Consolidated Statement of Operations

(In thousands)

Reconciliation of Net Income (Loss) to Adjusted EBITDA - OPCO, Net of Non-Cash Expenses & Transactional

(In thousands)

Cloud software and service revenue increased by $11,738,000,$7,469,000, or 95%31%, from the year ended July 31, 2021,2022 as compared to the year ended July 31, 2022.2023. In addition, our gross margin increased by $7,527,000 from the year ended July 31, 2021, to the year ended July 31, 2022.$5,529,000, or 37%, during Fiscal Year 2023. The increase in revenue and gross margin between yearsfor the entirety of fiscal year 2023 versus only part of fiscal year 2022 is primarily attributed to the increase in total customers between years due to the acquisitions of Nexogy, ActivePBX, Skynet in December 2021 and NextLevel.NextLevel in February 2022.

EBITDA from operations, as adjusted, increased from $1,518,000,by $1,222,000, or 75%34%, from the year ended July 31, 2021,2022 to the year ended July 31, 2022.2023. The primary reason for the improvement in EBITDA from operations is due to the increase in gross margin of $7,527,000 between the year ended July 31,2021 and 2022.$5,529,000 during Fiscal Year 2023. The improvement in gross margin was offset by the increase in total operational expenses of $6,009,000 between the years ended July 31, 2021,2022 and 2022.2023. (See table above for the adjustments to Net Income (Loss) attributable to Digerati shareholders.) EBITDA from operations, as adjusted, is not intended to represent cash flows for the periods presented, nor have they been presented as an alternative to operating income or as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

EBITDA from income, as adjusted, increased by $1,078,000, or 50%, from the year ended July 31, 2022 to the year ended July 31, 2023. The primary reason for the improvement in EBITDA from operations is due to the increase in gross margin of $5,529,000 during Fiscal Year 2023. EBITDA from income, as adjusted, is not intended to represent cash flows for the periods presented, nor have they been presented as an alternative to operating income or as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Our total customers increased from 2,6554,023 during the year ended July 31, 2021,2022 to 4,0234,671 for the year ended July 31, 2022. The increase in customers is attributed to the acquisitions and consolidation of Skynet and NextLevel during the year ended July 31, 2022.2023. Going forward, absent furtherfuture acquisitions, we expect a net increase in our number of customers of 1% to 5% each fiscal year.

Sources of revenue:

Cloud Software and Service Revenue: We provide UCaaS or cloud communication services and managed cloud-based solutions to small and medium size enterprise customers and to other resellers. Our Internet-based services include fully hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice and web conferencing, call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized IP/PBX features in a hosted or cloud environment. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, mobile broadband, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster recovery.

Direct Costs:

Cloud Software and Service: We incur bandwidth and colocation charges in connection with our UCaaS or cloud communication services. The bandwidth charges are incurred as part of the connectivity between our customers to allow them access to our various services. We also incur costs from underlying providers for fiber, Internet broadband, and telecommunication circuits in connection with our data and connectivity solutions.

Results of Operations

Cloud Software and Service Revenue. Cloud software and service revenue increased by $11,738,000, or 95% from the year ended July 31, 2021, to the year ended July 31, 2022. The increase in revenue is primarily attributed to the increase in total customers between years due to the acquisitions of Nexogy, ActivePBX, Skynet and NextLevel. Our total number of customers increased from 2,655 for the year ended July 31, 2021, to 4,023 customers for the year ended July 31, 2022. As part of the acquisitions, our primary emphasis is on integrating the secured customers base, consolidating products and services, retaining the monthly recuring revenue, and providing exceptional customer support.

Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $4,211,000, or 82% from the year ended July 31, 2021, to the year ended July 31, 2022. 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, ActivePBX, Skynet and NextLevel. Our total number of customers increased from 2,655 for the year ended July 31, 2021, to 4,023 customers for the year ended July 31, 2022. However, our consolidated gross margin improved by $7,527,000 from the year ended July 31, 2021, to the year ended July 31, 2022. We are not aware of any events that are reasonably likely to cause a material change in the relationship between our costs and our revenues.

Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A expenses increased by $5,815,000, from the year ended July 31, 2021, to the year ended July 31, 2022. The increase in SG&A is attributed to acquisition of Nexogy, ActivePBX, Skynet and NextLevel, as part of the consolidation, the Company absorbed all of the employees responsible for managing the customer base, technical support, sales, customer service, and administration.

Stock Compensation expense. Stock compensation expense decreased by $400,000, or 64% from the year ended July 31, 2021, to the year ended July 31, 2022. The decrease between periods is attributed to the Company only recognizing $97,863 in stock option expense associated with stock options awarded to various employees and recognized $125,250 in stock issued to consultants for professional services during the year ended July 31, 2022. In comparison, during the year ended July 31, 2021, the Company recognized stock option expense of $135,000 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 $223,000 in stock issued to consultants for professional services.

Legal and professional fees. Legal and professional fees increased by $2,142,000, or 240% from the year ended July 31, 2021, to the year ended July 31, 2022. The increase between periods is attributed to the recognition during the year ended July 31, 2022, of $1,850,000 in legal and professional fees related to due diligence, audits for the acquisitions, purchase price allocation, legal fees paid to counsel for Post Road, and investor relations.

Bad debt. Bad debt increased between the periods by $81,000. The increase is attributed to the recognition of $98,000 in bad debt during the year ended July 31, 2022, for accounts deemed uncollectable. During the year ended July 31, 2021, the Company recognized $17,000 in bad debt.

Depreciation and amortization. Depreciation and amortization increased by $1,167,000, from the year ended July 31, 2021, to the year ended July 31, 2022. The increase is primarily attributed to the acquisitions and related amortization of $2,414,000 for intangible assets, and the additional depreciation related to the depreciation for the assets acquired from Nexogy, ActivePBX, Skynet and NextLevel.

Operating loss. The Company reported an operating loss of $3,676,000 for the year ended July 31, 2022, compared to an operating loss of $2,398,000 for the year ended July 31, 2021. The increase in operating loss between periods is primarily due to the increase of SG&A of $5,815,000, legal fees of $2,142,000, bad debt of $81,000, and depreciation expense of $1,167,000. These increases were slightly offset by the increase in margin of $7,527,000 and the decrease in stock compensation expense of $400,000.

Gain (loss) on derivative instruments. Loss on derivative instruments decreased by $16,121,000 from the year ended July 31, 2021, to the year ended July 31, 2022. We are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re-measurement of all derivative instruments we recognized an increase between periods.

Gain (loss) on settlement of debt. Loss on settlement of debt increased by $6,041,000 from the year ended July 31, 2021, to the year ended July 31, 2022. On December 20, 2021, the Company and our lender entered into an amendment to a Credit Agreement, as described in Note 10, in connection with the amendment, the Company recognized a loss on extinguishment of debt for the amendment fee of $1,419,000 and the debt discount associated with the note of $4,061,000 was also recognized as a loss on extinguishment of debt.

Income tax benefit (expense). During the year ended July 31, 2022, the Company recognized an income tax expense of $419,000. During the year ended July 31, 2021, the Company recognized an income tax expense of $183,000.

Other income (expense). Other expense decreased by $320,000 or 109% in the year ended July 31, 2022, compared to the year ended July 31, 2021.

Interest Income (expense). Interest income (expense) increased by $1,225,000 from the year ended July 31, 2021, to the year ended July 31, 2022. During the year ended July 31, 2022, the Company recognized amortization of debt discount of $2,064,000 related to the adjustment to the present value of various convertible notes and debt. Additionally, the Company recognized $2,400,000 in interest cash payments to Post Road, $75,000 in interest cash payments on various promissory notes, accrual of $147,000 for interest expense for various promissory notes and $64,000 fair value of shares issued as well as $1,195,000 added to the principal balance of various promissory notes, all charged to interest expense as consideration for extension of the maturity dates.

Net loss including noncontrolling interest. Net loss including noncontrolling interest for the year ended July 31, 2022, was $9,354,000, a decrease in net loss of $7,661,000, as compared to a net loss for the year ended July 31, 2021, of $17,015,000. The decrease in net loss including noncontrolling interest between periods is primarily due to the improvement in gain on derivative instruments of $16,121,000, increase in margin of $7,527,000, the decrease in stock compensation expense of $400,000 and increase in other income of $320,000. These improvements were slightly offset by the increase in SG&A of $5,815,000, the increase in legal fees of $2,142,000, increase in bad debt of $81,000, and the increase in depreciation and amortization of $1,167,000. In addition to the increase in interest expense of $1,225,000, increase of income tax expense of $236,000, and the loss on gain on settlement of debt of $6,041,000.

Net loss attributable to the noncontrolling interest. During the years ended July 31, 2022, and 2021, the consolidated entity recognized net loss in noncontrolling interest of $1,341,000 and $332,000, respectively. The noncontrolling interest is presented as a separate line item in the Company’s stockholders’ equity section of the balance sheet.

Net loss attributable to Digerati’s shareholders. Net loss for the year ended July 31, 2022, was $8,013,000 compared to a net loss for the year ended July 31, 2021, of $16,683,000.

Deemed dividend on Series A Convertible Preferred Stock. Dividend declared on convertible preferred stock for the year ended July 31, 2022, was $19,000 compared to a deemed dividend on convertible preferred stock for the year ended July 31, 2021, of $20,000.

Net loss attributable to Digerati’s common shareholders. Net loss for the year ended July 31, 2022, was $8,032,000 compared to a net loss for the year ended July 31, 2021, of $16,703,000.

Liquidity and Capital Resources

Cash Position: We had a consolidated cash balance of $1,509,000approximately $924,000 as of July 31, 2022.2023. Net cash consumed byused in operating activities during the year ended July 31, 2022,2023 was approximately $1,960,000,$3,222,000. The increase in net cash used in operating activities resulted primarily from the net loss incurred during the year ended July 31, 2023 as a result of operating expenses, that included $98,000$881,000 in stock compensation and warrant expense, stock issued for services of $126,000, bad debt expense of $78,000,$115,000, amortization of right-of-use assets of $696,000, amortization of debt discount of $2,064,000, gain on derivative liability of $6,186,000,$2,930,000, depreciation and amortization expense of $2,916,000, accrued expense of $566,000, accounts receivable of $484,000 and deferred revenue of $911,000. Additionally, accounts payable $860,000, prepaid expenses and other current assets of $20,000, other assets of $131,000, inventory of $18,000, a loss on settlement of debt of $5,481,000, the recognition of $225,000$3,909,000, debt extension fee charged to interest expense gain on ActivePBX contingent earnout recognized in other income of $24,000$864,000, warrants issued for debt extension for $170,000, and common stock issued for debt extension charged to interest expense of $65,000.$589,000, partially offset by gain on settlement of conversion premium of $466,000, gain on derivative liability of $6,526,000, gain on extinguishment of debt of $55,000, and change in operating assets and liabilities resulted in a net increase of $3,200,000.

Cash used in investing activities during the year ended July 31, 2022,2023 was $12,885,000,$436,000, which included $272,000was used for the purchaseacquisition of equipment, the cash paid of $12,791,000, net of cash received, for the acquisitions of VoIP assets from Skynet and NextLevel and the Company received $178,000 from Nexogy as an adjustment consideration for payables from the acquisition.equipment.

Cash provided by financing activities during the year ended July 31, 2022,2023 was $14,865,000.$3,073,000. The net increase in cash provided by financing was primarily due to the Company secured $806,000securing $4,541,000 from convertible notes, net of issuance costs and discounts. In addition, the Company secured $15,530,000discounts and securing $250,000 from promissory notes,debt financing from a related party, net of issuance costs. (See Note 10) The Company madecosts and discounts, proceeds from the exercise of warrants of $22,000, proceeds from the exercise of stock options of $50,000, partially offset by principal payments of $250,000$785,000 on various convertible notes, principal payments of $425,000$298,000 on convertibledebt, principal payments of $568,000 on related party notes, and principal payments of 816,000$139,000 on related party notes. equipment financing.

Overall, our net operating, investing, and financing activities during the year ended July 31, 2022, contributed approximately $20,000 of our available cash.2023 resulted in a net decrease in cash and cash equivalents for $585,000. 

Digerati’s consolidated financial statements for the year ended July 31, 2022,2023 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 $113,393,000$121,684,000 and a working capital deficit of approximately $29,323,000$65,279,000 which raises substantial 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 fiscalFiscal Year 2023, we anticipate certain members of our management team continued to takereceive a portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from orour 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,streams; and we have also secured variousnumerous agent agreements tothrough 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 of evaluating such acquisitions we anticipate incurring significant legal and professional fees.

Our cash requirements to meet our interest payments to Post Road, capital expenditure needs, and operational cash flow needs over the next 18 months are estimated to be approximability $3,500,000. The Company anticipates issuing additional equity, or enteredentering into additional Convertible Notesconvertible notes and/or obtaining other indebtedness to secure the funding required to meet these cash needs. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, the Company may not be able to meet its interest payments, capital expenditures and operational needs. As a result, the Company will be required to negotiate with its lender the terms of the current financing agreements, in addition to postponing the timing of deployment of its capital expenditures and extending the timing of the operational cash needs.

The Credit Agreement with Post Roadcontains customary representations, warranties, and indemnification provisions. The Credit Agreement also contains affirmative and negative covenants with respect to the operation of the business and properties of T3 Nevadathe loan parties as well as financial performance.

Below are key covenantsfinancial covenant requirements, (measured quarterly): for the fiscal quarter ended July 31, 2023:

As of July 31, 2023, the Company was not in compliance with the financial covenants under the Credit Agreement. This noncompliance, together with certain other events of default that have occurred and are continuing under the Credit Agreement, resulted in our classifying the indebtedness under the Credit Agreement as a current liability.

The Operating Subsidiaries’ obligations under the Credit Agreement are secured by first priority security interests in (a) the equity interests of the Operating Subsidiaries (other than Verve Cloud Nevada), pursuant to the Pledge Agreement, dated November 17, 2020 (the “Pledge Agreement”), made by Verve Cloud Nevada in favor of Post Road Administrative and (b) substantially all of the other assets of the Operating Subsidiaries, pursuant to the Guaranty and Collateral Agreement, dated November 17, 2020, subsequently amended on December 31, 2021, February 4, 2022, December 15, 2022, and February 3, 2023 (the “Guaranty and Collateral Agreement”), among the Operating Subsidiaries and Post Road Administrative.

1. Maximum Allowed - Senior Leverage Ratio of 4.06During the period beginning on August 1, 2021, and ending on July 31, 2023, the Company and Post Road entered into several amendments and other modifications to 1.00

2. Minimum Allowed - EBITDA of $3,719,589

3. Minimum Allowed - Liquidity of $2,000,000

4. Maximum Allowed - Capital Expenditures of $94,798 (Quarterly)

5. Minimum Allowed - Fixed Charge Coverage Ratio of 1.5 to 1.00

6. Maximum Allowed - Churn of 3.00% at any timethe Credit Agreement. Specifically:

While Digerati, the parent company of T3 Nevada, is not subject to these financial covenants, they have had and will continue to have a material impact on T3 Nevada’s expenditures and ability to raise funds.

In addition,Additionally, on November 22, 2023 (with effect from November 2, 2023), Verve Cloud, Inc. (“Verve Cloud”) and Verve Cloud’s subsidiaries (Verve Cloud and its subsidiaries, collectively, the “Verve Cloud Nevada Parties”), Digerati and Post Road entered into a Second Forbearance Agreement, Amendment to Loan Documents and Limited Consent, which (a) extends the maturity date of our Term Loan C Note with Post Road from November 2, 2023, to December 31, 2023, (b) provides that Post Road and the other lenders under the Credit Agreement shall forbear through December 31, 2023 from exercising their rights and remedies under the loan documents and applicable law with a maturity daterespect to (i) certain existing events of August 4,default under the loan documents and (ii) certain events of default that are expected to arise before December 31, 2023, requires a full principal payment (currently $10,000,000) and accrued interest by(c) amends certain provisions of the maturity date. We will work with our equity partnersCredit Agreement and the other loan documents to secureallow the company to incur up to an additional financings$2,000,000 of working capital financing. For additional information regarding the Second Forbearance Agreement, Amendment to meet this obligation by the maturity date. In addition, we will work with our lender on the current termsLoan Documents and Limited Consent, see Note 18 - Subsequent Events to the Term Loan C Note,Consolidated Financial Statements; see also Part II, Item 9B, Other Information to extend the maturity date or restructure the terms of the note. There can be no assurance that the Company will be able to raise additional funds or raise themthis Annual Report on acceptable terms to meet the cash payment requirements on the Term Loan C Note. In addition, there can be no assurance that we will be able to restructure the terms or extend the maturity date of the Term Loan C Note with Post Road. If the Company is not able to restructure the financing or repay the Term Loan C Note by the August 4^th maturity date and Post Road declares an event of default, it would have a material adverse effect on our business and financial condition, including the possibility of Post Road foreclosing on some or all of our assets.Form 10-K.

We have been successful in raising debt and equity capital in the past and as described in Notes 10, 11, and 12 to the 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. 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.

Management believes that available resources as of July 31, 2022,2023, 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, andamong other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, and/or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off its obligations, if and when they come due.

Our current cash expenses are expected to be approximately $1,300,000 per month, including wages, rent, utilities, corporate expenses, and legal professional fees associated with potential acquisitions. As described elsewhere herein, we are not generating sufficient cash from operations to pay for our corporate and ongoing operating expenses, or to pay our current liabilities. As of July 31, 2022,2023, our total liabilities were approximately $67,503,000,$69,276,000, which included $10,588,000$4,125,000 in derivative liabilities. We will continue to use our available cash on hand to cover our deficiencies in operating expenses. Our cash requirements to meet our interest payments to Post Road, capital expenditure needs, and operational cash flow needs over the next 18 months are estimated to be approximately $3,500,000.

We have been successful in raising debt capital and equity capital in the past and as described in Notes 10, 11, and 12 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 and Estimates

The consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors believed to be relevant at the time the consolidated financial statements are prepared. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

We believe that our accounting policies and estimates are critical to aid in fully understanding and evaluating our reported financial results.

Valuation of Goodwill and Intangible Assets. Goodwill and other intangible assets include the cost of the acquired business in excess of the fair value of the tangible net assets recorded in connection with an acquisition. Other intangible assets include customer relationships, non-compete agreements, and trademarks.  The Company uses a third-party specialty valuation firm to value its intangible assets acquired in its business combination and asset acquisitions.   

In accordance with FASB ASC 350-20-35, “Intangibles - Goodwill and Other,” a third-party specialty valuation firm tested our goodwill for impairment. Based upon their impairment analysis performed during the fourth quarter of fiscal year 2023, management of the Company has agreed with our third-party  valuation firm in their conclusion that there was no impairment of goodwill at July 31, 2023.

In accordance with FASB ASC 360-10-35, “Property, Plant, and Equipment,” a third-party specialty valuation firm reviewed our long-lived asset groups, including property and equipment and other intangible assets, for impairment whenever events indicate that their carrying amounts may not be recoverable. When it is determined that one or more impairment indicators are present for an asset group, it is necessary to compare the carrying amount of the asset group to net future undiscounted cash flows that the asset group is expected to generate. If the carrying amount of the asset group is greater than the net future undiscounted cash flows, an impairment loss is recognized for the excess of the carrying amount of the asset group over its fair value. The management of the Company has agreed with the third-party specialty valuation firm in their conclusion that there were no impairment indicators relating to our long-lived assets  as July 31, 2023.

Revenue Recognition.The Company recognizes revenue in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC)(“ASC”) Topic 606, Revenues from Contracts with Customers (ASC 606) (“ASC 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 over time, on a monthly basis, as services are rendered or at thea point   in time when control of the products transfers to the customer.

Service Revenue

Service revenue from subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription services being rendered are recorded as deferred revenue. Usage fees, either bundled or not bundled, are recognized when the Company has a right to invoice. Professional services for configuration, system integration, optimization, customer training and/or education are primarily billed on a fixed-fee basis and are performed by the Company directly. Alternatively, customers may choose to perform these services themselves or engage their own third-party service providers. Professional services revenue is recognized over time, generally as services are activated for the customer

Product Revenue

The Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is generally upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical experience.

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, 2022 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.

Intangible Assets. Our intangible assets consist of customer relationships, developed technologies, trademarks and trade name. 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. The intangible assets are amortized following the patterns in which the economic benefits are consumed or straight-line over the estimated useful life. We periodically review the estimated useful lives of our intangible assets and review these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The determination of impairment is based on estimates of future undiscounted cash flows. If an intangible asset is considered to be impaired, the amount of the impairment will be equal to the excess of the carrying value over the fair value of the asset.

Long-Lived Assets. The Company reviews its long-lived assets, including property and equipment and identifiable intangibles 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 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. The Company accounts for its share-based awards under ASC 718, Compensation – Stock Compensation. Employee and non-employee stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. During FY 2022 and 2021, the Company issued 1,500,000 common shares and 7,858,820 common shares, respectively, to professionals for exchange of services and various employees as part of our profit sharing-plan contribution and stock in lieu of cash. During FY 2022 and 2021 we recognized stock-based compensation expense of $125,250 and $264,712, respectively, equivalent to the market value of the shares issued calculated based on the share’s closing price at the grant dates. During FY 2022 we recognized stock-based compensation expense of $97,863 related to stock options previously issued to various employees.

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 30,000,000 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, 2022, we believe that the treasury shares reserved are sufficient for any future conversions of these instruments. As a result, these debt instruments and warrants are excluded from derivative consideration.

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.

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.

Critical Accounting Estimates

Valuation of Goodwill and Intangible Assets. Goodwill and other intangible assets include the cost of the acquired business in excess of the fair value of the tangible net assets recorded in connection with an acquisition. Other intangible assets include customer relationships, non-compete agreements, and trademarks.  The Company uses a third-party specialty valuation firm to value its intangible assets acquired in its business combination and asset acquisitions.   

During the year ended July 31, 2022, the Company acquired Skynet Telecom LLC and Next Level Internet, Inc. the acquisitions were accounted for under the purchase method of accounting, with the Company identified as the accounting acquirer. Accordingly, the purchase prices of acquired tangible and intangible assets and liabilities were recorded and allocated at fair value on a relative basis as of acquisition dates. The Company based its estimates on historical experience, discounted cash flows and on various other assumptions that are believed to be reasonable in the circumstances at the time of acquisition, the results of which form the basis for making judgments about the fair value of the intangible assets acquired that are not readily apparent from other sources. The actual results from these acquisitions may differ from these estimates. 

OFF BALANCE SHEET ARRANGEMENTS

As of July 31, 2022,2023, we do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable to smaller reporting companies.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

Digerati Technologies, Inc.

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, 2022,2023 and 2021,2022, 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, 2022,2023 and 2021,2022, 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 audits. 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 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 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.

Critical Audit Matters

CriticalThe critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

/s/ MaloneBailey, LLP

www.malonebailey.com

www.malonebailey.com

We have served as the Company’s auditor since 2018.

Houston, Texas

November 22, 2023

Houston, Texas

October 31, 2022

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)