2021. The Company analyzed the assignment of the note for derivative accounting consideration and determined
that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time
of issuance, the Company recognized derivative liability for the convertible note of $70,888, of which $49,180 was recorded as debt discount
and will be amortized during the term of the Note, and $21,708 was recorded as day 1 derivative loss. The Company amortized $49,180 and
$0 of debt discount as interest expense during the period ended April 30, 2021, and the year ended July 31, 2020, respectively. The total
unamortized discount on the Note as of April 30, 2021, and July 31, 2020, were $0 and $49,180, respectively. During the period ended
April 30, 2021, the Company issued 2,195,680 shares of common stock for the conversion of $52,831 of the principal outstanding and $2,061
of accrued interest. The total principal balance outstanding as of April 30, 2020, and July 31, 2020, were $0 and $52,831, respectively.
The note was immediately convertible into shares of the Company’s Common Stock, at any time, at a conversion price for each share
of Common Stock. (See below variable conversion terms No.2)
|
|
|
-
|
|
|
|
52,831
|
|
|
|
|
|
|
|
|
|
|
On January 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $80,235, annual interest rate of 8% and a maturity date of February 17, 2022. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or seventy-five percent (75%) of the lowest daily volume weighted average price (“VWAP”) over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. The total principal balance outstanding as of April 30, 2021, was $80,235.
|
|
|
80,235
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On February 17, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $175,000, annual interest rate of 8% and a maturity date of February 17, 2022. After payment of transaction-related expenses and closing fees of $5,000, net proceeds to the Company from the Note totaled $170,000. Additionally, the Company recorded $5,000 as a discount to the Note and amortized over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or seventy-five percent (75%) of the lowest daily volume weighted average price (“VWAP”) over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. The total principal balance outstanding as of April 30, 2021, was $175,000.
|
|
|
175,000
|
|
|
|
-
|
|
On April 15, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $113,000, annual interest rate of 8% and a maturity date of January 15, 2022. After payment of transaction-related expenses and closing fees of $13,000, net proceeds to the Company from the Note totaled $100,000. Additionally, the Company recorded $13,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 100,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $14,138 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.15 (fifteen) cents or (b). seventy-five percent (75%) of the lowest traded price in the prior fifteen (15) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”). The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. The total principal balance outstanding as of April 30, 2021, was $113,000.
|
|
|
113,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable - derivative:
|
|
$
|
693,235
|
|
|
$
|
809,831
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable derivative and non-derivative
|
|
|
1,358,235
|
|
|
|
841,831
|
|
Less: discount on convertible notes payable
|
|
|
(491,903
|
)
|
|
|
(294,667
|
)
|
Total convertible notes payable, net of discount
|
|
|
866,332
|
|
|
|
547,164
|
|
Less: current portion of convertible notes payable
|
|
|
(866,332
|
)
|
|
|
(547,164
|
)
|
Long-term portion of convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
Additional
terms No.1: The Holder shall have the right at any time on or after six (6) months from the Issue Date to convert any portion
of the outstanding and unpaid principal balance into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall
equal (1) $0.05 (five) cents provided however that in the event the Borrower fails to complete the acquisition of Nexogy, Inc., the Conversion
Price shall equal (2) the Variable Conversion Price (as defined herein) (subject to equitable adjustments for stock splits, stock dividends
or rights offerings by the Borrower relating to the Borrower’s securities or the securities of any subsidiary of the Borrower,
combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The “Variable Conversion Price”
shall mean eighty-five percent (85%) multiplied by the Market Price (as defined herein) (representing a discount rate of fifteen percent
(15%)). “Market Price” means the lowest Trading Price for the Common Stock during the ten (10) Trading Day period ending
on the latest complete Trading Day prior to the Conversion Date.
Variable
Conversion No.2: The notes are immediately convertible into shares of the Company’s Common Stock, at any time, at a
conversion price for each share of Common Stock equal to the lesser of (i) the lowest trading price of the Common Stock (as defined in
the Note) as reported on the National Quotations Bureau OTC Marketplace exchange upon which the Company’s shares are traded during
the twenty (20) consecutive Trading Day period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest
traded price of the Common Stock during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the
Company receives a notice of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted
in connection with the terms of the Notes.at a discount of 35% to the average of the three lowest trading closing prices of the stock
for ten days prior to conversion.
The
total unamortized discount on the convertible notes as of April 30, 2021, and July 31, 2020, were $491,903 and $294,667, respectively.
The total principal balance outstanding as of April 30, 2021, and July 31, 2020, were $1,358,235 and $841,831, respectively. During the
periods ended April 30, 2021, and July 31, 2020, the Company amortized $528,645 and $1,228,000, respectively, of debt discount as interest
expense.
The
following table provides the fair value of the derivative financial instruments measured at fair value using significant unobservable
inputs:
|
|
|
|
|
|
Fair value measurements at reporting
date using:
|
|
|
|
|
|
|
|
Quoted
prices in
active
markets
for
identical
|
|
|
Significant
other
observable
|
|
|
Significant
unobservable
|
|
|
|
|
|
|
|
liabilities
|
|
|
inputs
|
|
|
inputs
|
|
Description
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Convertible notes & warrants derivative liability at July 31, 2020.
|
|
$
|
606,123
|
|
|
-
|
|
|
-
|
|
|
$
|
606,123
|
|
Convertible notes & warrants derivative liability at April 30, 2021.
|
|
$
|
17,339,843
|
|
|
-
|
|
|
-
|
|
|
$
|
17,339,843
|
|
The
fair market value of all derivatives during the nine months ended April 30, 2021, was determined using the Black-Scholes option pricing
model which used the following assumptions:
Expected dividend yield
|
|
0.00%
|
|
Expected stock price volatility
|
|
83.28% - 282.87%
|
|
Risk-free interest rate
|
|
0.09% -2.67%
|
|
Expected term
|
|
0.01 - 10.00 years.
|
|
Level
3 inputs.
The
following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value on a recurring
basis using significant unobservable inputs:
Balance at July 31, 2020
|
|
$
|
606,123
|
|
Derivative from warrants issued in conjunction with new notes
|
|
|
6,462,050
|
|
Derivative liability resolved to additional paid in capital due to debt conversion
|
|
|
(588,097
|
)
|
Derivative (gain) / loss
|
|
|
10,859,767
|
|
Balance at April 30, 2021
|
|
$
|
17,339,843
|
|
NOTE
9 – LEASES
The
leased properties have a remaining lease term of sixteen to seventy-two months as of August 1, 2019. At the option of the Company, it
can elect to extend the term of the leases.
Beginning
August 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments, including
annual rent increases, over the lease term at commencement date. Operating leases in effect prior to August 1, 2019, were recognized
at the present value of the remaining payments on the remaining lease term as of August 1, 2019. Because none of our leases included
an implicit rate of return, we used our incremental secured borrowing rate based on lease term information available as of the adoption
date or lease commencement date in determining the present value of lease payments. The incremental borrowing rate on the leases is 8.0%.
On
January 1, 2021, the Company entered into a new office lease, with a monthly base lease payment and applicable shared expenses of $4,750
and $2,140, respectively. The base rent will increase on an annual basis by 2% of the base lease payment. The lease expires on January
1, 2026, and at the option of the Company, the lease can be extended for one (1) five (5) year term with a base rent at the prevailing
market rate at the time of the renewal. The Company recorded ROU asset and liability of $254,375 for this new lease, using the incremental
borrowing rate of 8.0% over a 5 year term.
The
impact of ASU No. 2016-02 (“Leases (Topic 842)” on our consolidated balance sheet beginning August 1, 2019, was through the
recognition of ROU assets and lease liabilities for operating leases. Amounts recognized on July 31, 2020, and April 30, 2021, for operating
leases are as follows:
ROU Asset
|
|
July 31, 2020
|
|
$
|
176,097
|
|
Amortization
|
|
|
|
$
|
(95,694
|
)
|
Addition - Asset
|
|
|
|
$
|
254,375
|
|
ROU Asset
|
|
April 30, 2021
|
|
$
|
334,778
|
|
|
|
|
|
|
|
|
Lease Liability
|
|
July 31, 2020
|
|
$
|
176,097
|
|
Amortization
|
|
|
|
$
|
(95,694
|
)
|
Addition - Liability
|
|
|
|
$
|
254,375
|
|
Lease Liability
|
|
April 30, 2021
|
|
$
|
334,778
|
|
|
|
|
|
|
|
|
Lease Liability
|
|
Short term
|
|
$
|
73,985
|
|
Lease Liability
|
|
Long term
|
|
$
|
260,793
|
|
Lease Liability
|
|
Total:
|
|
$
|
334,778
|
|
|
|
|
|
|
|
|
Operating lease cost:
|
|
|
|
$
|
118,167
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
|
|
Operating cashflow from operating leases:
|
|
$
|
118,167
|
|
|
|
|
|
|
Weighted-average remain lease term-operating lease:
|
|
|
1.74 years
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
8.0
|
%
|
For
the period ended April 30, 2021, the amortization of operating ROU assets was $95,694.
For
the period ended April 30, 2021, the amortization of operating lease liabilities was $95,694.
The
future minimum lease payment under the operating leases are as follows:
|
|
|
Lease
|
|
Period Ending July 31,
|
|
|
Payments
|
|
2021
|
|
|
$
|
146,549
|
|
2022
|
|
|
|
114,935
|
|
2023
|
|
|
|
84,475
|
|
2024
|
|
|
|
59,528
|
|
2025
|
|
|
|
60,228
|
|
2026
|
|
|
|
30,362
|
|
Total:
|
|
|
$
|
496,077
|
|
NOTE 10 – PREFERED STOCK
CONVERTIBLE
SERIES A PREFERRED STOCK
In March 2019, the
Company’s Board of Directors designated and authorized the issuance up to 1,500,000 shares of the Series A Preferred Stock. Each
share of Series A Preferred Stock has a par value of $0.001 per share and a stated value equal to one dollar ($1.00) (the “Stated
Value”) and are entitled to a dividend at an annual rate of eight percent (8%) per share. The Company had 225,000 shares of the
Convertible Series A Preferred Stock outstanding as of April 30, 2021. During the three months ending April 30, 2021, the Company declared
a dividend of $5,000 and had $35,000 as accumulated dividends as of April 30, 2021.
The terms of our Series A Preferred Stock
allow for:
Voting Rights. Unless otherwise required by the
Nevada Revised Statutes, the shares of Series A Preferred Stock shall not be entitled to vote on any matter presented at any annual or
special meeting of stockholders of the Corporation, or through written consent.
Optional Conversion. Each holder
of shares of Series A Preferred Stock may, at holder’s option and commencing on April 30, 2020, convert any or all such shares,
on the terms and conditions set forth herein, into fully paid and non-assessable shares of the Corporation’s Common Stock. The number
of shares of Common Stock into which each share of Series A Preferred Stock may be converted shall be determined by dividing the Original
Issue Price of each share of Series A Preferred Stock, plus accrued and unpaid dividends through the Conversion Date, to be converted
by the Conversion Price (as defined below) in effect at the time of conversion. The “Conversion Price” at which shares of
Common Stock shall be issuable upon conversion of any shares of Series A Preferred Stock shall initially be the greater of (i) $0.40 per
share, (ii) a 30% discount to the offering price of the Common Stock (or Common Stock equivalent) in a $10 million or greater equity financing
that closes concurrently with an up-listing of the Company Common Stock on the NYSE American or Nasdaq, in the event of such up-listing,
and (iii) a 30% discount to the average closing price per share of the Common Stock for the 5 consecutive trading days commencing upon
the date the Common Stock is up-listed on either the NYSE American or Nasdaq in which there is no concurrent $10 million equity financing,
in the event of such up-listing, subject to adjustment as provided below.
Mandatory Conversion. Each
share of Series A Preferred Stock shall automatically convert into shares of Common Stock, as described in paragraph 2a, at the then applicable
Conversion Price, upon the earlier of (i) the closing of a public or private offering (or series of offerings within a 90-day period)
of Corporation equity or equity equivalent securities placed by a registered broker-dealer resulting in minimum gross proceeds to the
Corporation of $10 million, (ii) commencing on April 30, 2020, if the Common Stock shall close (or the last trade shall be) at or above
150% of the Conversion Price per share for 20 out of 30 consecutive trading days, and (iii) the uplisting of the Corporation’s Common
Stock to a national securities exchange or the Nasdaq stock market ((i), (ii) and (iii) are collectively referred to as “Mandatory
Conversion Event”). The Corporation will provide notice to holder within 20 days of the occurrence of a Mandatory Conversion Event
(failure of the Corporation to timely give such notice does not void the mandatory conversion). Holder shall surrender to the Corporation,
within 10 days of receiving such notice, the certificate(s) representing the shares of Series A Preferred Stock to be converted into Common
Stock. In the event holder does not surrender such certificate(s) within 10 days of receiving such notice, the Corporation shall deem
such certificate(s) cancelled and void. As soon as practicable, after the certificate(s) are either surrendered by the holder or cancelled
by the Corporation, as the case may be, the Corporation will issue and deliver to holder a new certificate for the number of full shares
of Common Stock issuable upon such mandatory conversion in accordance with the provisions hereof and cash as provided in paragraph 2(c)
in respect of any fraction of a share of Common Stock otherwise issuable upon such mandatory conversion, unless fractional shares are
rounded up to the next whole share. Holder will be deemed a Common Stockholder of record as of the date of the occurrence of a Mandatory
Conversion Event.
During the period ended April 30, 2021, the
Company evaluated Series A Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during the
period and determined that the convertible shares were classified as equity instruments.
CONVERTIBLE SERIES B PREFERRED STOCK
In April 2020, the
Company’s Board of Directors designated and authorized the issuance up to 1,000,000 shares of the Series B Preferred Stock. The
Series B Preferred Stock is only issuable to the Company’s debt holders as of March 25, 2020 (“Existing Debt Holders”)
who may purchase shares of Series B Preferred Stock at the Stated Value by converting all or part of the debt owed to them by the Corporation
as of March 25, 2020. Each share of Series B Preferred Stock has a par value of $0.001 per share and a stated value equal to one dollar
($1.00) (the “Stated Value”). In April 2020, the Company issued a total of 407,477 shares of Series B Preferred Stock for
settlement of debt of $370,000 on various promissory notes and $37,477 in accrued interest. In March 2021, the Company issued a total
of 17,965 shares of Series B Preferred Stock for settlement of debt of $16,000 on a promissory note and $1,965 in accrued interest.
The Company had
425,442 shares of Convertible Series B Preferred Stock outstanding as of April 30, 2021. No dividends are payable on the Convertible Series
B Preferred Stock.
The terms of our Series B Preferred Stock
allow for:
Voting Rights. Except as otherwise
provided by the Nevada Revised Statutes, other applicable law or as provided in this Certificate of Designation, the Series B Preferred
Stock shall have no voting rights. However, as long as any shares of Series B Preferred Stock are outstanding, the Corporation shall not,
without the affirmative vote of the Holders of a majority of the then outstanding shares of the Series B Preferred Stock, (a) alter or
change adversely the powers, preferences or rights given to the Series B Preferred Stock or alter or amend this Certificate of Designation,
(b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Holders,
(c) increase the number of authorized shares of Series B Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
Mandatory Conversion. Upon
(i) an up-listing of the Corporation’s Common Stock to Nasdaq or a US national securities exchange, (ii)an underwriting involving
the sale of $5,000,000 or more of the Corporation’s Common Stock or Common Stock Equivalents (a “Material Underwriting”),
(iii) the Corporation ceases to be a public corporation as the result of a going private transaction, (iv) the Corporation, directly or
indirectly, effects any sale, lease, exclusive license, assignment, transfer, conveyance or other disposition of all or substantially
all of its assets in one or a series of related transactions (including a transaction involving the Corporation’s spin-off of its
operating subsidiary, T3 Communications, Inc.), (v) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by
the Corporation or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their
shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (vi)
the Corporation, directly or indirectly, in one or more related transactions, effects any reclassification, reorganization or recapitalization
of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for
other securities, cash or property, or (vii) the Corporation, directly or indirectly, in one or more related transactions, consummates
a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person, other than an officer or director of the Company, whereby such other Person acquires
more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other
business combination) , all shares of Series B Preferred Stock shall be automatically converted, without any further action by the holders
of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent,
into the number of fully paid and nonassessable shares of Common Stock in an amount equal, following conversion ,to 18% of the Corporation’s
issued and outstanding shares of Common Stock . Each of (i)-(vii) above shall be hereafter referred to as a “Conversion Event”
and the date of a Conversion Event shall be hereafter referred to as a “Conversion Date”. Upon any such mandatory conversion
and the issuance of Conversion Shares further thereto, the shares of Series B Preferred Stock shall be deemed cancelled and of no further
force or effect. A mandatory conversion is the only means by which Series B Preferred Stock is convertible as the shares of Series B Preferred
Stock are not convertible at the option of the Holder. For purposes of the foregoing Conversion Events, conversion will be deemed to have
taken place immediately prior to the Conversion Event. By way of example, if the Corporation engages in a Material Underwriting, the Series
B Preferred Stock will be treated as having been converted immediately prior to the issuance of the securities in the Material Underwriting.
Redemption. At any time
on or after the second anniversary of the date of issuance of shares of Series B Preferred Stock to the Holder, the Corporation, in its
sole discretion ,may elect, by delivering written notice to the Holder no less than 10 days or more than 20 prior to the redemption date
set forth in such notice (the “Redemption Date”), to redeem all or any portion of the Series B Preferred Stock held by such
Holder at a price per share (the “Redemption Price”) equal to 120% of the Stated Value per share being redeemed . The Corporation
shall, unless otherwise prevented by law, redeem from such holder on the Redemption Date the number of shares of Series B Preferred Stock
identified in such notice of redemption. The Company will evaluate the convertible shares at each reporting balance sheet date and determine
if a re-classification is required.
During the period ended April 30, 2021, the
Company evaluated Series B Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during the
period and determined that the convertible shares were classified as equity instruments.
CONVERTIBLE
SERIES C PREFERRED STOCK
In July 2020, the
Company’s Board of Directors designated and authorized the issuance up to 1,000,000 shares of the Series C Preferred Stock. Each
share of Series C Preferred Stock has a par value of $0.001 per share and a stated value equal to ten dollars ($10.00) (the “Stated
Value”).
On February 25, 2021, Digerati’s
Board of Directors approved the issuance of the following shares of Series C Convertible Preferred Stock.:
|
●
|
Arthur L. Smith – 28,928 shares of Series C Convertible Preferred Stock
|
|
●
|
Antonio Estrada – 19,399 shares of Series C Convertible Preferred Stock
|
|
●
|
Craig Clement – 7,073 shares of Series C Convertible Preferred Stock
|
The Series C Convertible
Preferred Stock were issued for accrued compensation to the management team of $554,000.
The Company had
55,400 shares of Convertible Series C Preferred Stock outstanding as of April 30, 2021. No dividends are payable on the Convertible Series
C Preferred Stock.
The terms of our Series C Preferred Stock
allow for:
Designation, Amount and Par Value;
Eligible Recipients. The series of preferred stock shall be designated as its Series C Convertible Preferred Stock (the “Series
C Preferred Stock”) and the number of shares so designated shall be up to one million (1,000,000) (which shall not be subject to
increase without the written consent of the holders of a majority of the outstanding Series C Preferred Stock (each, a “Holder”
and collectively, the “Holders”). Series C Preferred Stock shall only be issuable to the Company’s officers and directors
as of July 1, 2020 who may from time-to-time purchase shares of Series C Preferred Stock at the Stated Value by converting all or part
of the compensation owed to them by the Corporation. Each share of Series C Preferred Stock shall have a par value of $0.001 per share
and a stated value equal to Ten Dollars ($10.00) (the “Stated Value”).
Dividends. No dividends are
payable on the shares of Series C Preferred Stock.
Voting Rights. Except as otherwise
provided by the Nevada Revised Statutes, other applicable law or as provided in this Certificate of Designation, the Series C Preferred
Stock shall have no voting rights. However, as long as any shares of Series C Preferred Stock are outstanding, the Corporation shall not,
without the affirmative vote of the Holders of a majority of the then outstanding shares of the Series C Preferred Stock, (a) alter or
change adversely the powers, preferences or rights given to the Series C Preferred Stock or alter or amend this Certificate of Designation,
(b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Holders,
(c) increase the number of authorized shares of Series C Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
Automatic Conversion. Upon (i) an up-listing
of the Corporation’s Common Stock to Nasdaq or a US national securities exchange, (ii) a financing or offering involving the sale
of $5,000,000 or more of the Corporation’s Common Stock or Common Stock Equivalents (a “Material Financing”), (iii)
the Corporation ceases to be a public corporation as the result of a going private transaction, (iv) the Corporation, directly or indirectly,
effects any sale, lease, exclusive license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets
in one or a series of related transactions (including a transaction involving the Corporation’s spin-off of its Nevada subsidiary,
T3 Communications, Inc.), (v) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Corporation or another
Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities,
cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (vi) the Corporation, directly or
indirectly, in one or more related transactions, effects any reclassification, reorganization or recapitalization of the Common Stock
or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash
or property, or (vii) the Corporation, directly or indirectly, in one or more related transactions, consummates a stock or share purchase
agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement)
with another Person, other than an officer or director of the Company, whereby such other Person acquires more than 50% of the outstanding
shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated
or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination), all issued
shares of Series C Preferred Stock shall be automatically converted, without any further action by the holders of such shares and whether
or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, into the number of fully paid
and nonassessable shares of Common Stock in an amount equal, following conversion, to 22% of the Corporation’s issued and outstanding
shares of Common Stock. Each of (i)-(vii) above shall be hereafter referred to as a “Conversion Event” and the date of a Conversion
Event shall be hereafter referred to as a “Conversion Date”. Upon any such mandatory conversion and the issuance of Conversion
Shares further thereto, the shares of Series C Preferred Stock shall be deemed cancelled and of no further force or effect. A mandatory
conversion is the only means by which Series C Preferred Stock is convertible as the shares of Series C Preferred Stock are not convertible
at the option of the Holder. For purposes of the foregoing Conversion Events, conversion will be deemed to have taken place immediately
prior to the Conversion Event. By way of example, if the Corporation engages in a Material Financing, the Series C Preferred Stock will
be treated as having been converted immediately prior to the issuance of the securities in the Material Underwriting.
Redemption. At any time on
or after the second anniversary of the date of issuance of shares of Series C Preferred Stock to the Holder, the Corporation, in its sole
discretion ,may elect, by delivering written notice to the Holder no less than 10 days or more than 20 prior to the redemption date set
forth in such notice (the “Redemption Date”), to redeem all or any portion of the Series C Preferred Stock held by such Holder
at a price per share (the “Redemption Price”) equal to 120% of the Stated Value per share being redeemed . The Corporation
shall, unless otherwise prevented by law, redeem from such holder on the Redemption Date the number of shares of Series C Preferred Stock
identified in such notice of redemption.
SERIES F SUPER
VOTING PREFERRED STOCK
In July 2020, the
Company’s Board of Directors designated and authorized the issuance up to 100 shares of the Series F Super Voting Preferred Stock.
Each share of Series F Super Voting Preferred Stock has a par value of $0.001 per share and a stated value equal to one cent ($0.01) (the
“Stated Value”).
On November 17, 2020, Digerati’s
Board of Directors approved the issuance of the following shares of Series F Super Voting Preferred Stock. (See note 10 for designations):
|
●
|
Arthur L. Smith - 34 shares of Series F Super Voting Preferred Stock
|
|
●
|
Antonio Estrada - 33 shares of Series F Super Voting Preferred Stock
|
|
●
|
Craig Clement - 33 shares of Series F Super Voting Preferred Stock
|
As of April 30,
2021, the Company has 100 shares outstanding of the Series F Super Voting Preferred Stock. No dividends are payable on the Series F Super
Voting Preferred Stock.
The terms of our Series F Super Voting Preferred
Stock allow for:
Designation, Amount and Par Value;
Eligible Recipients. The series of preferred stock shall be designated as its Series F Preferred Stock (the “Series F Preferred
Stock”) and the number of shares so designated shall be up to one hundred (100) (which shall not be subject to increase without
the written consent of the holders of a majority of the outstanding Series F Preferred Stock (each, a “Holder” and collectively,
the “Holders”). Series F Preferred Stock shall only be issuable to members of the Corporation’s Board of Directors,
as joint tenants, who may purchase shares of Series F Preferred Stock at the Stated Value per share. Each share of Series F Preferred
Stock shall have a par value of $0.001 per share and a stated value equal to one cent ($0.01) (the “Stated Value”).
Voting Rights. As long as any
shares of Series F Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the Holders of a majority
of the then outstanding shares of the Series F Preferred Stock, (a) alter or change adversely the powers, preferences or rights given
to the Series F Preferred Stock or alter or amend this Certificate of Designation, (b) amend its certificate of incorporation or other
charter documents in any manner that adversely affects any rights of the Holders, (c) increase the number of authorized shares of Series
F Preferred Stock, (d) sell or otherwise dispose of any assets of the Corporation not in the ordinary course of business, (e) sell or
otherwise effect or undergo any change of control of the corporation, (f) effect a reverse split of its Common Stock, or (g) enter into
any agreement with respect to any of the foregoing.
Holder of the Series F Preferred Stock shall
be entitled to vote on all matters subject to a vote or written consent of the holders of the Corporation’s Common Stock, and on
all such matters, the shares of Series F Preferred Stock shall be entitled to that number of votes equal to the number of votes that all
issued and outstanding shares of Common Stock and all other securities of the Corporation are entitled to, as of any such date of determination,
on a fully diluted basis, plus one million (1,000,000) votes, it being the intention that the Holders of the Series F Preferred
Stock shall have effective voting control of the Corporation. The Holders of the Series F Preferred Stock shall vote together with the
holders of Common Stock as a single class on all matters requiring approval of the holders of the Corporation’s Common Stock and
separately on matters not requiring the approval of holders of the Corporation’s Common Stock.
Conversion. No conversion rights apply to the Series
F Preferred Stock.
Redemption. At any time while
share of Series F Preferred Stock are issued and outstanding, the Corporation, in its sole discretion, may elect to redeem the shares
of Series F Preferred Stock.
NOTE 11 – EQUITY
During the nine months ended April 30, 2021,
the Company issued the following shares of common stock that are not disclosed in other footnotes:
On August 1, 2020, the Company issued an
aggregate of 2,000,000 shares of common stock, at the time of issuance the Company recognized the market value $58,000 as stock compensation
expense for professional services.
On January 26, 2021, the Company issued 1,000,000
shares of common stock for the settlement of $60,000 in accounts payable for professional services.
On February 5, 2021, the Company entered
into a Consulting Agreement, in which the Company agreed to issue a total of 2,000,000 shares of Common Stock, at issuance the Company
recognized the market value of the stock of $125,000 as stock compensation expense for professional services.
NOTE
12 – BUSINESS ACQUISITIONS
Acquisitions
Nexogy Merger
On November 17, 2020, T3 Nevada’s wholly
owned subsidiary, Nexogy Acquisition, Inc., merged with and into Nexogy, Inc. (“Nexogy”) resulting in Nexogy becoming a wholly
owned subsidiary of T3 Nevada (the “Merger”). Nexogy is a leading provider in South Florida of Unified Communications as a
Service and managed services, offering a portfolio of cloud-based solutions to the high-growth SMB market.
The purchase price for
Nexogy was $9 million in cash, plus an additional $452,000 in initial excess net working capital, with $900,000 of the $9 million being
placed in an indemnity escrow account and $50,000 of the $9 million being placed in a working capital escrow account. In addition, at
the closing of the Merger, T3 Nevada paid a number of Nexogy’s liabilities which were included in the $9 million purchase price.
ActivePBX Asset Purchase
On November 17, 2020, our indirect, wholly owned
subsidiary, T3 Communications, Inc., a Florida corporation (“T3 Florida”), executed and closed on an Asset Purchase Agreement
(the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation (“Seller”). Pursuant to the Purchase
Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software
and other licenses and miscellaneous assets used in connection with the operation of Seller’s telecommunications business known
as ActivePBX (collectively, the “Purchased Assets”).
The aggregate purchase price for the Purchased
Assets was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase Price”). $1,190,000 of the
Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover
part of potential future indemnification obligations of Seller to T3 Florida due to Seller’s breaches, if any,
of any representations and warranties made to T3 Florida by Seller under the Purchase Agreement, and $40,000 of such amount
being credited to T3 Florida against a payment in that amount made by T3 Florida to Seller pursuant to the Second Amendment to Letter
of Intent between Seller and T3 Florida dated as of October 15, 2020.
Part of the Purchase Price is payable in
8 equal quarterly payments of $136,250, subject to T3 Florida achieving quarterly post-purchase recurring
revenues under monthly contracts or subscriptions from the acquired customer base, excluding charges for taxes, regulatory fees,
additional set-up fees, equipment purchases or lease, and consulting fees. To the extent that a quarterly revenue threshold is not reached,
the amount of the corresponding quarterly payment shall be reduced on a proportional basis. T3 Florida’s $1,190,000 payment obligation
is represented by a promissory note of T3 Florida in the form included as an exhibit to the Purchase Agreement. The note, in turn, is
subject to the Subordination Agreement, included as an Exhibit to the Purchase Agreement, among Seller, the Company’s parent, T3
Nevada, and Post Road Administrative, LLC, in its capacity as administrative agent for the Post Road lenders. $275,000 of the
Purchase Price (the “Customer Renewal Value”) represents an incentive earn-out to be paid with respect to Seller’s
customer accounts which are transferred to T3 Florida at closing, that are renewed, expanded and/or revised with T3 Florida for a minimum
term of twelve months with an auto-renewal for 12 months.
In connection with the Purchase Agreement, we
entered into Consulting Agreements and a Non-Compete Agreement with each of Alex Gonzalez and Jose Gonzalez, the Chief Executive Officer
and Chief Technology Officer of Seller.
The total purchase price for Nexogy and ActivePBX were $9,452,000 and
$2,555,000, respectively. The acquisitions were accounted for under the purchase method of accounting, with Digerati identified as the
acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed by Digerati was allocated to customer
contracts acquired and intangible assets based on their estimated fair values as of November 17, 2020. Allocation of the purchase price
is based on the best estimates of management.
The
following information summarizes the allocation of the fair values assigned to the assets at the purchase date. The allocation of fair
values is preliminary and is subject to change in the future during the measurement period.
|
|
Nexogy
|
|
|
ActivePBX
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash
|
|
$
|
358
|
|
|
$
|
-
|
|
|
$
|
358
|
|
Accounts receivables
|
|
|
278
|
|
|
|
78
|
|
|
|
356
|
|
Intangible Assets and Goodwill
|
|
|
9,018
|
|
|
|
2,555
|
|
|
|
11,573
|
|
Property and equipment, net
|
|
|
164
|
|
|
|
-
|
|
|
|
164
|
|
Other Assets
|
|
|
83
|
|
|
|
2
|
|
|
|
85
|
|
Total identifiable assets
|
|
$
|
9,901
|
|
|
$
|
2,635
|
|
|
$
|
12,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: liabilities assumed
|
|
|
270
|
|
|
|
80
|
|
|
|
350
|
|
Total Purchase price
|
|
$
|
9,631
|
|
|
$
|
2,555
|
|
|
$
|
12,186
|
|
The
following table summarizes the estimated cost of intangible assets related to the acquisition:
|
|
Nexogy
|
|
|
ActivePBX
|
|
|
Total
|
|
|
Useful life
(years)
|
|
|
|
(in thousands)
|
|
|
|
|
Customer Relationships
|
|
$
|
4,100
|
|
|
$
|
1,610
|
|
|
$
|
5,710
|
|
|
7
|
|
Trade Names & Trademarks
|
|
|
2,600
|
|
|
|
270
|
|
|
|
2,870
|
|
|
7
|
|
Non-compete Agreement
|
|
|
200
|
|
|
|
90
|
|
|
|
290
|
|
|
2-3
|
|
Nexogy Goodwill
|
|
|
2,118
|
|
|
|
585
|
|
|
|
2,703
|
|
|
-
|
|
|
|
$
|
9,018
|
|
|
$
|
2,555
|
|
|
$
|
11,573
|
|
|
|
|
The
Company incurred approximately $460,000 in costs associated with the acquisitions. These included legal, regulatory, and accounting.
The Company incurred and expensed these costs of $158,000 and $302,000, during the year ended July 31, 2020, and nine months ended April
30, 2021, respectively.
Pro-forma
The
following schedule contains unaudited proforma consolidated results of operations for both acquisitions for the three and nine months
ended April 30, 2021, and 2020 as if the acquisition occurred on August 1, 2019. The unaudited pro-forma results of operations are presented
for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition
had taken place on August 1, 2019, or of results that may occur in the future.
|
|
Three months ended
April 30,
|
|
|
Nine months ended
April 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
Reported
|
|
|
Pro-forma
|
|
|
Reported
|
|
|
Pro-forma
|
|
|
Reported
|
|
|
Pro-forma
|
|
|
Reported
|
|
|
Pro-forma
|
|
Revenue
|
|
$
|
3,751
|
|
|
$
|
3,751
|
|
|
$
|
1,566
|
|
|
$
|
3,574
|
|
|
$
|
8,629
|
|
|
$
|
11,127
|
|
|
$
|
4,712
|
|
|
$
|
10,773
|
|
Income (loss) from operations
|
|
|
(588
|
)
|
|
|
(588
|
)
|
|
|
(472
|
)
|
|
|
(70
|
)
|
|
|
(1,978
|
)
|
|
|
(1,461
|
)
|
|
|
(1,842
|
)
|
|
|
(808
|
)
|
Net income (loss)
|
|
$
|
(12,956
|
)
|
|
$
|
(12,956
|
)
|
|
$
|
(1,108
|
)
|
|
$
|
(796
|
)
|
|
$
|
(15,692
|
)
|
|
$
|
(15,247
|
)
|
|
$
|
(3,130
|
)
|
|
$
|
(2,389
|
)
|
Earnings (loss) per common share-Basic and Diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
As
part of the acquisitions of Nexogy and ActivePBX, the Company secured an office and rooftop lease, with monthly base lease payments of
$13,720 and $3,546, respectively, the leases expire on July 31, 2022.
Additionally,
the Company secured four (4) additional leases, with the following terms:
|
|
Base
Monthly
Lease
|
|
|
Commencement
|
|
Expiration
|
|
|
|
Lease
|
|
Payment
|
|
|
Date
|
|
Date
|
|
Additional
terms
|
|
1
- Colocation
|
|
$
|
4,130
|
|
|
June
8, 2020
|
|
June
8, 2023
|
|
With
an option to extend for an additional twelve (12) months, and 5% increase in base monthly lease payment.
|
|
2
- Rooftop
|
|
$
|
2,450
|
|
|
June
1, 2015
|
|
June
1, 2021
|
|
With
an option to extend for five (5) additional one (1) year terms.
|
|
3
- Rooftop
|
|
$
|
979
|
|
|
December
1, 2015
|
|
December
1, 2025
|
|
Initial
term for five (5) years, lease renewed for additional five (5) years.
|
|
4
- Rooftop
|
|
$
|
2,700
|
|
|
November
30, 2013
|
|
November
30, 2023
|
|
Initial
term for five (5) years, lease renewed for additional five (5) years, with an option for a second renewal for an additional five
(5) years.
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Shareholders and Board of Directors
of
ActiveServe, Inc.
Miami, Florida
Opinion on the Financial Statements
We have audited the accompanying balance
sheet of ActiveServe, Inc. (the “Company”) as of July 31, 2020, and the related statement of operations, stockholders’
equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31,
2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with
the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audit included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company’s auditor
since 2020.
Houston, Texas
July 16, 2021
ACTIVESERVE, INC.
BALANCE SHEET
(In thousands)
|
|
July 31,
|
|
|
|
2020
|
|
|
|
|
|
ASSETS
|
|
|
|
CURRENT ASSETS:
|
|
|
|
Cash and cash equivalents
|
|
$
|
424
|
|
Accounts receivable, net
|
|
|
57
|
|
Prepaid and other current assets
|
|
|
27
|
|
Total current assets
|
|
|
508
|
|
|
|
|
|
|
LONG-TERM ASSETS:
|
|
|
|
|
Intangible assets, net
|
|
|
11
|
|
Property and equipment, net
|
|
|
4
|
|
Total assets
|
|
$
|
523
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
Accounts payable
|
|
$
|
3
|
|
Accrued liabilities
|
|
|
219
|
|
Note payable, current
|
|
|
1
|
|
Total current liabilities
|
|
|
223
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
Note payable
|
|
|
157
|
|
Total long-term liabilities
|
|
|
157
|
|
|
|
|
|
|
Total liabilities
|
|
|
380
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
Common stock, $0.01, 10,000 shares authorized, 2,000 issued and outstanding
|
|
|
-
|
|
Additional paid in capital
|
|
|
10
|
|
Retained earnings
|
|
|
133
|
|
Total stockholders’ equity
|
|
|
143
|
|
Total liabilities and stockholders’ equity
|
|
$
|
523
|
|
See accompanying notes to financial statements
ACTIVESERVE, INC.
STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
|
|
For the
Year Ended
|
|
|
|
July 31,
2020
|
|
OPERATING REVENUES:
|
|
|
|
Cloud software and service revenue
|
|
$
|
1,949
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,949
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
|
|
557
|
|
Selling, general and administrative expense
|
|
|
1,110
|
|
Bad debt
|
|
|
12
|
|
Depreciation and amortization expense
|
|
|
1
|
|
Total operating expenses
|
|
|
1,680
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
269
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
Income tax benefit (expense)
|
|
|
1
|
|
Interest expense
|
|
|
(1
|
)
|
Total other income (expense)
|
|
|
-
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
269
|
|
See accompanying notes to financial statements
ACTIVESERVE, INC.
STATEMENT OF STOCKHOLDERS’ EQUITY
YEAR ENDED JULY 31, 2020
(In thousands, except for share amounts)
|
|
Common
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
Total
stockholders’
|
|
|
|
Shares
|
|
|
Par
|
|
|
paid in capital
|
|
|
earnings
|
|
|
equity
|
|
BALANCE, July 31, 2019
|
|
|
2,000
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
13
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(149
|
)
|
|
|
(149
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
269
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, July 31, 2020
|
|
|
2,000
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
133
|
|
|
$
|
143
|
|
See accompanying notes to financial statements
ACTIVESERVE, INC.
STATEMENT OF CASH FLOWS
(In thousands)
|
|
For the
Year Ended
|
|
|
|
July 31,
2020
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net income
|
|
$
|
269
|
|
Adjustments to reconcile net loss to cash used in by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
|
1
|
|
Bad debt expense
|
|
|
12
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
|
|
17
|
|
Prepaid expenses and other current assets
|
|
|
1
|
|
Accounts payable
|
|
|
(46
|
)
|
Accrued expenses
|
|
|
65
|
|
Net cash provided by operating activities
|
|
|
319
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
Cash paid in acquisition of equipment
|
|
|
(5
|
)
|
Net cash used in investing activities
|
|
|
(5
|
)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
Borrowings from third party promissory notes, net
|
|
|
145
|
|
Payments for dividends
|
|
|
(149
|
)
|
Principal payment on debt
|
|
|
(15
|
)
|
Net cash used in financing activities
|
|
|
(19
|
)
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
295
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
129
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
424
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
Cash paid for interest
|
|
$
|
1
|
|
Income tax paid
|
|
$
|
-
|
|
See accompanying notes to financial statements
ACTIVESERVE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED
JULY 31, 2020
NOTE 1 – DESCRIPTION OF BUSINESS
ActiveServe, Inc., (“we”, “our”,
“Company” or “ActiveServe”) was incorporated in the state of Florida on September 18, 2002. We provide cloud services
specializing in Unified Communications as a Service (“UCaaS”) solutions for the business market. Our product line includes
a portfolio of Internet-based telephony products and services delivered through our cloud application platform and session-based communication
network and network services including mobile broadband. Our services are designed to provide enterprise-class, carrier-grade services
to the small-to-medium-sized business (“SMB”) at cost-effective monthly rates. Our UCaaS or cloud communication services include
fully hosted IP/PBX, mobile applications, Voice over Internet Protocol (“VoIP”) transport, SIP trunking, hosting services
and customized VoIP services.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Use of Estimates. In preparing
financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance
sheet and revenue and expenses in the statement of operations. Actual results could differ from those estimates.
Basis of Presentation.
These financial statements have been prepared by the Company in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries
which are directly or indirectly owned by the Company.
Cash and cash equivalents. The
Company considers all bank deposits and highly liquid investments with original maturities of three months or less to be cash and cash
equivalents.
Concentration of Credit Risk. Financial
instruments that potentially subject ActiveServe to concentration of credit risk consist primarily of trade receivables. In the normal
course of business, ActiveServe provides credit terms to its customers. Accordingly, ActiveServe performs ongoing credit evaluations of
its customers. ActiveServe maintains cash in bank deposit accounts, which, at times, may exceed federally insured limits. ActiveServe
has not experienced any losses in such accounts and ActiveServe does not believe it is exposed to any significant credit risk on cash
and cash equivalents.
During the year ended July 31, 2020, the
Company derived 11% of the total revenue from one customer. As of the year ended July 31, 2020, the company derived 26% of the total accounts
receivable balance from one customer.
Capitalization
of Fixed Assets. The Company capitalizes expenditures related to property and equipment,
subject to a minimum rule, that have a useful life greater than one year for: (1) assets purchased; (2) existing assets that are replaced,
improved or the useful lives have been extended, regardless of cost. Acquisitions of new assets, additions, replacements, and improvements
costing less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are
expensed as incurred.
Revenue Recognition. On August
1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of August
1, 2018. Results for reporting periods beginning after August 1, 2018, are presented under Topic 606. There was no impact to the opening
balance of accumulated deficit or revenues for the year ended July 31, 2019, as a result of applying Topic 606.
Sources of revenue:
Cloud-based hosted Services.
The Company recognizes cloud-based hosted services revenue, mainly from subscription services for its cloud telephony applications that
includes hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice, and web conferencing, call recording,
messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized
applications. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including
cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, and Ethernet over copper. We also offer remote network monitoring, data
backup and disaster recovery services. The Company applies a five-step approach in determining the amount and timing of revenue to be
recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining
the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue
when the performance obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the
products transfers to the customer.
Service Revenue
Service
revenue from subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over the
contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in advance
of subscription services being rendered are recorded as a deferred revenue. Usage fees, either bundled or not bundled, are recognized
when the Company has a right to invoice. Professional services for configuration, system integration, optimization, customer training
and/or education are primarily billed on a fixed-fee basis and are performed by the Company directly. Alternatively, customers may choose
to perform these services themselves or engage their own third-party service providers. Professional services revenue is recognized over
time, generally as services are activated for the customer.
Product Revenue
The
Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is generally
upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical experience.
Disaggregation of Cloud
software and service revenue
Summary of disaggregated revenue is as follows (in thousands):
|
|
For the
Year Ended
|
|
|
|
July 31,
2020
|
|
Cloud software and service revenue
|
|
$
|
1,930
|
|
Product revenue
|
|
|
19
|
|
|
|
|
|
|
Total operating revenue
|
|
$
|
1,949
|
|
Related parties. The Company
accounts for related party transactions in accordance with ASC 850 (“Related Party Disclosures”). A party is considered to
be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is
under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might
be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies
of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other
to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related
party. There were no related party transactions as of July 31, 2020.
Dividends.
During the year ended July 31, 2020, the Company paid cash dividends of $148,577 to its founding shareholders.
Recently issued accounting pronouncements.
Recent accounting pronouncements, other than below, issued by the Financial Accounting Standards Board (“FASB”) (including
its Emerging Issues Task Force), the AICPA and the SEC did not, or are not, believed by management to have a material effect on the Company’s
present or future financial statements.
In February 2016,
the FASB issued ASU No. 2016-02, “Leases.” ASU 2016-02 requires a lessee to record a right of use asset and a corresponding
lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual
reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest period presented in the
financial statements. The Company evaluated the impact that the application of the new standard has on its financial statements and related
disclosure and determined that it has no material impact.
Other recent accounting
pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and
the SEC did not or in management’s opinion will not have a material impact on the Company’s present or future financial statements.
NOTE 3 –
PROPERTY AND EQUIPMENT
As of July 31, 2020,
the Company’s fixed assets consisted of the following (in thousands):
|
|
July 31,
2020
|
|
|
|
|
|
Vehicles
|
|
$
|
27
|
|
Office Equipment
|
|
|
7
|
|
Network Equipment
|
|
|
29
|
|
Computers
|
|
|
4
|
|
Servers
|
|
|
178
|
|
Software Licenses
|
|
|
14
|
|
|
|
|
|
|
Total property and equipment
|
|
$
|
259
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(255
|
)
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
4
|
|
The
depreciation expense incurred for the year ended July 31, 2020, was $562.
NOTE 4 –
NOTES PAYABLE
On July 18, 2014,
the Company entered into a financing agreement with Bank of America, N.A., for $50,000, under a line of credit for working capital, with
a maturity date of September 1, 2015. Subsequentially, on July 31, 2015, the Company entered into a loan modification agreement, were
by the maturity date was extended until August 18, 2020. The interest rate under the loan agreement is equal to the Bank’s Prime
Rate, plus 2.75%, per annum. The amended loan agreement is for 60 months, with the first payment due on September 18, 2015, and with a
monthly principal payment of $833. The loan is secured by the Company’s equipment, inventory, and accounts receivable. During the
year ended July 31, 2020, the Company made a total principal payment of $10,000. The total outstanding balance as of July 31, 2020, was
$834. Subsequentially on August 18, 2020, the obligation was paid in full.
On February 1, 2017,
the Company entered into a financing agreement with Ford Credit, for a principal amount of $26,637 and financing charges of $2,451. The
financing is for a Company vehicle, with a maturity date of January 18, 2023, and interest rate under the financing agreement at 2.90%,
per annum. The financing agreement is for 72 months, with the first payment due on March 18, 2017, and with a monthly principal and interest
payment of $404. The financing agreement is secured by the vehicle acquired. During the year ended July 31, 2020, the Company made a total
principal payment of $4,427. The total outstanding balance as of July 31, 2020, was $12,042. Subsequentially on January 13, 2021, the
obligation was paid in full.
On May 1, 2020, the Company, entered into an unsecured promissory
note (the “Note”) for $145,370 made to the Company under the Paycheck Protection Program (the “PPP”). The PPP
was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the
U.S. Small Business Administration (the “SBA”). The Note to the Company was secured through Bank of America, National Association
(the “Lender”).
The Note provided
for an interest rate of 1.00% per annum and matures two years after the issuance date. Beginning on the seventh month following the date
of the Note, the Company was required to make 18 monthly principal payments in the amount of $8,076 and accrued interest. The Note was
used for payroll costs, costs related to certain group health care benefits and insurance premiums. The Note contained events of default
and other conditions customary for a Note of this type.
Under the terms
of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all, or a portion of loan granted under the PPP, with
such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any
payments of mortgage interest, rent, and utilities. The terms of any forgiveness may also be subject to further requirements in any regulations
and guidelines the SBA may adopt. The total outstanding balance as of July 31, 2020, was $145,370. Subsequently, on March 9, 2021, the
SBA informed the Company that the total outstanding principal balance of $145,370 and accrued interest of $1,227 were forgiven. On March
9, 2021, the Company recognized a gain on settlement of debt of $145,370.
NOTE 5 –
CAPITAL STOCK
As of July 31, 2020,
the Company had 10,000 authorized common shares, of which 2,000 founder shares were issued, and outstanding, with a $0.01 par value per
share.
NOTE 6 – SUBSEQUENT EVENTS
On November 17, 2020, T3 Communications,
Inc., a Florida corporation (“T3 Florida”), a subsidiary of Digerati Technologies, Inc., executed and closed on an Asset Purchase
Agreement (the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation (“Seller”). Pursuant to the
Purchase Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights,
software and other licenses and miscellaneous assets used in connection with the operation of Seller’s telecommunications business
known as ActivePBX (collectively, the “Purchased Assets”).
The aggregate purchase price for the Purchased
Assets was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase Price”). $1,190,000 of the
Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover
part of potential future indemnification obligations of Seller to T3 Florida due to Seller’s breaches, if any, of any
representations and warranties made to T3 Florida by Seller under the Purchase Agreement, and $40,000 of such amount being
credited to T3 Florida against a payment in that amount made by T3 Florida to Seller pursuant to the Second Amendment to Letter of Intent
between Seller and T3 Florida dated as of October 15, 2020.
Part of the Purchase Price is payable in
8 equal quarterly payments of $136,250, subject to T3 Florida achieving quarterly post-purchase recurring
revenues under monthly contracts or subscriptions from the acquired customer base, excluding charges for taxes, regulatory fees,
additional set-up fees, equipment purchases or lease, and consulting fees. To the extent that a quarterly revenue threshold is not reached,
the amount of the corresponding quarterly payment shall be reduced on a proportional basis. T3 Florida’s $1,140,000 payment obligation
is represented by a promissory note of T3 Florida in the form included as an exhibit to the Purchase Agreement. The note, in turn, is
subject to the Subordination Agreement, included as an Exhibit to the Purchase Agreement, among Seller, the Company’s parent, T3
Nevada, and Post Road Administrative, LLC, in its capacity as administrative agent for the Post Road lenders. $275,000 of the
Purchase Price (the “Customer Renewal Value”) represents an incentive earn-out to be paid with respect to Seller’s
customer accounts which are transferred to T3 Florida at closing, that are renewed, expanded and/or revised with T3 Florida for a minimum
term of twelve months with an auto-renewal for 12 months. During the period ended April 30, 2021, the Company made one of the quarterly
principal payments of $136,250, and a payment of $11,000 towards the Holdback amount, the total principal outstanding on the notes as
of April 30, 2021, was $1,267,750.
In connection with the Purchase Agreement,
the Company entered with the Note Holders into Consulting Agreements and a Non-Compete Agreement with each of Alex Gonzalez and Jose Gonzalez,
the Chief Executive Officer and Chief Technology Officer of ActivePBX. Under the Consulting Agreements, the Company will pay on an annual
basis $90,000 to each the consultants.
ACTIVESERVE, INC.
Unaudited Financial Statements
For the Three Months Ended October 31,
2020
ACTIVESERVE, INC.
BALANCE SHEETS
(Unaudited)
(In thousands)
|
|
October 31,
|
|
|
July 31,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
325
|
|
|
$
|
424
|
|
Accounts receivable, net
|
|
|
26
|
|
|
|
57
|
|
Prepaid and other current assets
|
|
|
114
|
|
|
|
27
|
|
Total current assets
|
|
|
465
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
11
|
|
|
|
11
|
|
Property and equipment, net
|
|
|
4
|
|
|
|
4
|
|
Total assets
|
|
$
|
480
|
|
|
$
|
523
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
25
|
|
|
$
|
3
|
|
Accrued liabilities
|
|
|
228
|
|
|
|
219
|
|
Note payable, current
|
|
|
-
|
|
|
|
1
|
|
Total current liabilities
|
|
|
253
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
156
|
|
|
|
157
|
|
Total long-term liabilities
|
|
|
156
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
409
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Common stock, $0.01, 10,000 shares authorized, 2,000 issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Additional paid in capital
|
|
|
10
|
|
|
|
10
|
|
Retained earnings
|
|
|
61
|
|
|
|
133
|
|
Total stockholders’ equity
|
|
|
71
|
|
|
|
143
|
|
Total liabilities and stockholders’ equity
|
|
$
|
480
|
|
|
$
|
523
|
|
See accompanying notes to the unaudited financial
statements
ACTIVESERVE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
|
|
Three Months Ended
October 31,
|
|
|
|
2020
|
|
|
2019
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
Cloud software and service revenue
|
|
$
|
463
|
|
|
$
|
522
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
463
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
|
|
138
|
|
|
|
142
|
|
Selling, general and administrative expense
|
|
|
273
|
|
|
|
265
|
|
Total operating expenses
|
|
|
411
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
52
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Total other expense
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
45
|
|
|
$
|
108
|
|
See accompanying notes to the unaudited financial statements
ACTIVESERVE, INC.
STATEMENT OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED OCTOBER 31, 2020
(Unaudited)
(In thousands, except for share amounts)
|
|
Common
|
|
|
|
|
|
Additional
paid in
|
|
|
Retained
|
|
|
Total
stockholders’
|
|
|
|
Shares
|
|
|
Par
|
|
|
capital
|
|
|
earnings
|
|
|
equity
|
|
BALANCE, July 31, 2020
|
|
|
2,000
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
133
|
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(117
|
)
|
|
|
(117
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, October 31, 2020
|
|
|
2,000
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
61
|
|
|
$
|
71
|
|
See accompanying notes to the unaudited financial
statements
ACTIVESERVE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
Three Months Ended
October 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income
|
|
$
|
45
|
|
|
$
|
108
|
|
Adjustments to reconcile net loss to cash used in by operating activities:
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
31
|
|
|
|
10
|
|
Prepaid expenses and other current assets
|
|
|
(87
|
)
|
|
|
(6
|
)
|
Accounts payable
|
|
|
22
|
|
|
|
(22
|
)
|
Accrued expenses
|
|
|
9
|
|
|
|
27
|
|
Net cash provided by operating activities
|
|
|
20
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments for dividends
|
|
|
(117
|
)
|
|
|
(41
|
)
|
Principal payment on debt
|
|
|
(2
|
)
|
|
|
(4
|
)
|
Net cash used in financing activities
|
|
|
(119
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(99
|
)
|
|
|
72
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
424
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
325
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Income tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
See accompanying notes to unaudited financial
statements
ACTIVESERVE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED OCTOBER 31,
2020
NOTE 1.
|
BASIS OF PRESENTATION
|
The accompanying unaudited financial statements
have been prepared in connection with ActiveServe, Inc.’s, business combination with T3 Communications, Inc., a Florida corporation
(“T3 Florida”), a subsidiary of Digerati Technologies, Inc.(“Digerati”), and to comply with the rules and regulations
of the Securities and Exchange Commission ("SEC") for inclusion by Digerati in its current report on Form 8-K/A.
The accompanying unaudited interim financial statements of ActiveServe,
Inc. (“Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America
and the rules of the Securities and Exchange Commission, and should be read in conjunction with the Company’s audited financial
statements and notes thereto for the year ended July 31, 2020. In the opinion of management, 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
have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be
expected for the full year. Notes to the interim financial statements which would substantially duplicate the disclosures contained
in the audited financial statements for the year ended July 31, 2020 have been omitted.
NOTE 2 –
NOTES PAYABLE
On July 18, 2014,
the Company entered into a financing agreement with Bank of America, N.A., for $50,000, under a line of credit for working capital, with
a maturity date of September 1, 2015. Subsequentially, on July 31, 2015, the Company entered into a loan modification agreement, were
by the maturity date was extended until August 18, 2020. The interest rate under the loan agreement is equal to the Bank’s Prime
Rate, plus 2.75%, per annum. The amended loan agreement is for 60 months, with the first payment due on September 18, 2015, and with a
monthly principal payment of $833. The loan is secured by the Company’s equipment, inventory, and accounts receivable. On August
18, 2020, the obligation was paid in full. During the three months ended October 31, 2020, the Company made a total principal payment
of $834. The total outstanding balance as of October 31, 2020, and July 31, 2020, were $0 and $834, respectively.
On February 1, 2017,
the Company entered into a financing agreement with Ford Credit, for a principal amount of $26,637 and financing charges of $2,451. The
financing is for a Company vehicle, with a maturity date of January 18, 2023, and interest rate under the financing agreement at 2.90%,
per annum. The financing agreement is for 72 months, with the first payment due on March 18, 2017, and with a monthly principal and interest
payment of $404. The financing agreement is secured by the vehicle acquired. During the three months ended October 31, 2020, the Company
made a total principal payment of $1,127. The total outstanding balance as of October 31, 2020, and July 31, 2020, were $10,915 and $12,042,
respectively. Subsequentially on January 13, 2021, the obligation was paid in full.
On May 1, 2020,
the Company, entered into an unsecured promissory note (the “Note”) for $145,370 made to the Company under the Paycheck Protection
Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The Note to the Company was secured
through Bank of America, National Association (the “Lender”).
The Note provided
for an interest rate of 1.00% per annum and matures two years after the issuance date. Beginning on the seventh month following the date
of the Note, the Company was required to make 18 monthly principal payments in the amount of $8,076 and accrued interest. The Note was
used for payroll costs, costs related to certain group health care benefits and insurance premiums. The Note contained events of default
and other conditions customary for a Note of this type.
Under the terms
of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all, or a portion of loan granted under the PPP, with
such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any
payments of mortgage interest, rent, and utilities. The terms of any forgiveness may also be subject to further requirements in any regulations
and guidelines the SBA may adopt. The total outstanding balance as of October 31, 2020, and July 31, 2020, was $145,370. Subsequently,
on March 9, 2021, the SBA informed the Company that the total outstanding principal balance of $145,370 and accrued interest of $1,227
were forgiven. On March 9, 2021, the Company recognized a gain on settlement of debt of $145,370.
NOTE 3 –
CAPITAL STOCK
As of October 31,
2020, the Company had 10,000 authorized common shares, of which 2,000 founder shares were issued,
and outstanding, with a $0.01 par value
per share.
NOTE 4 – SUBSEQUENT EVENTS
On November 17, 2020, T3 Communications,
Inc., a Florida corporation (“T3 Florida”), a subsidiary of Digerati Technologies, Inc., executed and closed on an Asset Purchase
Agreement (the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation (“Seller”). Pursuant to the
Purchase Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights,
software and other licenses and miscellaneous assets used in connection with the operation of Seller’s telecommunications business
known as ActivePBX (collectively, the “Purchased Assets”).
The aggregate purchase price for the Purchased
Assets was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase Price”). $1,190,000 of the
Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover
part of potential future indemnification obligations of Seller to T3 Florida due to Seller’s breaches, if any, of any
representations and warranties made to T3 Florida by Seller under the Purchase Agreement, and $40,000 of such amount being
credited to T3 Florida against a payment in that amount made by T3 Florida to Seller pursuant to the Second Amendment to Letter of Intent
between Seller and T3 Florida dated as of October 15, 2020.
Part of the Purchase Price is payable in
8 equal quarterly payments of $136,250, subject to T3 Florida achieving quarterly post-purchase recurring
revenues under monthly contracts or subscriptions from the acquired customer base, excluding charges for taxes, regulatory fees,
additional set-up fees, equipment purchases or lease, and consulting fees. To the extent that a quarterly revenue threshold is not reached,
the amount of the corresponding quarterly payment shall be reduced on a proportional basis. T3 Florida’s $1,140,000 payment obligation
is represented by a promissory note of T3 Florida in the form included as an exhibit to the Purchase Agreement. The note, in turn, is
subject to the Subordination Agreement, included as an Exhibit to the Purchase Agreement, among Seller, the Company’s parent, T3
Nevada, and Post Road Administrative, LLC, in its capacity as administrative agent for the Post Road lenders. $275,000 of the
Purchase Price (the “Customer Renewal Value”) represents an incentive earn-out to be paid with respect to Seller’s
customer accounts which are transferred to T3 Florida at closing, that are renewed, expanded and/or revised with T3 Florida for a minimum
term of twelve months with an auto-renewal for 12 months. During the period ended April 30, 2021, the Company made one of the quarterly
principal payments of $136,250, and a payment of $11,000 towards the Holdback amount, the total principal outstanding on the notes as
of April 30, 2021, was $1,267,750.
In connection with the Purchase Agreement,
the Company entered with the Note Holders into Consulting Agreements and a Non-Compete Agreement with each of Alex Gonzalez and Jose Gonzalez,
the Chief Executive Officer and Chief Technology Officer of ActivePBX. Under the Consulting Agreements, the Company will pay on an annual
basis $90,000 to each the consultants.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of
Nexogy, Inc.
Fort Myers, Florida
Opinion on the Financial Statements
We have audited the accompanying balance
sheets of Nexogy Inc. (the “Company”) as of July 31, 2020 and 2019, and the related statements of operations, stockholders’
deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31,
2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Going Concern Matter
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company
has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue
as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with
the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audit included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company’s auditor
since 2020.
Houston, Texas
July 23, 2021
NEXOGY, INC.
BALANCE SHEETS
(In thousands)
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
479
|
|
|
$
|
38
|
|
Accounts receivable, net
|
|
|
720
|
|
|
|
734
|
|
Total current assets
|
|
|
1,199
|
|
|
|
772
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
57
|
|
|
|
51
|
|
Total assets
|
|
$
|
1,256
|
|
|
$
|
823
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
241
|
|
|
$
|
323
|
|
Accounts payable, related party
|
|
|
-
|
|
|
|
58
|
|
Accrued liabilities
|
|
|
179
|
|
|
|
61
|
|
Note payable, current, related party
|
|
|
3,386
|
|
|
|
2,908
|
|
Equipment financing
|
|
|
75
|
|
|
|
131
|
|
Total current liabilities
|
|
|
3,881
|
|
|
|
3,481
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
451
|
|
|
|
-
|
|
Total long-term liabilities
|
|
|
451
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,332
|
|
|
|
3,481
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT:
|
|
|
|
|
|
|
|
|
Common stock, $0.001, 25,000,000 shares authorized, 100,000 and 100,000 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Accumulated deficit
|
|
|
(3,076
|
)
|
|
|
(2,658
|
)
|
Total stockholders’ deficit
|
|
|
(3,076
|
)
|
|
|
(2,658
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
1,256
|
|
|
$
|
823
|
|
See accompanying notes to the financial statements
NEXOGY, INC.
STATEMENTS OF OPERATIONS
(In thousands)
|
|
For the Years ended July 31,
|
|
|
|
2020
|
|
|
2019
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
Cloud software and service revenue
|
|
$
|
6,347
|
|
|
$
|
6,488
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
6,347
|
|
|
|
6,488
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
|
|
1,811
|
|
|
|
1,774
|
|
Selling, general and administrative expense
|
|
|
4,562
|
|
|
|
4,663
|
|
Legal and professional fees
|
|
|
109
|
|
|
|
92
|
|
Bad debt
|
|
|
94
|
|
|
|
126
|
|
Depreciation and amortization expense
|
|
|
13
|
|
|
|
163
|
|
Total operating expenses
|
|
|
6,589
|
|
|
|
6,818
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(242
|
)
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
(135
|
)
|
|
|
(104
|
)
|
Other income (expense)
|
|
|
(28
|
)
|
|
|
(25
|
)
|
Interest expense
|
|
|
(13
|
)
|
|
|
(17
|
)
|
Total other income (expense)
|
|
|
(176
|
)
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(418
|
)
|
|
$
|
(476
|
)
|
See accompanying notes to the financial statements
NEXOGY, INC.
STATEMENTS OF STOCKHOLDERS’ DEFICIT
YEARS ENDED JULY 31, 2019 AND 2020
(In thousands, except for share amounts)
|
|
Common
|
|
|
|
|
|
Additional Paid in
|
|
|
Accumulated
|
|
|
Total stockholders’
|
|
|
|
Shares
|
|
|
Par
|
|
|
Capital
|
|
|
deficit
|
|
|
deficit
|
|
BALANCE, July 31, 2018
|
|
|
100,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,182
|
)
|
|
$
|
(2,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(476
|
)
|
|
|
(476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, July 31, 2019
|
|
|
100,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,658
|
)
|
|
$
|
(2,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(418
|
)
|
|
|
(418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, July 31, 2020
|
|
|
100,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(3,076
|
)
|
|
$
|
(3,076
|
)
|
See accompanying notes to the financial statements
NEXOGY, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
For the Years ended
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(418
|
)
|
|
$
|
(476
|
)
|
Adjustments to reconcile net loss to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
13
|
|
|
|
163
|
|
Bad debt expense
|
|
|
94
|
|
|
|
126
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(80
|
)
|
|
|
(135
|
)
|
Other assets
|
|
|
(6
|
)
|
|
|
(14
|
)
|
Accounts payable
|
|
|
(82
|
)
|
|
|
(21
|
)
|
Accounts payable related party
|
|
|
(58
|
)
|
|
|
14
|
|
Accrued expenses
|
|
|
118
|
|
|
|
(17
|
)
|
Net cash used in operating activities
|
|
|
(419
|
)
|
|
|
(360
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash paid in acquisition of equipment
|
|
|
(13
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings from third party promissory notes, net
|
|
|
451
|
|
|
|
-
|
|
Borrowings from related party
|
|
|
478
|
|
|
|
468
|
|
Principal payment on equipment financing
|
|
|
(56
|
)
|
|
|
(44
|
)
|
Net cash provided by financing activities
|
|
|
873
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
441
|
|
|
|
64
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
38
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
479
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
10
|
|
|
$
|
12
|
|
Income tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Equipment Financing on purchased assets
|
|
$
|
-
|
|
|
$
|
175
|
|
See accompanying notes to the financial statements
NEXOGY, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2020, AND
2019
NOTE 1 – DESCRIPTION OF BUSINESS
Nexogy, Inc., (“we”, “our”,
“Company” or “Nexogy”) was incorporated in the state of Florida on September 2, 2005. We provide
cloud services specializing in Unified Communications as a Service (“UCaaS”) solutions for the business market. Our
product line includes a portfolio of Internet-based telephony products and services delivered through our cloud application platform and
session-based communication network and network services including Internet broadband, fiber, and mobile broadband. Our services are designed
to provide enterprise-class, carrier-grade services to the small-to-medium-sized business (“SMB”) at cost-effective monthly
rates. Our UCaaS or cloud communication services include fully hosted IP/PBX, mobile applications, Voice over Internet Protocol (“VoIP”)
transport, SIP trunking, and customized VoIP services. We provide services in various industries including banking, healthcare, financial
services, legal, insurance, hotels, real estate, food services, and education.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Use of Estimates. In preparing
financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance
sheet and revenue and expenses in the statement of operations. Actual results could differ from those estimates.
Basis of Presentation.
These financial statements have been prepared by the Company in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries
which are directly or indirectly owned by the Company.
Cash and cash equivalents. The
Company considers all bank deposits and highly liquid investments with original maturities of three months or less to be cash and cash
equivalents.
Concentration of Credit Risk. Financial
instruments that potentially subject Nexogy to concentration of credit risk consist primarily of trade receivables. In the normal course
of business, Nexogy provides credit terms to its customers. Accordingly, Nexogy performs ongoing credit evaluations of its customers.
Nexogy maintains cash in bank deposit accounts, which, at times, may exceed federally insured limits. Nexogy has not experienced any losses
in such accounts and Nexogy does not believe it is exposed to any significant credit risk on cash and cash equivalents.
Allowance for Doubtful Accounts. Bad
debt expense is recognized based on management’s estimate of likely losses each year based on past experience and an estimate of
current year uncollectible amounts. As of July 31, 2020, and 2019, Nexogy’s allowance for doubtful accounts balance was $0 and $0,
respectively. For the Years Ended July 31, 2020, and 2019, Nexogy recognized bad debt expense of $94,000 and $126,000 respectively.
Revenue Recognition. On August
1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of August
1, 2018. Results for reporting periods beginning after August 1, 2018, are presented under Topic 606. There was no impact to the opening
balance of accumulated deficit or revenues for the year ended July 31, 2019, as a result of applying Topic 606.
Sources of revenue:
Cloud-based hosted Services. The Company
recognizes cloud-based hosted services revenue, mainly from subscription services for its cloud telephony applications that includes hosted
IP/PBX services, SIP trunking, call center applications, auto attendant, voice, and web conferencing, call recording, messaging, voicemail
to email conversion, integrated mobility applications that are device and location agnostic, and other customized applications. Other
services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN
(Software-defined Wide Area Network), fiber, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster
recovery services. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying
the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4)
allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation
is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products and services transfers
to the customer.
Service Revenue
Service revenue
from subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over the contractual
subscription term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription
services being rendered are recorded as a deferred revenue. Usage fees, either bundled or not bundled, are recognized when the Company
has a right to invoice. Professional services for configuration, system integration, optimization, customer training and/or education
are primarily billed on a fixed-fee basis and are performed by the Company directly. Alternatively, customers may choose to perform these
services themselves or engage their own third-party service providers. Professional services revenue is recognized over time, generally
as services are activated for the customer.
Product Revenue
The
Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is generally
upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical experience.
Disaggregation of Cloud-based
hosted revenues
Summary of
disaggregated revenue is as follows (in thousands):
|
|
For the Years ended
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cloud software and service revenue
|
|
$
|
6,193
|
|
|
$
|
6,294
|
|
Product revenue
|
|
|
154
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
6,347
|
|
|
$
|
6,488
|
|
Related parties. The Company
accounts for related party transactions in accordance with ASC 850 (“Related Party Disclosures”). A party is considered to
be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is
under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might
be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies
of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other
to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related
party.
Income taxes. Nexogy recognizes
deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using
the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. Nexogy provides a
valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Nexogy accounts for uncertain tax positions
in accordance with the authoritative guidance issued by the Financial Accounting Standards Board on income taxes which addresses how an
entity should recognize, measure and present in the financial statements uncertain tax positions that have been taken or are expected
to be taken in a tax return. Pursuant to this guidance, Nexogy recognizes a tax benefit only if it is “more likely than not”
that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard
has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being
realized upon settlement. As of July 31, 2020, and 2019, we have no liability for unrecognized tax benefits.
Recently issued accounting pronouncements.
Recent accounting pronouncements, other than below, issued by the Financial Accounting Standards Board (“FASB”) (including
its Emerging Issues Task Force), the AICPA and the SEC did not, or are not, believed by management to have a material effect on the Company’s
present or future financial statements.
In February 2016,
the FASB issued ASU No. 2016-02, “Leases.” ASU 2016-02 requires a lessee to record a right of use asset and a corresponding
lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual
reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest period presented in the
financial statements. The Company adopted the new guidance on August 1, 2020.
Other recent accounting
pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and
the SEC did not or in management’s opinion will not have a material impact on the Company’s present or future consolidated
financial statements.
NOTE 3 – GOING CONCERN
Financial Condition
The Company’s financial statements
as of July 31, 2020, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities
in the normal course of business. Since the Company’s inception in 2005, the Company has incurred net losses and accumulated a deficit
of approximately $3,076,000, a working capital deficit of approximately $2,682,000 and total liabilities as of July 31, 2020 of $4,332,000,
which includes $3,386,000 in notes payable to related parties, which raises substantial doubt about Nexogy’s ability to continue
as a going concern.
Management Plans to Continue as a Going
Concern
Management believes that available resources
as of July 31, 2020, will not be sufficient to fund the Company’s operations and legal 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, 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 debt financing, sales of assets, or collaborative arrangements.
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 have been successful in raising debt in
the past and as described in Notes 6 and 8. The Company’s financial statements as of July 31, 2020, do not include any adjustments
that might result from the inability to implement or execute the Company’s plans to improve our ability to continue as a going concern.
As described in Note 10, on November 17,
2020, Nexogy Acquisition, Inc., a Florida Corporation, a wholly owned subsidiary of T3 Communications, Inc. (“T3 Nevada”),
merged with and into Nexogy, Inc. (“Nexogy”) resulting in Nexogy becoming a wholly owned subsidiary of T3 Nevada (the “Merger”).
As part of this merger, Nexogy will have access to working capital from T3 Nevada. In addition, the Company anticipate realizing some
costs savings as we consolidate networks and multiple technical, operational, and administrative functions. However, there can be no assurance
that the planned costs savings will be realized during the anticipated periods. There can be no guarantee that the planned costs savings
will generate the expected reductions on the schedule anticipated by management.
NOTE 4 – INCOME TAXES
The current tax year is subject to examination
by the Internal Revenue Service and certain state taxing authorities. As of July 31, 2020, Nexogy had net operating loss carryforwards
of approximately $1,972,000 to reduce future federal income tax liabilities; the loss carryforwards will start to expire in 2037. Under
the recently enacted Tax Cuts and Jobs Act (TCJA), the new effective Corporate flat tax rate is 21% (effective for tax years beginning
after December 31, 2017). Income tax benefit (provision) for the years ended July 31, 2020, and 2019 are as follows:
The effective tax rate for Nexogy is reconciled
to statutory rates as follows:
|
|
2020
|
|
|
2019
|
|
Expected Federal benefit (provision), at statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Change in valuation allowance
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Deferred tax assets are comprised of the
following as of July 31, 2020, and 2019:
|
|
2020
|
|
|
2019
|
|
Net operating loss carryover
|
|
$
|
414,073
|
|
|
$
|
361,829
|
|
Valuation allowance
|
|
|
(414,073
|
)
|
|
|
(361,829
|
)
|
Total deferred tax asset, net
|
|
$
|
-
|
|
|
$
|
-
|
|
At July 31, 2020, realization of Nexogy’s
deferred tax assets was not considered likely to be realized. The change in the valuation allowance for 2020 was resulted in a decrease
of approximately $52,244. Management has evaluated and concluded that there are no significant uncertain tax positions requiring recognition
in Nexogy’s financial statements. The current year remains open to examination by the major taxing jurisdictions in which Nexogy
is subject to tax. The Company files a calendar year return, and the net operating loss was adjusted for the fiscal year ended July 31,
2020.
We record unrecognized
tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluate
on new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result
in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will
be reflected as increases or decreases to income tax expense in the period in which new information is available.
NOTE 5 –
COMMITMENTS AND CONTINGENCIES
The Company has the following leases:
Lease
|
|
Base Monthly Rent Payment
|
|
|
Commencement
Date
|
|
Expiration
Date
|
|
Additional Terms
|
Office
|
|
$
|
12,933
|
|
|
October 11, 2011
|
|
July 31, 2022
|
|
Initial term for sixty-two (62) months, lease renewed for additional sixty-three (63) months.
|
Colocation
|
|
$
|
4,130
|
|
|
June 8, 2020
|
|
June 8, 2023
|
|
With an option to extend for an additional twelve (12) months, and 5% increase in base monthly lease payment.
|
Rooftop
|
|
$
|
704
|
|
|
December 18, 2013
|
|
July 31, 2021
|
|
Initial term for twenty-four (24) months, lease renewed for additional two (2) successive two (2) year periods. After, the lease shall remain on a month-to-month basis.
|
Rooftop
|
|
$
|
1,075
|
|
|
August 28, 2014
|
|
July 31, 2021
|
|
Initial term for thirty-six (36) months. After the initial term, the lease shall remain on a month-to-month basis.
|
Rooftop
|
|
$
|
268
|
|
|
November 27, 2013
|
|
July 31, 2022
|
|
Initial term for forty-eight (48) months, lease renewed for additional sixty-three (63) months.
|
Rooftop
|
|
$
|
2,840
|
|
|
June 1, 2015
|
|
June 1, 2021
|
|
With an option to extend for five (5) additional one (1) year terms.
|
Rooftop
|
|
$
|
1,101
|
|
|
December 1, 2015
|
|
December 1, 2025
|
|
Initial term for five (5) years, lease renewed for additional five (5) years.
|
Rooftop
|
|
$
|
2,950
|
|
|
November 30, 2013
|
|
November 30, 2023
|
|
Initial term for five (5) years, lease renewed for additional five (5) years, with an option for a second renewal for an additional five (5) years.
|
Total monthly base rent:
|
|
$
|
26,002
|
|
|
|
|
|
|
|
The leased properties have a remaining lease
term of twenty to sixty months as of July 31, 2020. At the option of the Company, it can elect to extend the term of the leases.
The Company recorded a total rent payment
of $436,536 and $529,129, for the years ended July 31, 2020, and 2019, respectively.
During the years
ended July 31, 2019, and 2020, the Company had a Colo lease with a monthly lease payment of $11,829, this Colo lease ended June 1, 2020.
The Future minimum
lease payment under the operating leases are as follows:
Year Ending July 31,
|
|
Lease
Payments
|
|
2021
|
|
$
|
292,307
|
|
2022
|
|
|
287,340
|
|
2023
|
|
|
91,787
|
|
2024
|
|
|
23,649
|
|
2025
|
|
|
14,874
|
|
Total:
|
|
$
|
709,957
|
|
NOTE 6 –
RELATED PARTY TRANSACTIONS
During the years
ended July 31, 2020, and 2019, the Company engaged an entity owned by one of its major shareholders to performed international and domestic
termination services for $103,521 and $117,031, respectively. As of July 31, 2020, and July 31, 2019, the total outstanding balance was
$0, and 58,005, respectively.
During the years
ended July 31, 2020, and 2019, the Company engaged an entity owned by one of its major shareholders to performed programing services for
$7,812 and $19,964, respectively.
During the years
ended July 31, 2020, and 2019, the Company engaged an entity owned by one of its major shareholders to performed programing and provisioning
services for $78,504 and $73,583, respectively.
During the years
ended July 31, 2020, and 2019, the Company engaged an entity owned by one of its major shareholders to performed management services for
$234,688 and $229,136, respectively.
As of July 31, 2020
& 2019, the Company borrowed working capital from its major shareholder in the aggregate amount of $2,511,000. These notes were non-interest
bearing and due on demand.
During the years
ended July 31, 2020, and 2019, the Company received proceeds from related party of $478,000 and $468,000, respectively. As of July 31,
2020, and July 31, 2019, the total outstanding related party note payable balance were approximately $3,386,000 and $2,908,000, respectively.
Subsequently, on November 17, 2020, the notes were paid in full to the shareholders.
NOTE 7 –
EQUIPMENT FINANCING
The Company entered
into three financing agreements for equipment purchased. Under the terms of these transactions, assets with a cost of approximately $34,364,
$96,954, and $43,916, were financed under three separate financing agreements dated August 20, 2018, November 2, 2018, and November 28,
2018, respectively. The equipment financing is net of costs associated with the assets such as maintenance, insurance and property taxes
are for the account of the Company. The equipment financing agreements are for 36 months, with the first payments starting August 20,
2018, November 2, 2018, and November 28, 2018, respectively and monthly principal and interest payments of $1,081, $3,048, and $1,380,
respectively. The interest rate under the financing agreements ranged from 8.21% to 8.70% per annum. During the years ended July 31, 2020,
and 2019, the Company made total principal payments of $56,335 and $42,791, respectively. Subsequently, on September 10, 2020, the three
financing agreements were paid in full.
NOTE 8 –
NOTE PAYABLE
On April 16, 2020,
the Company, entered into an unsecured promissory note (the “Note”) for $450,500 made to the Company under the Paycheck Protection
Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The Note to the Company was made through
City National Bank of Florida (the “Lender”).
The Note provided
for an interest rate of 1.00% per annum and matures two years after the issuance date. Beginning on the seventh month following the date
of the Note, the Company is required to make 18 monthly principal payments in the amount of $25,028 and accrued interest. The Note was
used for payroll costs, costs related to certain group health care benefits and insurance premiums. The Note contain events of default
and other conditions customary for a Note of this type.
Under the terms
of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all, or a portion of loan granted under the PPP, with
such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any
payments of mortgage interest, rent, and utilities. The terms of any forgiveness may also be subject to further requirements in any regulations
and guidelines the SBA may adopt. While the Company currently believes that its use of the Note proceeds will meet the conditions for
forgiveness under the PPP, no assurance is provided that the Company will obtain forgiveness of the Notes in whole or in part. Subsequently,
on December 12, 2020, the SBA informed the Company that the total outstanding principal balance of $450,500 and accrued interest of $2,986.88
were forgiven. Subsequentially, on December 12, 2020, the Company recognized a gain on settlement of debt of $450,500.
NOTE 9 –
CAPITAL STOCK
As of July 31, 2020,
and 2019, the Company had 25,000,000 authorized common shares, of which 100,000 founder shares were issued and outstanding, with a $0.001
par value per share.
NOTE 10 –
SUBSEQUENT EVENTS
On November 17, 2020, Nexogy Acquisition,
Inc., a Florida Corporation, a wholly owned subsidiary of T3 Communications, Inc. (“T3 Nevada”), merged with and into Nexogy,
Inc. (“Nexogy”) resulting in Nexogy becoming a wholly owned subsidiary of T3 Nevada (the “Merger”). Nexogy is
a leading provider in South Florida of Unified Communications as a Service and managed services, offering a portfolio of cloud-based solutions
to the high-growth SMB market.
The purchase price for Nexogy was $9 million
in cash, plus an additional $452,000 in initial excess net working capital, with $900,000 of the $9 million being placed in an indemnity
escrow account and $50,000 of the $9 million being placed in a working capital escrow account. In addition, at the closing of the Merger,
T3 Nevada paid a number of Nexogy’s liabilities which were included in the $9 million purchase price.
NEXOGY, INC.
Unaudited Financial Statements
For the Three Months Ended October 31,
2020
NEXOGY,
INC.
BALANCE
SHEETS
(Unaudited)
(In
thousands)
|
|
October 31,
|
|
|
July 31,
|
|
|
|
2020
|
|
|
2020
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
177
|
|
|
$
|
479
|
|
Accounts receivable, net
|
|
|
726
|
|
|
|
720
|
|
Prepaid expenses
|
|
|
7
|
|
|
|
-
|
|
Total current assets
|
|
|
910
|
|
|
|
1,199
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
|
Equipment, net
|
|
|
13
|
|
|
|
-
|
|
Other assets
|
|
|
55
|
|
|
|
57
|
|
Right-of-use asset
|
|
|
442
|
|
|
|
-
|
|
Total assets
|
|
$
|
1,420
|
|
|
$
|
1,256
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
210
|
|
|
$
|
241
|
|
Accrued liabilities
|
|
|
245
|
|
|
|
179
|
|
Note payable, current, related party
|
|
|
3,107
|
|
|
|
3,386
|
|
Equipment financing
|
|
|
-
|
|
|
|
75
|
|
Operating lease liability, current
|
|
|
199
|
|
|
|
-
|
|
Total current liabilities
|
|
|
3,761
|
|
|
|
3,881
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
451
|
|
|
|
451
|
|
Operating lease liability
|
|
|
243
|
|
|
|
-
|
|
Total long-term liabilities
|
|
|
694
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,455
|
|
|
|
4,332
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT:
|
|
|
|
|
|
|
|
|
Common stock, $0.001, 25,000,000 shares authorized, 100,000 and 100,000
|
|
|
|
|
|
|
|
|
issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Accumulated deficit
|
|
|
(3,035
|
)
|
|
|
(3,076
|
)
|
Total stockholders’ deficit
|
|
|
(3,035
|
)
|
|
|
(3,076
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
1,420
|
|
|
$
|
1,256
|
|
See accompanying notes to the unaudited financial
statements
NEXOGY,
INC.
STATEMENTS
OF OPERATIONS
(Unaudited)
(In
thousands)
|
|
For the Three Months ended October 31,
|
|
|
|
2020
|
|
|
2019
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
Cloud software and service revenue
|
|
$
|
1,672
|
|
|
$
|
1,569
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,672
|
|
|
|
1,569
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
|
|
482
|
|
|
|
460
|
|
Selling, general and administrative expense
|
|
|
1,100
|
|
|
|
1,180
|
|
Legal and professional fees
|
|
|
34
|
|
|
|
43
|
|
Bad debt
|
|
|
15
|
|
|
|
44
|
|
Depreciation and amortization expense
|
|
|
1
|
|
|
|
-
|
|
Total operating expenses
|
|
|
1,632
|
|
|
|
1,727
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
40
|
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(36
|
)
|
|
|
(32
|
)
|
Other income
|
|
|
37
|
|
|
|
6
|
|
Interest expense
|
|
|
-
|
|
|
|
6
|
|
Total other income (expense)
|
|
|
1
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
41
|
|
|
$
|
(178
|
)
|
See accompanying notes to the unaudited financial
statements
NEXOGY,
INC.
STATEMENTS
OF STOCKHOLDERS’ DEFICIT
THREE
MONTHS ENDED OCTOBER 31, 2020
(Unaudited)
(In
thousands, except for share amounts)
|
|
Common
|
|
|
|
|
|
Additional Paid in
|
|
|
Accumulated
|
|
|
Total stockholders’
|
|
|
|
Shares
|
|
|
Par
|
|
|
Capital
|
|
|
deficit
|
|
|
deficit
|
|
BALANCE, July 31, 2020
|
|
|
100,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(3,076
|
)
|
|
$
|
(3,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, October 31, 2020
|
|
|
100,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(3,035
|
)
|
|
$
|
(3,035
|
)
|
See accompanying notes to the unaudited financial
statements
NEXOGY,
INC.
STATEMENTS
OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Three Months Ended
October 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
41
|
|
|
$
|
(178
|
)
|
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1
|
|
|
|
-
|
|
Bad debt expense
|
|
|
15
|
|
|
|
44
|
|
Amortization of ROU - operating
|
|
|
19
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(21
|
)
|
|
|
(68
|
)
|
Prepaids & other assets
|
|
|
(5
|
)
|
|
|
2
|
|
Right of use operating lease liability
|
|
|
(19
|
)
|
|
|
-
|
|
Accounts payable
|
|
|
(31
|
)
|
|
|
51
|
|
Accrued expenses
|
|
|
66
|
|
|
|
(45
|
)
|
Net cash provided by (used in) operating activities
|
|
|
66
|
|
|
|
(194
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash paid in acquisition of equipment
|
|
|
(14
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings from related party
|
|
|
-
|
|
|
|
200
|
|
Principal payment to related party
|
|
|
(279
|
)
|
|
|
-
|
|
Principal payment on equipment financing
|
|
|
(75
|
)
|
|
|
(13
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(354
|
)
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(302
|
)
|
|
|
(7
|
)
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
479
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
177
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1
|
|
|
$
|
3
|
|
Income tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Capitalization of ROU assets and liabilities - operating
|
|
$
|
462
|
|
|
$
|
-
|
|
See accompanying notes to the unaudited financial
statements
NEXOGY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED OCTOBER 31,
2020, AND 2019
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements
have been prepared in connection with Nexogy, Inc.’s, business combination with Nexogy Acquisition, Inc., a Florida Corporation,
a wholly owned subsidiary of T3 Communications, Inc. (“T3 Nevada”), merged with and into Nexogy, Inc. (“Nexogy”)
resulting in Nexogy becoming a wholly owned subsidiary of T3 Nevada (the “Merger”), a subsidiary of Digerati Technologies,
Inc.(“Digerati”), and to comply with the rules and regulations of the Securities and Exchange Commission (“SEC”)
for inclusion by Digerati in its current report on Form 8-K/A.
The accompanying unaudited interim financial statements of Nexogy,
Inc. (“Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America
and the rules of the Securities and Exchange Commission, and should be read in conjunction with the Company’s audited financial
statements and notes thereto for the year ended July 31, 2020. In the opinion of management, 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
have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be
expected for the full year. Notes to the interim financial statements which would substantially duplicate the disclosures contained
in the audited financial statements for the year ended July 31, 2020 have been omitted.
NOTE 2 – GOING CONCERN
Financial Condition
The Company’s financial statements
as of October 31, 2020, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. Since the Company’s inception in 2005, the Company has incurred net losses and accumulated
a deficit of approximately $3,035,000, a working capital deficit of approximately $2,851,000 and total liabilities of $4,455,000, which
includes $3,107,000 in notes payable to related parties, which raises substantial doubt about Nexogy’s ability to continue as a
going concern.
Management Plans to Continue as a Going
Concern
Management believes that available resources
as of October 31, 2020, will not be sufficient to fund the Company’s operations and legal 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, 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 debt financing, sales of assets, or
collaborative arrangements. 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 have been successful in raising debt in
the past and as described in Notes 4 and 5. The Company’s financial statements as of October 31, 2020, do not include any adjustments
that might result from the inability to implement or execute the Company’s plans to improve our ability to continue as a going concern.
As described in Note 6, on November 17, 2020,
Nexogy Acquisition, Inc., a Florida Corporation, a wholly owned subsidiary of T3 Communications, Inc. (“T3 Nevada”), merged
with and into Nexogy, Inc. (“Nexogy”) resulting in Nexogy becoming a wholly owned subsidiary of T3 Nevada (the “Merger”).
As part of this merger, Nexogy will have access to working capital from T3 Nevada. In addition, the Company anticipate realizing some
costs savings as we consolidate networks and multiple technical, operational, and administrative functions. However, there can be no assurance
that the planned costs savings will be realized during the anticipated periods. There can be no guarantee that the planned costs savings
will generate the expected reductions on the schedule anticipated by management.
NOTE 3 –
OPERATING LEASES
The leased properties have a remaining lease
term of seventeen to fifty-seven months as of August 1, 2020. At the option of the Company, it can elect to extend the term of the leases.
The Company has the following leases:
|
|
Base Monthly Rent
|
|
Commencement
|
|
Expiration
|
|
|
Lease
|
|
Payment
|
|
Date
|
|
Date
|
|
Additional Terms
|
Office
|
|
$
|
12,933
|
|
October 11, 2011
|
|
July 31, 2022
|
|
Initial term for sixty-two (62) months, lease renewed for additional sixty-three (63) months.
|
|
|
|
|
|
|
|
|
|
|
Colocation
|
|
$
|
4,130
|
|
June 8, 2020
|
|
June 8, 2023
|
|
With an option to extend for an additional twelve (12) months, and 5% increase in base monthly lease payment.
|
|
|
|
|
|
|
|
|
|
|
Rooftop
|
|
$
|
704
|
|
December 18, 2013
|
|
July 31, 2021
|
|
Initial term for twenty-four (24) months, lease renewed for additional two (2) successive two (2) year periods. After, the lease shall remain on a month-to-month basis.
|
|
|
|
|
|
|
|
|
|
|
Rooftop
|
|
$
|
1,075
|
|
August 28, 2014
|
|
July 31, 2021
|
|
Initial term for thirty-six (36) months. After the initial term, the lease shall remain on a month-to-month basis.
|
|
|
|
|
|
|
|
|
|
|
Rooftop
|
|
$
|
268
|
|
November 27, 2013
|
|
July 31, 2022
|
|
Initial term for forty-eight (48) months, lease renewed for additional sixty-three (63) months.
|
|
|
|
|
|
|
|
|
|
|
Rooftop
|
|
$
|
2,840
|
|
June 1, 2015
|
|
June 1, 2021
|
|
With an option to extend for five (5) additional one (1) year terms.
|
|
|
|
|
|
|
|
|
|
|
Rooftop
|
|
$
|
1,102
|
|
December 1, 2015
|
|
December 1, 2025
|
|
Initial term for five (5) years, lease renewed for additional five (5) years.
|
|
|
|
|
|
|
|
|
|
|
Rooftop
|
|
$
|
2,950
|
|
November 30, 2013
|
|
November 30, 2023
|
|
Initial term for five (5) years, lease renewed for additional five (5) years, with an option for a second renewal for an additional five (5) years.
|
Total monthly base rent:
|
|
$
|
26,002
|
|
|
|
|
|
|
‘Beginning August 1, 2020, operating
ROU assets and operating lease liabilities are recognized based on the present value of lease payments, including annual rent increases,
over the lease term at commencement date. Operating leases in effect prior to August 1, 2020, were recognized at the present value of
the remaining payments on the remaining lease term as of August 1, 2020. Because none of our leases included an implicit rate of return,
we used our incremental secured borrowing rate based on lease term information available as of the adoption date or lease commencement
date in determining the present value of lease payments. The incremental borrowing rate on the leases is 9.0%.
The impact of ASU No. 2016-02 (“Leases
(Topic 842)” on our consolidated balance sheet beginning August 1, 2020, was through the recognition of ROU assets and lease liabilities
for operating leases. Amounts recognized on July 31, 2020, and October 31, 2020, for operating leases are as follows:
ROU Asset
|
|
August 1, 2020
|
|
$
|
461,472
|
|
Amortization
|
|
|
|
$
|
(19,319
|
)
|
ROU Asset
|
|
October 31, 2020
|
|
$
|
442,153
|
|
|
|
|
|
|
|
|
Lease Liability
|
|
August 1, 2020
|
|
$
|
461,472
|
|
Amortization
|
|
|
|
$
|
(19,319
|
)
|
Lease Liability
|
|
October 31, 2020
|
|
$
|
442,153
|
|
|
|
|
|
|
|
|
Lease Liability
|
|
Short term
|
|
$
|
198,759
|
|
Lease Liability
|
|
Long term
|
|
$
|
243,394
|
|
Lease Liability
|
|
Total
|
|
$
|
442,153
|
|
Operating lease cost:
|
|
$
|
72,669
|
|
Cash paid for amounts included in the measurement of lease labilities
|
|
|
|
|
Operating cashflow from operating leases:
|
|
$
|
72,669
|
|
Weighted-average remain lease term-operating lease:
|
|
|
2.42 Years
|
|
Weighted-average discount rate
|
|
|
9.0
|
%
|
For the period ended October 31, 2020, the
amortization of operating ROU assets was $19,319.
For the period ended October 31, 2020, the
amortization of operating lease liabilities was $19,319.
The Company recorded a total rent payment
of $83,829 and $84,832, for the three months ended October 31, 2020, and 2019, respectively.
The Future minimum lease payment under the
operating leases are as follows:
Year Ending July 31,
|
|
Lease Payments
|
|
2021
|
|
$
|
219,638
|
|
2022
|
|
|
287,340
|
|
2023
|
|
|
91,787
|
|
2024
|
|
|
23,649
|
|
2025
|
|
|
14,874
|
|
Total:
|
|
$
|
637,288
|
|
NOTE 4 –
RELATED PARTY TRANSACTIONS
During the three
months ended October 31, 2020, and 2019, the Company engaged an entity owned by one of the of its major shareholders to performed international
and domestic termination services for $26,824 and $30,054, respectively. As of October 31, 2020, and July 31, 2020, the total outstanding
balance was $6,618, and $0, respectively.
During the three
months ended October 31, 2020, and 2019, the Company engaged an entity owned by one of the of its major shareholders to performed programing
and provisioning services for $16,137 and $22,497, respectively.
As of October 31,
2020, and July 31, 2020, the total outstanding related party note payable balance were $3,107,000 and $3,386,000, respectively. During
the months ended October 31, 2020, the Company made principal payments on the related party notes of $279,000. Subsequently, on November
17, 2020, the notes were paid in full to the shareholders.
NOTE 5 –
NOTE PAYABLE
On April 16, 2020,
the Company, entered into an unsecured promissory note (the “Note”) for $450,500 made to the Company under the Paycheck Protection
Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The Note to the Company was made through
City National Bank of Florida (the “Lender”).
The Note provided
for an interest rate of 1.00% per annum and matures two years after the issuance date. Beginning on the seventh month following the date
of the Note, the Company is required to make 18 monthly principal payments in the amount of $25,028 and accrued interest. The Note was
used for payroll costs, costs related to certain group health care benefits and insurance premiums. The Note contain events of default
and other conditions customary for a Note of this type.
Under the terms
of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all, or a portion of loan granted under the PPP, with
such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any
payments of mortgage interest, rent, and utilities. The terms of any forgiveness may also be subject to further requirements in any regulations
and guidelines the SBA may adopt. While the Company currently believes that its use of the Note proceeds will meet the conditions for
forgiveness under the PPP, no assurance is provided that the Company will obtain forgiveness of the Notes in whole or in part. Subsequently,
on December 12, 2020, the SBA informed the Company that the total outstanding principal balance of $450,500 and accrued interest of $2,986.88
were forgiven. Subsequentially, on December 12, 2020, the Company recognized a gain on settlement of debt of $450,500.
NOTE 6 –
SUBSEQUENT EVENTS
On November 17, 2020, Nexogy Acquisition,
Inc., a Florida Corporation, a wholly owned subsidiary of T3 Communications, Inc. (“T3 Nevada”), merged with and into Nexogy,
Inc. (“Nexogy”) resulting in Nexogy becoming a wholly owned subsidiary of T3 Nevada (the “Merger”). Nexogy is
a leading provider in South Florida of Unified Communications as a Service and managed services, offering a portfolio of cloud-based solutions
to the high-growth SMB market.
The purchase price for Nexogy was $9 million
in cash, plus an additional $452,000 in initial excess net working capital, with $900,000 of the $9 million being placed in an indemnity
escrow account and $50,000 of the $9 million being placed in a working capital escrow account. In addition, at the closing of the Merger,
T3 Nevada paid a number of Nexogy’s liabilities which were included in the $9 million purchase price.
DIGERATI TECHNOLOGIES,
INC., NEXOGY, INC. AND ACTIVESERVE, INC.
Unaudited Pro Forma Consolidated
Balance Sheet
and
Unaudited Pro Forma
Consolidated Statements of Operations
Nexogy Acquisition
On November 17, 2020, Digerati
Technologies, Inc. (the “Company” or “Digerati”), through Nexogy Acquisition, Inc., a Florida Corporation, a
wholly owned subsidiary of T3 Communications, Inc. (“T3 Nevada”), a Digerati subsidiary, merged with and into Nexogy, Inc.
(“Nexogy”) resulting in Nexogy becoming a wholly owned subsidiary of T3 Nevada (the “Merger”). Nexogy is a leading
provider in South Florida of Unified Communications as a Service and managed services, offering a portfolio of cloud-based solutions
to the high-growth SMB market. The aggregate purchase price for Nexogy was $9 million in cash, plus an additional $452,000 in initial
excess net working capital, with $900,000 of the $9 million being placed in an indemnity escrow account and $50,000 of the $9 million
being placed in a working capital escrow account. In addition, at the closing of the Merger, T3 Nevada paid a number of Nexogy’s
liabilities which were included in the $9 million purchase price.
ActiveServe, Inc. Asset Acquisition
On November 17, 2020, Digerati,
through its subsidiary, T3 Communications, Inc., a Florida corporation (“T3 Florida”), executed and closed on an Asset Purchase
Agreement (the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation (“ActiveServe”). Pursuant to
the Purchase Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights,
software and other licenses and miscellaneous assets used in connection with the operation of ActiveServe’s telecommunications business
known as ActivePBX (collectively, the “Purchased Assets”). The aggregate purchase price for the Purchased Assets was $2,555,000 in
cash, subject to adjustment as provided therein (the “Purchase Price”). $1,190,000 of the Purchase Price was payable at closing,
with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover part of potential future indemnification
obligations of ActiveServe to T3 Florida due to ActiveServe’s breaches, if any, of any representations and warranties made to T3
Florida by ActiveServe under the Purchase Agreement, and $40,000 of such amount being credited to T3 Florida against a payment
in that amount made by T3 Florida to ActiveServe pursuant to the Second Amendment to Letter of Intent between ActiveServe and T3 Florida
dated as of October 15, 2020. Part of the Purchase Price is payable in 8 equal quarterly payments of $136,250, subject to T3
Florida achieving quarterly post-purchase recurring revenues under monthly contracts or subscriptions
from the acquired customer base, excluding charges for taxes, regulatory fees, additional set-up fees, equipment purchases or lease, and
consulting fees. To the extent that a quarterly revenue threshold is not reached, the amount of the corresponding quarterly payment shall
be reduced on a proportional basis. T3 Florida’s $1,140,000 payment obligation is represented by a promissory note of T3 Florida
in the form included as an exhibit to the Purchase Agreement. The note, in turn, is subject to the Subordination Agreement, included as
an Exhibit to the Purchase Agreement, among ActiveServe, the Company’s parent, T3 Nevada, and Post Road Administrative, LLC, in
its capacity as administrative agent for the Post Road lenders. $275,000 of the Purchase Price (the “Customer Renewal
Value”) represents an incentive earn-out to be paid with respect to ActiveServe’s customer accounts which are transferred
to T3 Florida at closing, that are renewed, expanded and/or revised with T3 Florida for a minimum term of twelve months with an auto-renewal
for 12 months.
The
unaudited pro forma condensed consolidated combined financial information presented below has been prepared on the basis set forth
in the notes below and have been presented to illustrate the estimated effects of the Nexogy Acquisition and ActiveServe Asset Acquisition.
The Nexogy Acquisition and ActiveServe Asset Acquisitions are being accounted for as business combinations
using the acquisition method with the Company as the accounting acquirer in accordance with Financial Accounting Standards Board Accounting
Standards Codification (“ASC”) Topic 805, Business Combinations.
The historical financial information
of the Company for the three months ended October 31, 2020 has been derived from the unaudited consolidated financial statements of the
Company as of October 31, 2020, as found in Form 10Q which was filed with the Securities and Exchange Commission on December 14, 2020.
The historical financial information of the Company for the year ended July 31, 2020 has been derived from the audited consolidated financial
statements of the Company as of July 31, 2020, as found in Form 10K which was filed with the Securities and Exchange Commission on October
29, 2020.
The historical financial information
of ActiveServe for the three months ended October 31, 2020 has been derived from the unaudited financial statements of ActiveServe as
of and for the three months ended October 31, 2020, included in Exhibit 99.2 to the Company’s Form 8-K/A filed with the SEC on July
16, 2021. The historical financial information of ActiveServe has been derived from the audited financial statements of ActiveServe for
the year ended July 31, 2020, included in Exhibit 99.1 to the Company’s Form 8-K/A filed with the SEC on July 16, 2021.
The historical financial information
of Nexogy for the three months ended October 31, 2020 has been derived from the unaudited financial statements of Nexogy as of and for
the three months ended October 31, 2020, included in Exhibit 99.2 to the Company’s Form 8-K/A filed with the SEC on July 26, 2021.
The historical financial information of Nexogy for the year ended July 31, 2020 has been derived from the audited financial statements
of Nexogy for the year ended July 31, 2020, included in Exhibit 99.1 to the Company’s Form 8-K/A filed with the Securities and Exchange
Commission on July 26, 2021.
The
following unaudited pro forma consolidated balance sheet as of October 31, 2020, and the unaudited pro forma consolidated
statement of operations for the three months ended October 31, 2020, and twelve months ended July 31, 2020 (collectively, the “Pro
Forma Statements”) have been prepared in compliance with the requirements of SEC Regulation S-X Article 11 using accounting
policies in accordance with U.S. GAAP.
The
pro forma adjustments presented below are based on preliminary estimates and currently available information and assumptions that
management believes are reasonable and appropriate under the circumstances and are factually supported based on information currently
available. The notes to the unaudited pro forma condensed consolidated combined financial information provide a discussion of how such
adjustments were derived and presented in the Pro Forma Statements. Changes in facts and circumstances or discovery of new information
may result in revised estimates. As a result, there may be material adjustments to the Pro Forma Statements. Certain historical financial
statement caption amounts for Nexogy and ActiveServe have been reclassified or combined to conform to presentation and the disclosure
requirements of the combined company.
DIGERATI TECHNOLOGIES, INC., NEXOGY, INC. AND
ACTIVESERVE, INC.
Unaudited Pro Forma Consolidated Balance Sheet
As of October 31, 2020
|
|
Historical (unaudited)
|
|
|
Pro Forma
|
|
|
|
|
Pro Forma
|
|
|
|
Digerati
|
|
|
Nexogy
|
|
|
ActiveServe
|
|
|
Adjustments
|
|
|
Note 3
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
446
|
|
|
$
|
177
|
|
|
$
|
325
|
|
|
$
|
(325
|
)
|
|
(a) (b)
|
|
$
|
623
|
|
Accounts receivable, net
|
|
|
116
|
|
|
|
726
|
|
|
|
26
|
|
|
|
52
|
|
|
(b)
|
|
|
920
|
|
Prepaid and other current assets
|
|
|
732
|
|
|
|
7
|
|
|
|
114
|
|
|
|
(112
|
)
|
|
(b)
|
|
|
741
|
|
Total current assets
|
|
|
1,294
|
|
|
|
910
|
|
|
|
465
|
|
|
|
(385
|
)
|
|
|
|
|
2,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
1,357
|
|
|
|
-
|
|
|
|
11
|
|
|
|
8,859
|
|
|
(a) (b)
|
|
|
10,227
|
|
Goodwill, net
|
|
|
810
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,703
|
|
|
(a) (b)
|
|
|
3,513
|
|
Property and equipment, net
|
|
|
482
|
|
|
|
13
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
(b)
|
|
|
495
|
|
Other assets
|
|
|
43
|
|
|
|
55
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
98
|
|
Investment in Itellum
|
|
|
185
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
185
|
|
Right-of-use asset
|
|
|
139
|
|
|
|
442
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
581
|
|
Total assets
|
|
$
|
4,310
|
|
|
$
|
1,420
|
|
|
$
|
480
|
|
|
$
|
11,173
|
|
|
|
|
$
|
17,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,821
|
|
|
$
|
210
|
|
|
$
|
25
|
|
|
$
|
65
|
|
|
(a)
|
|
$
|
2,121
|
|
Accrued liabilities
|
|
|
1,887
|
|
|
|
245
|
|
|
|
228
|
|
|
|
(148
|
)
|
|
(b)
|
|
|
2,212
|
|
Equipment financing
|
|
|
62
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
62
|
|
Convertible note payable, current, net $296
|
|
|
647
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
647
|
|
Note payable, current, related party, net $0
|
|
|
138
|
|
|
|
3,107
|
|
|
|
-
|
|
|
|
(2,237
|
)
|
|
(a) (b)
|
|
|
1,008
|
|
Note payable, current, net $0
|
|
|
1,616
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
1,616
|
|
Deferred income
|
|
|
138
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
138
|
|
Derivative liability
|
|
|
223
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
223
|
|
Operating lease liability, current
|
|
|
74
|
|
|
|
199
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
273
|
|
Total current liabilities
|
|
|
6,606
|
|
|
|
3,761
|
|
|
|
253
|
|
|
|
(2,320
|
)
|
|
|
|
|
8,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, related party, net $0
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
545
|
|
|
(b)
|
|
|
545
|
|
Note payable, net $0
|
|
|
133
|
|
|
|
451
|
|
|
|
156
|
|
|
|
9,984
|
|
|
(a) (b)
|
|
|
10,724
|
|
Equipment financing
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
20
|
|
Operating lease liability
|
|
|
64
|
|
|
|
243
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
307
|
|
Total long-term liabilities
|
|
|
217
|
|
|
|
694
|
|
|
|
156
|
|
|
|
10,529
|
|
|
|
|
|
11,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,823
|
|
|
|
4,455
|
|
|
|
409
|
|
|
|
8,209
|
|
|
|
|
|
19,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001, 50,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Series A Preferred stock, $0.001, 1,500,000 shares designated, 225,000 issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Convertible Series B Preferred stock, $0.001, 1,000,000 shares designated, 407,477 issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Convertible Series C Preferred stock, $0.001, 1,000,000 shares designated, 0 issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Series F Super Voting Preferred stock, $0.001, 100 shares designated, 100 issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Common stock, $0.001, 150,000,000 shares authorized, 122,182,410 issued and outstanding (15,000,000 reserved in Treasury)
|
|
|
122
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
122
|
|
Additional paid in capital
|
|
|
87,199
|
|
|
|
-
|
|
|
|
10
|
|
|
|
(10
|
)
|
|
(b)
|
|
|
87,199
|
|
(Accumulated deficit) Retained earnings
|
|
|
(89,418
|
)
|
|
|
(3,035
|
)
|
|
|
61
|
|
|
|
2,974
|
|
|
(a) (b)
|
|
|
(89,418
|
)
|
Other comprehensive income
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
1
|
|
Total Digerati’s stockholders’ deficit
|
|
|
(2,096
|
)
|
|
|
(3,035
|
)
|
|
|
71
|
|
|
|
2,964
|
|
|
|
|
|
(2,096
|
)
|
Noncontrolling interest
|
|
|
(417
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(417
|
)
|
Total stockholders’ deficit
|
|
|
(2,513
|
)
|
|
|
(3,035
|
)
|
|
|
71
|
|
|
|
2,964
|
|
|
|
|
|
(2,513
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
4,310
|
|
|
$
|
1,420
|
|
|
$
|
480
|
|
|
$
|
11,173
|
|
|
|
|
$
|
17,383
|
|
See accompanying notes to unaudited pro forma
consolidated financial statements
DIGERATI TECHNOLOGIES, INC., NEXOGY, INC. AND
ACTIVESERVE, INC.
Unaudited Pro Forma Consolidated Statement of
Operations
(In thousands, except per share amounts)
For the Three Months Ended October 31, 2020
|
|
Historical (unaudited)
|
|
|
Pro Forma
|
|
|
|
|
Pro Forma
|
|
|
|
Digerati
|
|
|
Nexogy
|
|
|
ActiveServe
|
|
|
Adjustments
|
|
|
Note 3
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud software and service revenue
|
|
$
|
1,552
|
|
|
$
|
1,672
|
|
|
$
|
463
|
|
|
$
|
-
|
|
|
|
|
$
|
3,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,552
|
|
|
|
1,672
|
|
|
|
463
|
|
|
|
-
|
|
|
|
|
|
3,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
|
|
748
|
|
|
|
482
|
|
|
|
138
|
|
|
|
-
|
|
|
|
|
|
1,368
|
|
Selling, general and administrative expense
|
|
|
1,011
|
|
|
|
1,100
|
|
|
|
273
|
|
|
|
-
|
|
|
|
|
|
2,384
|
|
Legal and professional fees
|
|
|
258
|
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
292
|
|
Bad debt
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
15
|
|
Depreciation and amortization expense
|
|
|
161
|
|
|
|
1
|
|
|
|
-
|
|
|
|
339
|
|
|
(c)
|
|
|
501
|
|
Total operating expenses
|
|
|
2,178
|
|
|
|
1,632
|
|
|
|
411
|
|
|
|
339
|
|
|
|
|
|
4,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING (LOSS) INCOME
|
|
|
(626
|
)
|
|
|
40
|
|
|
|
52
|
|
|
|
(339
|
)
|
|
|
|
|
(873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on derivative instruments
|
|
|
178
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
178
|
|
Income tax expense
|
|
|
(8
|
)
|
|
|
(36
|
)
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
|
|
(51
|
)
|
Other income
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
37
|
|
Interest expense
|
|
|
(300
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(300
|
)
|
Total other income (expense)
|
|
|
(130
|
)
|
|
|
1
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
|
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST
|
|
|
(756
|
)
|
|
|
41
|
|
|
|
45
|
|
|
|
(339
|
)
|
|
|
|
|
(1,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to the noncontrolling interests
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51
|
|
|
(d)
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS
|
|
|
(721
|
)
|
|
|
41
|
|
|
|
45
|
|
|
|
(288
|
)
|
|
|
|
|
(923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend on Series A Convertible preferred stock
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS
|
|
$
|
(726
|
)
|
|
$
|
41
|
|
|
$
|
45
|
|
|
$
|
(288
|
)
|
|
|
|
$
|
(928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE - BASIC
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE - DILUTED
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
|
|
|
119,914,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,914,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED
|
|
|
119,914,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,914,246
|
|
See accompanying notes to unaudited pro forma
consolidated financial statements
DIGERATI TECHNOLOGIES, INC., NEXOGY, INC. AND
ACTIVESERVE, INC.
Unaudited Pro Forma Consolidated Statement of
Operations
(In thousands, except share amounts)
For the Year Ended July 31, 2020
|
|
Historical
|
|
|
Pro forma
|
|
|
|
|
Pro Forma
|
|
|
|
Digerati
|
|
|
Nexogy
|
|
|
ActiveServe
|
|
|
Adjustments
|
|
|
Note 3
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud software and service revenue
|
|
$
|
6,279
|
|
|
$
|
6,347
|
|
|
$
|
1,949
|
|
|
$
|
-
|
|
|
|
|
$
|
14,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
6,279
|
|
|
|
6,347
|
|
|
|
1,949
|
|
|
|
-
|
|
|
|
|
|
14,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
|
|
3,035
|
|
|
|
1,811
|
|
|
|
557
|
|
|
|
-
|
|
|
|
|
|
5,403
|
|
Selling, general and administrative expense
|
|
|
4,106
|
|
|
|
4,562
|
|
|
|
1,110
|
|
|
|
-
|
|
|
|
|
|
9,778
|
|
Legal and professional fees
|
|
|
642
|
|
|
|
109
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
751
|
|
Bad debt
|
|
|
(5
|
)
|
|
|
94
|
|
|
|
12
|
|
|
|
-
|
|
|
|
|
|
101
|
|
Depreciation and amortization expense
|
|
|
613
|
|
|
|
13
|
|
|
|
1
|
|
|
|
1,356
|
|
|
(c)
|
|
|
1,983
|
|
Total operating expenses
|
|
|
8,391
|
|
|
|
6,589
|
|
|
|
1,680
|
|
|
|
1,356
|
|
|
|
|
|
18,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(2,112
|
)
|
|
|
(242
|
)
|
|
|
269
|
|
|
|
(1,356
|
)
|
|
|
|
|
(3,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on derivative instruments
|
|
|
263
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
263
|
|
Gain on settlement of debt
|
|
|
129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
129
|
|
Income tax benefit (expense)
|
|
|
33
|
|
|
|
(135
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
(101
|
)
|
Other income (expense)
|
|
|
116
|
|
|
|
(28
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
88
|
|
Interest expense
|
|
|
(1,853
|
)
|
|
|
(13
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
|
|
(1,867
|
)
|
Total other expense
|
|
|
(1,312
|
)
|
|
|
(176
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(1,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST
|
|
|
(3,424
|
)
|
|
|
(418
|
)
|
|
|
269
|
|
|
|
(1,356
|
)
|
|
|
|
|
(4,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to the noncontrolling interests
|
|
|
47
|
|
|
|
-
|
|
|
|
-
|
|
|
|
301
|
|
|
(d)
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS
|
|
|
(3,377
|
)
|
|
|
(418
|
)
|
|
|
269
|
|
|
|
(1,055
|
)
|
|
|
|
|
(4,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend on Series A Convertible preferred stock
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS
|
|
$
|
(3,396
|
)
|
|
$
|
(418
|
)
|
|
$
|
269
|
|
|
$
|
(1,055
|
)
|
|
|
|
$
|
(4,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE - BASIC
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE - DILUTED
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
|
|
|
53,883,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,883,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED
|
|
|
53,883,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,883,966
|
|
See accompanying notes to unaudited pro forma
consolidated financial statements
Notes
to the Unaudited Pro Forma Consolidated Financial Statements
Note
1 - Basis of Presentation and Description of Transactions
The unaudited pro forma consolidated
financial statements were prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of SEC Regulation S-X and
presents the pro forma financial position and results of operations of the combined companies based upon the historical data of Digerati
Technologies, Inc. (the “Company” or “Digerati”), Nexogy, Inc. (“Nexogy”) and ActiveServe Inc., a
Florida corporation (“ActiveServe”).
Description
of Transaction
Nexogy
Acquisition
On November 17, 2020, Digerati
through Nexogy Acquisition, Inc., a Florida Corporation, a wholly owned subsidiary of T3 Communications, Inc. (“T3 Nevada”),
a Digerati subsidiary, merged with and into Nexogy resulting in Nexogy becoming a wholly owned subsidiary of T3 Nevada (the “Merger”).
Nexogy is a leading provider in South Florida of Unified Communications as a Service and managed services, offering a portfolio of cloud-based
solutions to the high-growth SMB market.
The
aggregate purchase price for Nexogy was $9 million in cash, plus an additional $452,000 in initial excess net working capital, with $900,000
of the $9 million being placed in an indemnity escrow account and $50,000 of the $9 million being placed in a working capital escrow
account. In addition, at the closing of the Merger, T3 Nevada paid a number of Nexogy’s liabilities which were included in the
$9 million purchase price.
ActiveServe,
Inc. Asset Acquisition
On November 17, 2020, the
Company, through its subsidiary, T3 Communications, Inc., a Florida corporation (“T3 Florida”), executed and closed on an
Asset Purchase Agreement (the “Purchase Agreement”) with ActiveServe. Pursuant to the Purchase Agreement, T3 Florida acquired
the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous
assets used in connection with the operation of ActiveServe’s telecommunications business known as ActivePBX (collectively, the
“Purchased Assets”).
The aggregate purchase price
for the Purchased Assets was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase Price”).
$1,190,000 of the Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of
12 months to cover part of potential future indemnification obligations of ActiveServe to T3 Florida due to ActiveServe’s breaches,
if any, of any representations and warranties made to T3 Florida by ActiveServe under the Purchase Agreement.
Basis
of Presentation
The historical financial information
of the Company for the three months ended October 31, 2020 has been derived from the unaudited consolidated financial statements of the
Company as of October 31, 2020, as found in Form 10Q which was filed with the Securities and Exchange Commission on December 14, 2020.
The historical financial information of the Company for the year ended July 31, 2020 has been derived from the audited consolidated financial
statements of the Company as of July 31, 2020, as found in Form 10-K which was filed with the Securities and Exchange Commission on October
29, 2020.
The historical financial information
of ActiveServe for the three months ended October 31, 2020 has been derived from the unaudited financial statements of ActiveServe as
of and for the three months ended October 31, 2020, included in Exhibit 99.2 to the Company’s Form 8-K/A filed with the SEC on July
16, 2021. The historical financial information of ActiveServe for the year ended July 31, 2020 has been derived from the audited financial
statements of ActiveServe for the year ended July 31, 2020, included in Exhibit 99.1 to the Company’s Form 8-K/A filed with the
Securities and Exchange Commissionon July 16, 2021.
The historical financial information
of Nexogy for the three months ended October 31, 2020 has been derived from the unaudited financial statements of Nexogy as of and for
the three months ended October 31, 2020, included in Exhibit 99.2 to the Company’s Form 8-K/A filed with the SEC on July 26, 2021.
The historical financial information of Nexogy for the year ended July 31, 2020 has been derived from the audited financial statements
of Nexogy for the year ended July 31, 2020, included in Exhibit 99.1 to the Company’s Form 8-K/A filed with the Securities and Exchange
Commissionon July 26, 2021.
The
historical consolidated financial statements have been adjusted in the pro forma consolidated financial statements to give effect to pro
forma events that are (1) directly attributable to the Nexogy Acquisition and ActiveServe Asset Acquisition, (2) factually supportable
and (3) with respect to the pro forma consolidated statement of operations, expected to have a continuing impact on the combined results
of the Company following the Nexogy Acquisition and ActiveServe Asset Acquisition.
The
Nexogy Acquisition and ActiveServe Asset Acquisition are being accounted for as business combinations using the acquisition method with
the Company as the accounting acquirer in accordance with ASC Topic 805, Business Combinations. As the accounting acquirer, the Company
has estimated the fair value of Nexogy and ActiveServe assets acquired, and liabilities assumed and conformed the accounting policies
of Nexogy to its own accounting policies.
The
pro forma consolidated financial statements do not necessarily reflect what the combined company’s financial condition or results
of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future
financial condition and results of operations of the combined company. The actual financial position and results of operations may differ
significantly from the pro forma amounts reflected herein due to a variety of factors.
Note
2 - Preliminary purchase price allocation
Nexogy
Acquisition
On November 17, 2020, Digerati
through Nexogy Acquisition, Inc., a Florida Corporation, a wholly owned subsidiary of T3 Nevada, merged with and into Nexogy resulting
in Nexogy becoming a wholly owned subsidiary of T3 Nevada (the “Merger”). Nexogy is a leading provider in South Florida of
Unified Communications as a Service and managed services, offering a portfolio of cloud-based solutions to the high-growth SMB market.
The aggregate purchase price for Nexogy was $9 million in cash, plus an additional $452,000 in initial excess net working capital. In
addition, the Company anticipates adjusting the initial networking capital by approximately $179,000 to reflect additional asset value
and other liabilities identified. Of the $9 million, $900,000 was placed in an indemnity escrow account and $50,000 of the $9 million
was placed in a working capital escrow account. In addition, at the closing of the Merger, T3 Nevada paid a number of Nexogy’s
liabilities which were included in the $9 million purchase price.
ActiveServe,
Inc. Asset Acquisition
On November 17, 2020, Digerati,
through its subsidiary, T3 Florida, executed and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with ActiveServe.
Pursuant to the Purchase Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory,
contract rights, software and other licenses and miscellaneous assets used in connection with the operation of ActiveServe’s telecommunications
business known as ActivePBX (collectively, the “Purchased Assets”). The aggregate purchase price for the Purchased Assets
was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase Price”). $1,190,000 of the Purchase
Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover part of
potential future indemnification obligations of ActiveServe to T3 Florida due to ActiveServes’s breaches, if any, of any representations
and warranties made to T3 Florida by ActiveServe under the Purchase Agreement.
The
following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the Nexogy
Acquisition and ActiveServe Asset Acquisition:
|
|
Nexogy
|
|
|
ActiveServe
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
358
|
|
|
$
|
-
|
|
|
$
|
358
|
|
Accounts receivables
|
|
|
278
|
|
|
|
78
|
|
|
|
356
|
|
Intangible Assets and Goodwill
|
|
|
9,018
|
|
|
|
2,555
|
|
|
|
11,573
|
|
Property and equipment, net
|
|
|
164
|
|
|
|
-
|
|
|
|
164
|
|
Other Assets
|
|
|
83
|
|
|
|
2
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets
|
|
$
|
9,901
|
|
|
$
|
2,635
|
|
|
$
|
12,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: liabilities assumed
|
|
|
270
|
|
|
|
80
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Purchase price
|
|
$
|
9,631
|
|
|
$
|
2,555
|
|
|
$
|
12,186
|
|
The
following table summarizes the intangible assets acquired in the acquisitions:
|
|
Nexogy
|
|
|
ActiveServe
|
|
|
Total
|
|
|
Useful
life
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
|
(years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
$
|
4,100
|
|
|
$
|
1,610
|
|
|
$
|
5,710
|
|
|
|
7
|
|
Trade Names & Trademarks
|
|
|
2,600
|
|
|
|
270
|
|
|
|
2,870
|
|
|
|
7
|
|
Non-compete Agreement
|
|
|
200
|
|
|
|
90
|
|
|
|
290
|
|
|
|
2-3
|
|
Goodwill
|
|
|
2,118
|
|
|
|
585
|
|
|
|
2,703
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,018
|
|
|
$
|
2,555
|
|
|
$
|
11,573
|
|
|
|
|
|
Note
3 - Pro forma adjustments
The
pro forma adjustments are based on preliminary estimates and assumptions that are subject to change. The following adjustments have been
reflected in the unaudited pro forma consolidated financial statements:
|
a)
|
Adjustment
for the acquisition of Nexogy by the Company:
|
|
●
|
Represents
cash secured by the Company for $9 million for the initial cash payment made at closing for
the Nexogy Acquisition and included in the Long Term Note payable in the pro forma balance
sheet. The financing is part of the Credit Agreement and Notes secured from Post Road and
previously disclosed. (filed as Exhibits 4.1 and 4.2 to Form 8-K filed with the SEC
on November 23, 2020.)
|
|
●
|
Cash
paid of $9 million at the closing of Nexogy’s Acquisition.
|
|
●
|
Preliminary
purchase price allocated to the intangible assets based on the estimated fair values as follows:
|
Customer
relationships: The fair value of the customer relationships was determined using an income approach based upon management’s
assessment of prospective financial information and a discount rate based upon the Company’s weighted average cost of capital.
Trade
Names and Trademarks: The fair value of the Trade names and trademarks were determined using an income approach based upon
management’s assessment of prospective revenues, a royalty rate selected from a range of comparable licensing transactions and
a discount rate based upon the Company’s weighted average cost of capital.
Non-compete
provisions: The fair value of the non-compete provisions, was determined using an income approach based upon management’s
assessment of prospective financial information, including an estimated impact of competition, and a discount rate based upon the Company’s
weighted average cost of capital.
|
●
|
Goodwill: Represents the
preliminary purchase price allocated to goodwill in the Nexogy Acquisition. Goodwill represents the excess of the consideration
transferred over the preliminary fair value of the net tangible and intangible assets acquired. Goodwill will not be amortized, but
instead will be tested for impairment at least annually and whenever events or circumstances have occurred that may indicate a
possible impairment. In the event management determines that the value of goodwill has become impaired, the combined company will
incur an accounting charge for the amount of the impairment during the period in which the determination is made.
|
|
●
|
Adjustment
for additional payables assumed by the Company.
|
|
●
|
Adjustment to eliminate Related party notes payable, Nexogy paid in full these notes at closing.
|
|
●
|
Adjustment
to eliminate Nexogy’s historical accumulated deficit.
|
|
b)
|
Adjustment
for the acquisition of ActiveServe by the Company:
|
|
●
|
Cash paid at the closing of the ActiveServe Asset Acquisition of $1.14 million and the cash retained by ActiveServe of $424,000.
|
|
●
|
Elimination
of $325,000 for the net cash not retained by the Company.
|
|
●
|
Adjustment
to eliminate the Property and equipment, which was not acquired by the Company.
|
|
●
|
Deferred
consideration of $1.09 million, of which $545,000 is due on the one-year anniversary of the
ActiveServe Asset Acquisition and included in the Current Note payable, related party in
the pro forma balance sheet, and $545,000 is due on the two-year anniversary of the ActiveServe
Asset Acquisition and included in Long term Note Payable, related party, net of current portion
in the pro forma balance sheet; and $50,000 indemnification holdback due on the one-year
anniversary and $275,000 in earn-out associated with the Customer Renewal Value due on the
one-year anniversary, both included in the Current Note Payable, related party in the pro
forma balance sheet.
|
|
●
|
Preliminary
purchase price allocated to the intangible assets based on the estimated fair values as follows:
|
Customer
relationships: The fair value of the customer relationships was determined using an income approach based upon management’s
assessment of prospective financial information and a discount rate based upon the Company’s weighted average cost of capital.
Non-compete
provisions: The fair value of the non-compete provisions, was determined using an income approach based upon management’s
assessment of prospective financial information, including an estimated impact of competition, and a discount rate based upon the Company’s
weighted average cost of capital.
Trade
Names and Trademarks: The fair value of the Trade names and trademarks were determined using an income approach based upon
management’s assessment of prospective revenues, a royalty rate selected from a range of comparable licensing transactions and
a discount rate based upon the Company’s weighted average cost of capital.
|
●
|
Goodwill:
Represents the preliminary purchase price allocated to goodwill in the ActiveServe
Asset Acquisition. Goodwill represents the excess of the consideration transferred over the
preliminary fair value of the net tangible and intangible assets acquired. Goodwill will
not be amortized, but instead will be tested for impairment at least annually and whenever
events or circumstances have occurred that may indicate a possible impairment. In the event
management determines that the value of goodwill has become impaired, the combined company
will incur an accounting charge for the amount of the impairment during the period in which
the determination is made.
|
|
●
|
Adjustment
to eliminate certain Accounts receivables, Prepaid and other current assets, Accounts payable,
Accrued liabilities and note payable, which were not transferred to the Company in the ActiveServe
Asset Acquisition.
|
|
●
|
Represents
cash secured by the Company $1.14 million for the initial cash payment made at closing for
the ActiveServe Asset Acquisition and included in the Long Term Note payable in the pro forma
balance sheet. The financing is part of the Credit Agreement and Notes secured from Post
Road and previously disclosed. (filed as Exhibits 4.1 and 4.2 to Form 8-K filed with
the SEC on November 23, 2020.)
|
|
●
|
Adjustment
to eliminate ActiveServe’s historical additional paid-in capital and retained earnings.
|
|
c)
|
Represents
the future annual amortization of the intangible assets based upon their estimated useful
lives. The estimated useful lives were determined based on a review of the time period over
which the economic benefit of each intangible asset is estimated to be generated.
|
|
d)
|
Adjustment
to allocate T3 Communications, Inc., Digerati’s operating subsidiary, net (loss) to
redeemable noncontrolling interest holders, this is reflected in Digerati consolidated financial
statements. The net (loss) allocated to noncontrolling interest is computed by applying the
19.99% ownership interest in T3 Communications, Inc.
|
DIGERATI
TECHNOLOGIES, INC.
Units
Each
Unit Consisting of One Share of Common Stock and
One
Warrant to Purchase Common Stock
PROSPECTUS
Sole
Book-Running Manager
Maxim
Group LLC
,
2021
Through
and including , 2021 (the 25th day after the date of this prospectus), all dealers
effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This
is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment
or subscription.
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The following table sets forth
the costs and expenses payable by us in connection with the offer of the Common Stock being registered. All amounts are estimates except
the SEC registration fee, the Nasdaq listing fee, and the FINRA filing fee.
SEC
registration fee
|
|
$
|
2,719
|
|
Nasdaq
listing fee
|
|
|
|
|
FINRA
filing fee
|
|
|
|
|
Legal
fees and expenses
|
|
|
|
|
Accounting
fees and expenses
|
|
|
|
|
Transfer
agent and registrar fees and expenses
|
|
|
|
|
Miscellaneous
fees and expenses
|
|
|
|
|
Total
|
|
$
|
2,719
|
|
Item
14. Indemnification of Directors and Officers.
We
are a Nevada corporation and generally governed by the Nevada Private Corporations Code, Title 78 of the Nevada Revised Statutes, or
NRS.
Section 78.138
of the NRS provides that, unless the corporation’s articles of incorporation provide otherwise, a director or officer will not
be individually liable unless it is proven that (i) the director’s or officer’s acts or omissions constituted a breach
of his or her fiduciary duties, and (ii) such breach involved intentional misconduct, fraud, or a knowing violation of the law.
Our articles of incorporation provide the personal liability of our directors is eliminated to the fullest extent permitted under the
NRS.
Section 78.7502
of the NRS permits a company to indemnify its directors and officers against expenses, judgments, fines, and amounts paid in settlement
actually and reasonably incurred in connection with a threatened, pending, or completed action, suit, or proceeding, if the officer or
director (i) is not liable pursuant to NRS 78.138, or (ii) acted in good faith and in a manner the officer or director reasonably
believed to be in or not opposed to the best interests of the corporation and, if a criminal action or proceeding, had no reasonable
cause to believe the conduct of the officer or director was unlawful. Section 78.7502 of the NRS requires a corporation to indemnify
a director or officer that has been successful on the merits or otherwise in defense of any action or suit. Section 78.7502
of the NRS precludes indemnification by the corporation if the officer or director has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only
to the extent that the court determines that in view of all the circumstances, the person is fairly and reasonably entitled to indemnity
for such expenses and requires a corporation to indemnify its officers and directors if they have been successful on the merits or otherwise
in defense of any claim, issue, or matter resulting from their service as a director or officer.
Section 78.751
of the NRS permits a Nevada company to indemnify its officers and directors against expenses incurred by them in defending a civil or
criminal action, suit, or proceeding as they are incurred and in advance of final disposition thereof, upon determination by the stockholders,
the disinterested board members, or by independent legal counsel. If so provided in the corporation’s articles of incorporation,
bylaws, or other agreement, Section 78.751 of the NRS requires a corporation to advance expenses as incurred upon receipt of an
undertaking by or on behalf of the officer or director to repay the amount if it is ultimately determined by a court of competent jurisdiction
that such officer or director is not entitled to be indemnified by the company. Section 78.751 of the NRS further permits the company
to grant its directors and officers additional rights of indemnification under its articles of incorporation, bylaws, or other agreement.
Section 78.752
of the NRS provides that a Nevada company may purchase and maintain insurance or make other financial arrangements on behalf of any person
who is or was a director, officer, employee, or agent of the company, or is or was serving at the request of the company as a director,
officer, employee, or agent of another company, partnership, joint venture, trust, or other enterprise, for any liability asserted against
him and liability and expenses incurred by him in his capacity as a director, officer, employee, or agent, or arising out of his status
as such, whether or not the company has the authority to indemnify him against such liability and expenses.
Our
bylaws implement the indemnification provisions permitted by Chapter 78 of the NRS by providing that we shall indemnify our directors
and officers to the fullest extent permitted by the NRS against expense, liability, and loss reasonably incurred or suffered by them
in connection with their service as an officer or director. Our bylaws provide shall advance costs and expenses incurred with
respect to any proceeding to which a person is made a party as a result of being a director or officer in advance of final disposition
of such proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it is ultimately
determined that such person is not entitled to indemnification. We may purchase and maintain liability insurance, or make other arrangements
for such obligations or otherwise, to the extent permitted by the NRS.
At
the present time, there is no pending litigation or proceeding involving a director, officer, employee, or other agent of ours in which
indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding that may result in a claim
for such indemnification.
We
maintain standard policies of insurance that provide coverage (1) to our directors and officers against loss rising from claims made
by reason of breach of duty or other wrongful act, and (2) to us with respect to indemnification payments that we may make to such directors
and officers.
Item
15. Recent Sales of Unregistered Securities.
The following securities were
issued in reliance on the exemptions from registration under the Securities Act in Section 4(a)(2) of the Securities Act and, in some
instances, Regulation D thereunder. The sale of these securities did not involve any solicitation or advertisement, were for investment
purposes only and not for resale, and did not include more than 35 non-accredited investors. The securities were issued with restrictions
on the resale of the securities. Each purchaser was given adequate access to sufficient information about us to make an informed investment
decision. From August 1, 2018 through August 2, 2021, we issued and sold the following unregistered securities:
In August 2018, the Company
secured $40,000 from an accredited investor under a private placement and issued 80,000 shares of its Common Stock at a price of $0.50
per share and warrants to purchase an additional 15,000 shares of its Common Stock at an exercise price of $0.50 per share. We determined
that the warrants issued in connection with the private placement were equity instruments and did not represent derivative instruments.
In September 2018, the Company
issued an aggregate of 21,672 shares of Common Stock with a market value at time of issuance of $5,794. The shares were issued to settle
accounts payables with a professional, the Company recognized a loss of $507 upon issuance of the shares, this loss is immaterial, thus
presented in stock-based compensation expense on the statement of cash flows.
In
October 2018, the Company secured a promissory note for $25,000, bearing interest at a rate of 8% per annum, with maturity date of November
12, 2018. In conjunction with this promissory note, the Company issued 140,000 common shares, the shares vested at time of issuance,
these shares replace previously issued warrants with an exercise price of $0.15, therefore the exercise price of $21,000 was recognized
as a discount on the promissory note. The company will amortize the fair market value as interest expense over the term of the note.
In
October 2018, the Company secured a promissory note for $25,000, bearing interest at a rate of 8% per annum, with maturity date of November
18, 2018. In conjunction with this promissory note, the Company issued 100,000 common shares, the shares vested at time of issuance,
these shares replace previously issued warrants with an exercise price of $0.15, therefore the exercise price of $15,000 was recognized
as a discount on the promissory note. The company will amortize the fair market value as interest expense over the term of the note.
In November 2018, the
Company issued an aggregate of 16,883 shares of Common Stock with a market value at time of issuance of $5,875. The shares were issued
to settle accounts payables of $5,287 to a professional, the Company recognized a loss of $587 upon issuance of the shares. This loss
is immaterial, thus presented in stock-based compensation expense on the statement of cash flows.
In November 2018, the
Company issued an aggregate of 39,444 shares of Common Stock with a market value at time of issuance of $11,833. The shares were issued
to settle accounts payables of $10,545 to a professional, the Company recognized a loss of $1,288 upon issuance of the shares. This loss
is immaterial, thus presented in stock-based compensation expense on the statement of cash flows.
In
November 2018, the Company received $75,000 for the issuance of 258,621 shares of Common Stock. At the time of issuance, the shares of
Common Stock were priced at $0.29.
In
November 2018, the Company entered into an Amendment to the Convertible Promissory Note (the “Note”) dated May 30, 2018 (the
“Amendment”) with FirstFire Global Opportunity Fund, LLC. (“FirstFire”). Under the Amendment, FirstFire
agreed to extend the “conversion period” from 180 days after the issuance date to 210 days after the issuance date. No other
changes were made to the Note. In conjunction with the Amendment, the Company issued 85,000 shares of Common Stock at price per share
of $0.28.
In November 2018, the Company
issued an aggregate of 200,000 shares of Common Stock at a price per share of $0.35. The shares were issued as compensation of $69,600
under a consulting agreement for professional services.
In November 2018, the Company
issued an aggregate of 139,860 shares of Common Stock. The shares were issued in conjunction with a conversion of $20,000 of principal
on a convertible debenture.
In December 2018, the
Company issued an aggregate of 28,000 shares of Common Stock. The shares were issued in conjunction with promissory note $25,000.
In December 2018,
the Company issued an aggregate of 356,007 shares of Common Stock. The shares were issued in conjunction with a conversion of $20,000
of principal on a convertible debenture.
In December 2018, the Company
issued an aggregate of 20,000 shares of Common Stock at a price per share of $0.20. The shares were issued to replace previously issued
warrants under various promissory notes.
In January 2019, the
Company issued an aggregate of 218,181 shares of Common Stock. The shares were issued in conjunction with a conversion of $15,000 of principal
on a convertible debenture.
In January 2019, the
Company issued an aggregate of 427,972 shares of Common Stock. The shares were issued in conjunction with a conversion of $30,000 of principal
on a convertible debenture.
In January 2019, the Company
issued an aggregate of 450,000 shares of Common Stock. The shares were issued in conjunction with various convertible promissory notes
for $420,000.
In January 2019, the Company
issued an aggregate of 50,000 shares of Common Stock. The shares were issued in conjunction with a convertible promissory note for $57,750.
In February 2019, the
Company issued an aggregate of 50,000 shares of Common Stock. The shares were issued in conjunction with a convertible promissory note
for $57,750.
In February 2019, the
Company issued an aggregate of 475,511 shares of Common Stock. The shares were issued in conjunction with a conversion of $20,000 of
principal on a convertible debenture with Peak One Opportunity Fund, LP., dated July 31, 2018.
In February 2019, the Company
secured $150,000 from an accredited investor under a Securities Purchase Agreement and issued 600,000 shares of its Common Stock at a
price of $0.25.
In February 2019, the Company
issued an aggregate of 325,000 shares of Common Stock with a market value at time of issuance of $78,000 and recognized the total fair
market value as stock-based compensation expense at the time of issuance. The shares were issued for consulting services.
In February 2019, the Company
issued an aggregate of 400,000 shares of Common Stock with a market value at time of issuance of $100,000 and recognized the total fair
market value as stock-based compensation expense at the time of issuance. The shares were issued for consulting services.
In March 2019, the Company
issued an aggregate of 60,715 shares of Common Stock with a market value at time of issuance of $11,536. The shares were issued to settle
accounts payables of $10,382 to a professional, the Company recognized a loss of $1,154 upon issuance of the shares. This loss is immaterial,
thus presented in stock-based compensation expense on the statement of cash flows.
In March 2019, the Company
issued an aggregate of 356,633 shares of Common Stock. The shares were issued in conjunction with a conversion of $25,000 of principal
on a convertible debenture.
In March 2019, the Company
issued 75,000 shares of Common Stock. The shares were issued in conjunction with the exercise of 75,000 warrants with an exercise price
of $0.10 per warrant.
In March 2019, the Company
issued an aggregate of 85,000 shares of Common Stock at a price per share of $0.21. The shares were issued in conjunction with an extension
of various promissory notes.
In April 2019, the Company
issued an aggregate of 356,633 shares of Common Stock. The shares were issued in conjunction with a conversion of $25,000 of principal
on a convertible debenture.
In April 2019, the Company
issued an aggregate of 50,000 shares of Common Stock. The shares were issued in conjunction with a convertible promissory note for $44,000.
In May 2019, the Company issued
713,266 shares of Common Stock. The shares were issued in conjunction with a conversion of $50,000 of the principal outstanding under
a convertible debenture.
In June 2019, the Company
issued 189,008 shares of Common Stock for the conversion of $15,000 of the principal outstanding under the convertible debenture.
On August 12, 2019, the Company
issued 114,123 shares of Common Stock for the conversion of $7,500 of the principal outstanding and $500 in administrative fees under
the convertible note.
On August 20, 2019, the Company
issued 191,116 shares of Common Stock for the conversion of $7,500 of the principal outstanding and $538 in accrued interest and administrative
fees under the convertible note.
On August 26, 2019, the Company
issued 250,000 shares of Common Stock for the conversion of $14,500 of the principal outstanding and $500 in administrative fees under
a convertible note.
On August 26, 2019, the Company
issued 416,666 shares of Common Stock for the conversion of $25,000 of the principal outstanding under a convertible note.
On September 4, 2019, the
Company issued 250,620 shares of Common Stock for the conversion of $10,000 of the principal outstanding and $541 in administrative fees
under a convertible note.
On September 10, 2019, the
Company issued 277,291 shares of Common Stock for the conversion of $12,750 of the principal outstanding and $3,888 in accrued interest
and administrative fees under a convertible note.
On September 26, 2019, the
Company issued 342,466 shares of Common Stock for the conversion of $14,500 of the principal outstanding and $500 in administrative fees
under a convertible note.
On October 7, 2019, the Company
issue 400,000 shares of Common Stock, as part of an amendment to various promissory notes. The shares were recorded as debt discount and
amortized over the remaining term of the notes.
On October 27, 2019, the Company
issued 332,667 shares of Common Stock for the conversion of $9,500 of the principal outstanding and $500 in administrative fees under
a convertible note.
On October 29, 2019, the Company
issued 465,736 shares of Common Stock for the conversion of $13,500 of the principal outstanding and $500 in administrative fees under
a convertible note.
On October 31, 2019, the Company
issued 310,527 shares of Common Stock for the conversion of $6,500 of the principal outstanding and $2,834 in accrued interest and administrative
fees under a convertible note.
On October 31, 2019, the Company
issued 831,669 shares of Common Stock for the conversion of $25,000 of the principal outstanding under a convertible note.
On November 14, 2019, the
Company issued 301,697 shares of Common Stock for the conversion of $7,500 of the principal outstanding, $500 in fees and accrued interest
of $146 under one of the convertible notes.
On November 15, 2019, the
Company issued 398,247 shares of Common Stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of
the convertible notes.
On November 19, 2019, the
Company issued 537,635 shares of Common Stock for the conversion of $13,000 of the principal outstanding and $500 in fees under one of
the convertible notes.
On November 26, 2019, the
Company issued 447,917 shares of Common Stock for the conversion of $8,000 of the principal outstanding, $500 in fees and accrued interest
of $100 under one of the convertible notes.
In November 2019, in conjunction
of various note extension agreements, the Company issued 80,000 shares of Common Stock with a fair market value $3,200.
In November 2019, the Company
issued 282,885 shares of Common Stock for payment of $14,382 in accrued interest.
In November 2019, the Company
issued 86,667 shares of Common Stock in conjunction to the conversion of 25,000 shares of the Series A Convertible Preferred stock and
$1,189 in accrued dividends.
On December 10, 2019, the
Company issued 400,000 shares of Common Stock with a fair market value of $15,240 for compensation on an agreement for professional services.
On December 16, 2019, the
Company issued 520,833 shares of Common Stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of
the convertible notes.
On December 24, 2019, the
Company issued 444,672 shares of Common Stock for the conversion of $8,000 of the principal outstanding, $500 in fees and accrued interest
of $171 under one of the convertible notes.
On December 31, 2019, the
Company issued 517,598 shares of Common Stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of
the convertible notes.
On January 8, 2020, the Company
issued 785,760 shares of Common Stock for the conversion of $5,000 of the principal outstanding, $500 in fees and accrued interest of
$8,408 under one of the convertible notes.
On January 9, 2020, the Company
issued 200,000 shares of Common Stock for the conversion of $1,328 of the principal outstanding and accrued interest of $2,212 under one
of the convertible notes.
On January 13, 2020, the Company
issued 549,858 shares of Common Stock for the conversion of $8,000 of the principal outstanding, $500 in fees and accrued interest of
$78 under one of the convertible notes.
On January 16, 2020, the Company
issued 705,128 shares of Common Stock for the conversion of $10,500 of the principal outstanding and $500 in fees under one of the convertible
notes.
On January 22, 2020, the Company
issued 1,698,717 shares of Common Stock for the conversion of $25,000 of the principal outstanding and accrued interest of $1,500 under
one of the convertible notes.
On January 28, 2020, the Company
issued 474,891 shares of Common Stock for the conversion of $6,000 of the principal outstanding, $500 in fees and accrued interest of
$25 under one of the convertible notes.
On January 28, 2020, the Company
issued 956,226 shares of Common Stock for the conversion of $9,250 of the principal outstanding, $500 in fees and accrued interest of
$3,962 under one of the convertible notes.
On February 4, 2020, the Company
issued 2,054,263 shares of Common Stock for the conversion of $25,000 of the principal outstanding and accrued interest of $1,500 under
one of the convertible notes.
On February 15, 2020, the
Company issued 200,000 shares of Common Stock as a principal payment on a note for $10,000. At issuance, the Company recognized a benefit
to non-cash expense of $4,600, this benefit was recognized as a result of the difference between the fair market value of the shares of
Common Stock issued and debt settled.
On February 19, 2020, the
Company issued 110,027 shares of Common Stock for payment of accrued interest and a fair market value of $4,401.
On February 19, 2020, in conjunction
with various note extension agreements, the Company issued 260,000 shares of Common Stock with a fair market value of $6,890.
On February 20, 2020, in conjunction
with a note extension agreement, the Company issued 40,000 shares of Common Stock with a fair market value of $800.
On February 24, 2020, the
Company issued 11,509,022 common shares to various employees as part of the Company’s Non-Standardized profit-sharing plan contribution.
The Company recognized stock-based compensation expense of approximately $233,633 equivalent to the value of the shares calculated based
on the share’s closing price at the grant date.
On February 27, 2020, the
Company issued 2,500,000 shares of Common Stock for the conversion of $15,000 of the principal outstanding and accrued interest of $1,500
under one of the convertible notes.
On April 2, 2020, the Company
issued 3,208,955 shares of Common Stock for the conversion of $20,000 of the principal outstanding and accrued interest of $1,500 under
one of the convertible notes.
On April 24, 2020, the Company
issued 3,208,955 shares of Common Stock for the conversion of $20,000 of the principal outstanding and accrued interest of $1,500 under
one of the convertible notes.
On April 30, 2020, the Company
issued 14,138,826 shares of Common Stock for the settlement of debt of $386,000 and $38,164 in accrued interest. At the time of issuance,
the Company recognized a gain in settlement of debt $134,319.
On
April 30, 2020, the Company issued a total of 424,165 shares of Series B Preferred Stock for payment of $386,000 of the outstanding principal
balance on various promissory notes and $38,165 in accrued interest.
On May 29, 2020, the Company
issued 3,500,000 shares of Common Stock for the conversion of $30,000 of the principal outstanding and accrued interest of $1,500 under
one of the convertible notes.
On
August 1, 2020, the Company issued 2,000,000 common shares for professional services. The Company recognized as stock-based compensation
expense of approximately $58,000 equivalent to the value of the shares calculated based on the share’s closing price at the time
of issuance.
On August 4, 2020, the Company
issued 5,000,000 shares of Common Stock for the conversion of $75,000 of the principal outstanding and accrued interest of $1,500 under
one of the convertible notes.
On
August 7, 2020, the Company issued 7,608,820 common shares to various employees as part of the Company’s Non-Standardized profit-sharing
plan contribution. The Company recognized stock-based compensation expense of approximately $247,287 equivalent to the value of the shares
calculated based on the share’s closing price at the grant date.
On August 14, 2020, the Company
issued 5,000,000 shares of Common Stock for the conversion of $80,000 of the principal outstanding under one of the convertible notes.
On
September 1, 2020, the Company issued 250,000 common shares to a former member of the management team for services in lieu of cash compensation.
The Company recognized stock-based compensation expense of approximately $17,500 equivalent to the value of the shares calculated based
on the share’s closing price at the grant dates.
On October 13, 2020, the Company
entered into a $330,000 promissory note, and in conjunction with the promissory note, we issued 1,000,000 shares of Common Stock. At the
time of issuance, the Company recognized the relative fair market value of the shares of $45,000 as debt discount, and it will be amortized
to interest expense during the term of the promissory note.
On November 17, 2020, the
Company issued 3,730,000 options to purchase common shares to various employees with an exercise price of $0.04 per share and a term of
5 years. The options vest equally over a period of three years. At the time of issuance, the options had a fair market value of $215,000.
On January 12, 2021, the Company
issued 4,680,365 shares of Common Stock for the conversion of $102,500 of the principal outstanding and accrued interest of $1,500 under
one of the convertible notes.
On January 26, 2021, the Company
issued 1,000,000 shares of Common Stock for the settlement of $60,000 in accounts payable for professional services.
On January 27, 2021, the Company
entered into a $250,000 promissory note, and in conjunction with the promissory note, we issued 500,000 shares of Common Stock. 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.
On January 31, 2021, the Company
issued 5,996,400 shares of Common Stock for the conversion of $140,600 of the principal outstanding and accrued interest of $9,310 under
one of the convertible notes.
On
February 5, 2021, the Company entered into a Consulting Agreement for professional services, in which the Company agreed to issue a total
of 2,000,000 shares of Common Stock, at issuance the Company recognized the market value of the stock of $125,000 as stock compensation
expense.
On
February 25, 2021, the Company issued 500,000 options to purchase common shares to one of our members of the Board of Directors with
an exercise price of $0.1475 per share and a term of 5 years. At issuance, 166,666 of the options vested, 333,334 of the options will
vest equally over a period of two years. At the time of issuance, the options had a fair market value of $67,376.
On
February 25, 2021, Digerati’s Board of Directors approved the issuance of the following shares of Series C Convertible Preferred
Stock:
|
●
|
Arthur
L. Smith – 28,928 shares of Series C Convertible Preferred Stock
|
|
●
|
Antonio
Estrada – 19,399 shares of Series C Convertible Preferred Stock
|
|
●
|
Craig
Clement – 7,073 shares of Series C Convertible Preferred Stock
|
As
of February 25, 2021, the Company had 55,400 shares outstanding of the Series C Convertible Preferred Stock.
On
March 11, 2021, the Company entered into a Debt Conversion Agreement, in which the Company agreed to issue a total of 17,965 shares of
Series B Preferred Stock and 598,825 shares of Common Stock for the settlement of principal balance of $32,000 and $3,796.16 in accrued
interest.
On April 14, 2021, the Company
entered into a $250,000 promissory note, and in conjunction with the promissory note, we issued 500,000 shares of Common Stock. 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.
On April 15, 2021, the Company
entered into a $113,000 promissory note, and in conjunction with the promissory note, we issued 100,000 shares of Common Stock. 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.
On April 30, 2021, the Company
received $30,000 in proceeds from the exercise of 300,000 warrants, with an exercise price of $0.10 per warrant, as a result we issued
300,000 shares of Common Stock. These warrants were issued in March 2018.
Item
16. Exhibits and Financial Statement Schedules.
(a)
Exhibits.
The
following exhibits are being filed herewith:
Exhibit
Number
|
|
Description
|
1.1***
|
|
Form
of Underwriting Agreement
|
2.1
|
|
Agreement
and Plan of Merger by and among T3 Communications, Inc., Nexogy Acquisition, Inc., Nexogy, Inc. and Juan Carlos Canto as Shareholder
Representative, dated September 20, 2019, as amended (2)
|
3.1
|
|
Amended and Restated Articles of Incorporation (1)
|
3.2
|
|
Second Amended and Restated Bylaws, effective as of January 13, 2015 (1)
|
4.1
|
|
Certificate
of Designation of Series A Convertible Preferred Stock (1)
|
4.2
|
|
Certificate
of Designation of Series B Convertible Preferred Stock (1)
|
4.3
|
|
Certificate
of Designation of Series C Convertible Preferred Stock (1)
|
4.4
|
|
Certificate
of Designation of Series F Super Voting Preferred Stock (1)
|
4.5
|
|
Convertible
Promissory Note for $275,000 with LGH Investments, LLC dated July 27, 2020 (1)
|
4.6
|
|
Convertible
Promissory Note for $330,000 with Platinum Point Capital LLC dated October 13, 2020 (1)
|
4.7
|
|
Convertible
Promissory Note for $27,500 with Platinum Point Capital LLC dated October 15, 2020 (1)
|
4.8
|
|
Payoff
Letter dated October 15, 2020, by and between Digerati Technologies, Inc., and Platinum Point Capital LLC. (1)
|
4.9***
|
|
Form
of Representative’s Warrant Agreement
|
4.10***
|
|
Form
of Warrant Agent Agreement
|
4.11
|
|
Term
Loan A Note for $10,500,000 issued by T3 Communications, Inc. to Post Road Special Opportunity Fund II LP, dated November 17, 2020
(2)
|
4.12
|
|
Term
Loan B Note for $3,500,000 issued by T3 Communications, Inc. to Post Road Special Opportunity Fund II LP, dated November 17, 2020
(2)
|
4.13
|
|
Delayed
Draw Term Note for Up to $6,000,000 issued by T3 Communications, Inc. to Post Road Special Opportunity Fund II LP, dated November
17, 2020 (2)
|
4.14
|
|
Warrant
to Purchase Shares of Common Stock Issued to Post Road Special Opportunity Fund II LP, dated November 17, 2020 (2)
|
4.15
|
|
Convertible
Promissory Note for $250,000 with Tysadco Partners, LLC. dated January 27, 2021 (3)
|
4.16
|
|
Convertible
Promissory Note for $175,000 with Platinum Point Capital LLC dated February 17, 2021 (3)
|
4.17
|
|
Convertible
Promissory Note for $80,235 with Platinum Point Capital LLC dated February 17, 2021 (3)
|
4.18
|
|
Debt
Conversion Agreement in the aggregate amount of $35,929 dated March 11, 2021 (3)
|
4.19
|
|
Consulting
Agreement dated February 5, 2021 (3)
|
5.1***
|
|
Opinion
of Lucosky Brookman LLP
|
10.1**
|
|
Form
of stock award agreement under the Company’s 2015 Stock Compensation Plan for grants to qualifying employees’ 401K Retirement
Accounts (filed as Exhibit 10.7 to Form 8-K filed on January 21, 2015 (File No. 001-15687)).
|
10.2**
|
|
Employment
Agreement between the Registrant and Craig K. Clement, dated as of February 14, 2019. (filed
as Exhibit 10.1 to Form 10-Q filed with the SEC on March 18, 2019).
|
10.3**
|
|
Employment
Agreement between the Registrant and Arthur L. Smith, dated as of February 14, 2019. (filed
as Exhibit 10.2 to Form 10-Q filed with the SEC on March 18, 2019).
|
10.4**
|
|
Employment
Agreement between the Registrant and Antonio Estrada Jr., dated as of February 14, 2019.
(filed as Exhibit 10.3 to Form 10-Q filed with the SEC on March 18, 2019).
|
10.5
|
|
Securities
Purchase Agreement with LGH Investments, LLC, dated July 27, 2020. (1)
|
10.6
|
|
Securities
Purchase Agreement for $330,000 with Platinum Point Capital LLC dated October 13, 2020. (1)
|
10.7
|
|
Securities
Purchase Agreement for $27,500 with Platinum Point Capital LLC dated October 15, 2020. (1)
|
10.8
|
|
Asset
Purchase Agreement by and between T3 Communications, Inc. (Florida) and ActiveServe, Inc, dated November 17, 2020 (2)
|
10.9
|
|
Credit
Agreement by and among T3 Communications, Inc., the Subsidiaries of T3 Communications, Post Road Administrative LLC, and Post Road
Special Opportunity Fund II LP, dated November 17, 2020 (2)
|
10.10
|
|
Guaranty
and Collateral Agreement by and among T3 Communications, Inc., the Subsidiaries of T3 Communications, And Post Road Administrative
LLC, dated November 17, 2020 (2)
|
10.11
|
|
Pledge
Agreement made by T3 Communications, Inc. in favor of Post Road Administrative LLC, dated November 17, 2020 (2)
|
10.12
|
|
Tag-Along
Agreement by and among the Company’s Executives and Post Road, dated November 17, 2020 (2)
|
10.13
|
|
Board
Observer Agreement by and between the Company and Post Road, dated November 17, 2020 (2)
|
10.14
|
|
Securities
Purchase Agreement for $175,000 with Platinum Point Capital LLC dated February 17, 2021 (3)
|
10.15
|
|
Exchange
Agreement for $80,235 with Platinum Point Capital LLC dated February 17, 2021 (3)
|
21.1*
|
|
Subsidiaries of the Registrant
|
23.1*
|
|
Consent of MaloneBailey, LLP as to the financial statements of Digerati Technologies, Inc.
|
23.2*
|
|
Consent of MaloneBailey, LLP as to the financial statements of ActiveServe, Inc.
|
23.3*
|
|
Consent of MaloneBailey, LLP as to the financial statements of Nexogy, Inc.
|
23.4***
|
|
Consent
of Lucosky Brookman LLP (included in Exhibit 5.1)
|
24.1
|
|
Power of Attorney (included on the signature page to this registration statement).
|
*
|
Filed
or furnished herewith.
|
**
|
Indicates
a management contract or compensatory plan or arrangement.
|
***
|
To
be filed by amendment.
|
(1)
|
Incorporated
by reference from the registrant’s Annual Report on Form 10-K filed with the SEC on October 29, 2020.
|
(2)
|
Incorporated
by reference from the registrant’s Current Report on Form 8-K filed with the SEC on November 23, 2020.
|
(3)
|
Incorporated
by reference from the registrant’s Quarterly Report on Form 10-Q filed with the SEC on March 16, 2021.
|
(b)
Financial Statement Schedules.
No
financial statement schedules are provided because the information called for is not required or is shown in the consolidated financial
statements or related notes.
Item
17. Undertakings.
The
undersigned registrant hereby undertakes to:
(1)
File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement:
(i)
To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii)
To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration
Fee” table in the effective registration statement;
(iii)
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
Provided,
however, that paragraphs (1)(i), (1)(ii) and (1)(iii) do not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in reports filed with or furnished to the SEC by the registrant pursuant to Section 13 or
15(d) of the Exchange Act that are incorporated by reference in the registration statement.
(2)
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4)
That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(5)
That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution
of the securities: the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant
to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to
the purchaser and will be considered to offer or sell such securities to such purchaser:
(i)
Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule
424;
(ii)
Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by
the undersigned registrant;
(iii)
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant
or its securities provided by or on behalf of the undersigned registrant; and
(iv)
Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(6)
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(i)
Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of
the date the filed prospectus was deemed part of and included in the registration statement; and
(ii)
Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance
on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information
required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any
person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a
time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made in any such document immediately prior to such effective
date.
(7)
If the registrant is subject to Rule 430C:
Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements
relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement
or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into
the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of
sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part
of the registration statement or made in any such document immediately prior to such date of first use.
(8)
For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b) (1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of
the time it was declared effective.
(9)
For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(10)
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication
of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of San Antonio, State of Texas, on August 11, 2021.
|
DIGERATI
TECHNOLOGIES, INC.
|
|
|
|
|
By:
|
/s/
Arthur L. Smith
|
|
|
Arthur
L. Smith
|
|
|
President
and Chief Executive Officer
|
POWER
OF ATTORNEY
KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Arthur L. Smith and Antonio Estrada
Jr. and each of them, any of whom may act without the joinder of the other, his true and lawful attorneys-in-fact and agents with full
power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and to sign any registration statement for the same offering covered
by this registration statement that is to be effective on filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended,
and all post-effective amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming that said attorneys-in-fact and agents or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities
and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Arthur L. Smith
|
|
Chief
Executive Officer, President, and Director
|
|
August
11, 2021
|
Arthur
L. Smith
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Antonio Estrada Jr.
|
|
Chief
Financial Officer
|
|
August
11, 2021
|
Antonio
Estrada Jr.
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Craig K. Clement
|
|
Director
|
|
August
11, 2021
|
Craig
K. Clement
|
|
|
|
|
|
|
|
|
|
/s/
Maxwell A. Polinsky
|
|
Director
|
|
August
11, 2021
|
Maxwell
A. Polinsky
|
|
|
|
|
Digerati Technologies (QB) (USOTC:DTGI)
Graphique Historique de l'Action
De Avr 2024 à Mai 2024
Digerati Technologies (QB) (USOTC:DTGI)
Graphique Historique de l'Action
De Mai 2023 à Mai 2024