UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended January 31, 2018April 30, 2022

 

or

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ___________

 

Commission File Number 001-15687

 

DIGERATI TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada 74-2849995

 (State(State or Other Jurisdiction of


Incorporation or Organization)

 (I.R.S. Employer

Identification No.)

1600 NE Loop 410,825 W. Bitters, Suite 126

104
San Antonio, Texas

 

78209

78216
(Address of Principal Executive Offices) (Zip Code)

 

(210) 614-7240

(Registrant’s Telephone Number, Including Area Code:(210) 775-0888Code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
N/AN/AN/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filerAccelerated 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)13(a) of the Securities Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

 

Number of SharesClass:Class:As of:
11,128,781139,988,039Common Stock $0.001 par valueMarch 22, 2018June 14, 2022

 

 

 

 

 

DIGERATI TECHNOLOGIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JANUARY 31, 2018APRIL 30, 2022

 

INDEX

 

PART I --I-- FINANCIAL INFORMATION

 
   
Item 1.Consolidated Financial Statements (Unaudited)1
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1234
Item 3.Quantitative and Qualitative Disclosures About Market Risk1740
Item 4.ControlControls and Procedures1740
   
PART II --II-- OTHER INFORMATION 
   
Item 1.Legal Proceedings1841
Item 1A.Risk Factors1841
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds1841
Item 3.Defaults Upon Senior Securities1841
Item 5.4.Other InformationMine Safety Disclosures1841
Item 5.Other Information41
Item 6.Exhibits1842
   
SIGNATURES1944

 

i

 

 

DIGERATI TECHNOLOGIES, INC. 

CONTENTS

 

PAGE1CONSOLIDATED BALANCE SHEETS AS OF JANUARY 31, 2018APRIL 30, 2022, AND JULY 31, 20172021 (UNAUDITED)
  
PAGE2CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE & SIXAND NINE MONTHS ENDED JANUARY 31, 2018APRIL 30, 2022, AND 20172021 (UNAUDITED)
  
PAGE3 3-4CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2022, AND 2021 (UNAUDITED)
PAGE 5CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIXNINE MONTHS ENDED JANUARY 31, 2018APRIL 30, 2022, AND 20172021 (UNAUDITED)
  
PAGES 4-116-33NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

ii

 

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, unaudited)

  January 31, 2018  July 31,
2017
 
ASSETS      
CURRENT ASSETS:      
Cash and cash equivalents $112  $673 
Accounts receivable, net  46   15 
Prepaid and other current assets  35   9 
Escrow Deposits related to acquisition  275   - 
Total current assets  468   697 
         
LONG-TERM ASSETS:        
Intangible assets, net  305   14 
Property and equipment, net  97   2 
Total assets $870  $713 
         
LIABILITIES AND STOCKHOLDERS’ DEFICIT        
CURRENT LIABILITIES:        
Accounts payable $983  $859 
Accrued liabilities  422   365 
Note Payable, current  125   - 
Total current liabilities  1,530   1,224 
         
LONG-TERM LIABILITIES:        
Customer deposits  131   131 
Convertible debenture, net $200 and $0, respectively  -   - 
Derivative liability  335   - 
Total long-term liabilities  466   131 
Total liabilities  1,996   1,355 
Commitments and contingencies        
         
STOCKHOLDERS’ DEFICIT:        
Preferred stock, $0.001, 50,000,000 shares authorized, none issued and outstanding  -   - 
Common stock, $0.001, 150,000,000 shares authorized, 10,968,781 and 8,386,056 issued and outstanding, respectively  11   8 
Additional paid in capital  78,337   76,986 
Accumulated deficit  (79,475)  (77,637)
Other comprehensive income  1   1 
Total stockholders’ deficit  (1,126)  (642)
Total liabilities and stockholders’ deficit $870  $713 
  April 30,  July 31, 
  2022  2021 
ASSETS      
CURRENT ASSETS:      
Cash and cash equivalents $2,384  $1,489 
Accounts receivable, net  1,602   617 
Prepaid and other current assets  867   232 
Total current assets  4,853   2,338 
         
LONG-TERM ASSETS:        
Intangible assets, net  24,969   8,527 
Goodwill  8,878   3,931 
Property and equipment, net  1,742   529 
Other assets  398   76 
Investment in Itellum  185   185 
Right-of-use asset  1,966   934 
Total assets $42,991  $16,520 
         
LIABILITIES AND STOCKHOLDERS’ DEFICIT        
CURRENT LIABILITIES:        
Accounts payable $3,514  $1,653 
Accrued liabilities  8,164   2,570 
Equipment financing  14   37 
Convertible note payable, current, net $92 and $340, respectively  3,286   1,049 
Note payable, current, related party, net $0 and $0, respectively  1,024   998 
Note payable, current, net $0 and $714, respectively  1,050   2,963 
Acquisition payable  1,000   - 
Deferred income  2,140   20 
Derivative liability  8,922   16,773 
Operating lease liability, current  773   503 
Total current liabilities  29,887   26,566 
         
LONG-TERM LIABILITIES:        
Convertible note payable  750   - 
Notes payable, related party, net $0 and $0, respectively  100   136 
Note payable, net $0 and $4,641, respectively  33,568   6,241 
Operating lease liability  1,349   431 
Total long-term liabilities  35,767   6,808 
         
Total liabilities  65,654   33,374 
         
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 425,442 issued and outstanding, respectively  -   - 
Convertible Series C Preferred stock, $0.001, 1,000,000 shares designated, 55,400 and 55,400 issued and outstanding, respectively  -   - 
Series F Super Voting Preferred stock, $0.001, 100 shares designated, 100 and 100 issued and outstanding, respectively  -   - 
Common stock, $0.001, 500,000,000 shares authorized, 139,988,039 and 138,538,039 issued and outstanding, respectively (28,000,000 reserved in Treasury)  139   139 
Additional paid in capital  89,309   89,100 
Accumulated deficit  (110,092)  (105,380)
Other comprehensive income  1   1 
Total Digerati’s stockholders’ deficit  (20,643)  (16,140)
Noncontrolling interest  (2,020)  (714)
Total stockholders’ deficit  (22,663)  (16,854)
Total liabilities and stockholders’ deficit $42,991  $16,520 

See accompanying notes to consolidated unaudited financial statements

1

 

 

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

 

  Three months ended
January 31,
  Six months ended
January 31,
 
  2018  2017  2018  2017 
OPERATING REVENUES:            
Cloud-based hosted services $151  $42  $207  $87 
Total operating revenues  151   42   207   87 
                 
OPERATING EXPENSES:                
Cost of services (exclusive of depreciation and amortization)  98   34   143   69 
Selling, general and administrative expense  291   243   496   504 
Stock compensation & warrant expense  919   374   975   374 
Legal and professional fees  176   99   292   126 
Depreciation and amortization expense  35   4   39   9 
Total operating expenses  1,519   754   1,945   1,082 
                 
OPERATING LOSS  (1,368)  (712)  (1,738)  (995)
                 
OTHER INCOME (EXPENSE):                
Gain on derivative instruments  108   -   108   - 
Interest income (expense)  (208)  -   (208)  - 
Total other income (expense)  (100)  -   (100)  - 
                 
NET LOSS $(1,468) $(712) $(1,838) $(995)
                 
LOSS PER SHARE - BASIC AND DILUTED $(0.15) $(0.11) $(0.20)  (0.17)
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED  9,884,962   6,216,232   9,339,435   5,722,513 
  Three months ended
April 30,
  Nine months ended
April 30,
 
  2022  2021  2022  2021 
OPERATING REVENUES:            
Cloud software and service revenue $8,163  $3,751  $15,959  $8,629 
Total operating revenues  8,163   3,751   15,959   8,629 
                 
OPERATING EXPENSES:                
Cost of services (exclusive of depreciation and amortization)  3,161   1,526   6,203   3,708 
Selling, general and administrative expense  4,296   1,993   8,211   4,969 
Legal and professional fees  756   204   2,505   717 
Bad debt expense  36   5   51   9 
Depreciation and amortization expense  1,540   611   2,514   1,204 
Total operating expenses  9,789   4,339   19,484   10,607 
                 
OPERATING LOSS  (1,626)  (588)  (3,525)  (1,978)
                 
OTHER INCOME (EXPENSE):                
Gain (loss) on derivative instruments  6,827   (10,878)  7,835   (10,860)
Loss on extinguishment of debt  -   -   (5,480)  - 
Gain on settlement of debt  -   150   -   347 
Income tax benefit (expense)  (167)  (63)  (285)  (122)
Other income (expense)  2   -   -   - 
Interest expense  (1,676)  (1,577)  (4,563)  (3,079)
Total other income (expense)  4,986   (12,368)  (2,493)  (13,714)
                 
NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST  3,360   (12,956)  (6,018)  (15,692)
Less: Net loss attributable to the noncontrolling interests  546   158   1,306   223 
NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS  3,906   (12,798)  (4,712)  (15,469)
Deemed dividend on Series A Convertible preferred stock  (4)  (5)  (14)  (15)
NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS $3,902  $(12,803) $(4,726) $(15,484)
                 
INCOME (LOSS) PER COMMON SHARE - BASIC $0.03  $(0.09) $(0.03) $(0.12)
                 
LOSS PER COMMON SHARE - DILUTED $(0.01) $(0.09) $(0.03) $(0.12)
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC  139,751,107   136,719,871   139,285,833   126,524,312 
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED  254,167,793   136,719,871   139,285,833   126,524,312 

 

See accompanying notes to consolidated unaudited financial statements

 

2

 

 

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) $(2,613)
Amortization of employee stock options  -   -   -   -   -   -   -   -   -   -   20   -   -   20   -   20 
Common stock issued for services, to employees  -   -   -   -   -   -   -   -   7,858,820   8   257   -   -   265   -   265 
Common stock issued for services  -   -   -   -   -   -   -   -   2,000,000   2   56   -   -   58   -   58 
Common stock issued for debt conversion  -   -   -   -   -   -   -   -   10,000,000   10   147   -   -   157   -   157 
Common stock issued concurrent with convertible debt  -   -   -   -   -   -   -   -   1,000,000   1   44   -   -   45   -   45 
Beneficial conversion feature on convertible debt  -   -   -   -   -   -   -   -   -   -   111   -   -   111   -   111 
Derivative liability resolved to APIC due to note conversion  -   -   -   -   -   -   -   -   -   -   205   -   -   205   -   205 
Dividends declared  -   -   -   -   -   -   -   -   -   -   (5)  -   -   (5)  -   (5)
Net Ioss  -   -   -   -   -   -   -   -   -   -   -   (721)  -   (721)  (35)  (756)
BALANCE, October 31, 2020  225,000   -   407,477   -   -   -   100   -   122,182,410  $122  $87,199  $(89,418) $1  $(2,096) $(417) $(2,513)
Amortization of employee stock options  -   -   -   -   -   -   -   -   -   -   33   -   -   33   -   33 
Common stock issued for settlement of accounts payable  -   -   -   -   -   -   -   -   1,000,000   1   59   -   -   60   -   60 
Common stock issued for debt conversion  -   -   -   -   -   -   -   -   10,676,765   11   243   -   -   254   -   254 
Common stock issued concurrent with convertible debt  -   -   -   -   -   -   -   -   500,000   -   24   -   -   24   -   24 
Beneficial conversion feature on convertible debt  -   -   -   -   -   -   -   -   -   -   30   -   -   30   -   30 
Derivative liability resolved to APIC due to note conversion  -   -   -   -   -   -   -   -   -   -   383   -   -   383   -   383 
Dividends declared  -   -   -   -   -   -   -   -   -   -   (5)  -   -   (5)  -   (5)
Net Ioss  -   -   -   -   -   -   -   -   -   -   -   (1,950)  -   (1,950)  (30)  (1,980)
BALANCE, January 31, 2021  225,000   -   407,477   -   -   -   100   -   134,359,175  $134  $87,966  $(91,368) $1  $(3,267) $(447) $(3,714)
Amortization of employee stock options  -   -   -   -   -   -   -   -   -   -   57   -   -   57   -   57 
Preferred Stock Series B issued for debt settlement  -   -   17,965   -   -   -   -   -   -   -   18   -   -   18   -   18 
Preferred Stock Series C issued for debt settlement  -   -   -   -   55,400   -   -   -   -   -   554   -   -   554   -   554 
Common stock issued for debt conversion  -   -   -   -   -   -   -   -   598,825   1   17   -   -   18   -   18 
Common stock issued concurrent with convertible debt  -   -   -   -   -   -   -   -   600,000   1   77   -   -   78   -   78 
Common stock issued for services  -   -   -   -   -   -   -   -   2,000,000   2   123   -   -   125   -   125 
Common stock issued for exercise of warrants  -   -   -   -   -   -   -   -   300,000   -   30   -   -   30   -   30 
Beneficial conversion feature on convertible debt  -   -   -   -   -   -   -   -   -   -   413   -   -   413   -   413 
Dividends declared  -   -   -   -   -   -   -   -   -   -   (5)  -   -   (5)  -   (5)
Net Loss  -   -   -   -   -   -   -   -   -   -   -   (12,798)  -   (12,798)  (158)  (12,956)
BALANCE, April 30, 2021  225,000   -   425,442   -   55,400   -   100   -   137,858,000  $138  $89,250  $(104,166) $1  $(14,777) $(605) $(15,382)

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, 2022

(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, 2021  225,000   -   425,442   -   55,400   -   100   -   138,538,039  $139  $89,100  $(105,380) $1  $(16,140) $(714) $(16,854)
Amortization of employee stock options  -   -   -   -   -   -   -   -   -   -   24   -   -   24   -   24 
Common stock issued concurrent with convertible debt  -   -   -   -   -   -   -   -   600,000   -   38   -   -   38   -   38 
Dividends declared  -   -   -   -   -   -   -   -   -   -   (5)  -   -   (5)  -   (5)
Net Loss  -   -   -   -   -   -   -   -   -   -   -   2,424   -   2,424   (158)  2,266 
BALANCE, October 31, 2021  225,000   -   425,442   -   55,400   -   100   -   139,138,039  $139  $89,157  $(102,956) $1  $(13,659) $(872) $(14,531)
Amortization of employee stock options  -   -   -   -   -   -   -   -   -   -   23   -   -   23   -   23 
Common stock issued concurrent with convertible debt  -   -   -   -   -   -   -   -   600,000   -   -   -   -   -   -   - 
Dividends declared  -   -   -   -   -   -   -   -   -   -   (5)  -   -   (5)  -   (5)
Net Ioss  -   -   -   -   -   -   -   -   -   -   -   (11,042)  -   (11,042)  (602)  (11,644)
BALANCE, January 31, 2022  225,000   -   425,442   -   55,400   -   100   -   139,738,039  $139  $89,175  $(113,998) $1  $(24,683) $(1,474) $(26,157)
Amortization of employee stock options  -   -   -   -   -   -   -   -   -   -   28   -   -   28   -   28 
Common stock issued for debt extension  -   -   -   -   -   -   -   -   250,000   -   34   -   -   34   -   34 
Derivative liability resolved to APIC due to note payoff  -   -   -   -   -   -   -   -   -   -   76   -   -   76   -   76 
Dividends declared  -   -   -   -   -   -   -   -   -   -   (4)  -   -   (4)  -   (4)
Net income  -   -   -   -   -   -   -   -   -   -   -   3,906   -   3,906   (546)  3,360 
BALANCE, April 30, 2022  225,000   -   425,442   -   55,400   -   100   -   139,988,039  $139  $89,309  $(110,092) $1  $(20,643) $(2,020) $(22,663)

See accompanying notes to consolidated unaudited financial statements


DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

 

  Six months ended
January 31,
 
  2018  2017 
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net loss $(1,838) $(995)
Adjustments to reconcile net loss to cash used in by operating activities:        
Depreciation and amortization  39   9 
Stock compensation and warrant expense  975   374 
Gain on derivative instruments  (108)  - 
Debt discount in excess of Face value  208     
Changes in operating assets and liabilities:        
Accounts receivable  (31)  (6)
Escrow deposit related to acquisition  (275)    
Prepaid expenses and other current assets  (26)  (12)
Accounts payable  124   33 
Accrued liabilities and customer deposits  57   44 
Net cash used in operating activities  (875)  (553)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Acquisition of oil and gas property  -   (38)
Acquisition of VoIP assets  (125)  - 
Net cash used in investing activities  (125)  (38)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from issuance of common stock  280   - 
Borrowings from convertible debt, net of original issue cost and discounts  159   - 
Net cash provided by financing activities  439   - 
         
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  (561)  (591)
CASH AND CASH EQUIVALENTS, beginning of period  673   1,169 
         
CASH AND CASH EQUIVALENTS, end of period $112  $578 
         
SUPPLEMENTAL DISCLOSURES:        
Cash paid for interest $-  $- 
  Nine months ended
April 30,
 
  2022  2021 
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net loss $(6,018) $(15,692)
Adjustments to reconcile net loss to cash (used in)/provided by operating activities:        
Depreciation and amortization expense  2,514   1,204 
Stock compensation and warrant expense  75   558 
Bad debt expense  51   9 
Amortization of ROU Asset  214   95 
Amortization of debt discount  1,943   1,827 
(Gain) on derivative liabilities  (7,835)  10,860 
Loss on extinguishment of debt  5,480   - 
(Gain) on settlement of debt  -   (347)
Shares issued for debt extension charged to interest expense  34   - 
Debt extension fee charged to interest expense  155   - 
Changes in operating assets and liabilities:        
Accounts receivable  (433)  (96)
Inventory  10   26 
Prepaid expenses and other current assets  (96)  (141)
Other assets  23   - 
Right of use operating lease liability  (268)  (95)
Accounts payable  1,385   97 
Accrued expenses  1,003   1,397 
Deferred income  22   (105)
Net cash used in operating activities  (1,741)  (403)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Cash paid in acquisition of equipment  (193)  (228)
Proceeds from Nexogy  178   - 
Acquisition of VoIP assets, net of cash received  (12,790)  (10,108)
Net cash used in investing activities  (12,805)  (10,336)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Borrowings from convertible debt, net of original issuance cost and discounts  706   1,078 
Proceed from the exercise of warrants  -   30 
Borrowings from debt, net of original issuance cost and discounts  15,530   13,036 
Principal payments on debt, net  -   (1,330)
Principal payments on convertible notes, net  (175)  (266)
Principal payments on related party notes, net  (590)  (316)
Principal payment on equipment financing  (30)  (53)
Net cash provided by financing activities  15,441   12,179 
         
INCREASE IN CASH AND CASH EQUIVALENTS  895   1,440 
CASH AND CASH EQUIVALENTS, beginning of period  1,489   685 
CASH AND CASH EQUIVALENTS, end of period $2,384  $2,125 
         
SUPPLEMENTAL DISCLOSURES:        
Cash paid for interest $1,677  $753 
Income tax paid $-  $- 
         
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES        
Accrued interest rolled into principal $640  $328 
Incentive earnout adjustment on Active PBX acquisition $120  $- 
Stock issued with convertible debt - debt discount $38  $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 
Derivative liability resolved to APIC $76  $588 
Debt discount from derivative liabilities $60  $6,462 
Promissory note reclassed to convertible debt $-  $15 
Capitalization of ROU assets and liabilities - operating $-  $254 
Common Stock issued for debt conversion $-  $429 
Common Stock issued for accounts payable $-  $60 
Dividend declared $14  $15 

 

See accompanying notes to consolidated unaudited financial statements

3

 

 

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, 20172021, contained in the Company’s Form 10-K filed on December 14, 2017October 26, 2021 have been omitted.

 

Income TaxesEarnings (Loss) Per Share

 

Basic and diluted earnings (loss) per share is computed by dividing loss attributable to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. Basic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of shares of Common Stock outstanding during the respective period presented in the Company’s accompanying condensed consolidated financial statements. Fully-diluted earnings (loss) per share is computed similarly to basic income (loss) per share except that the denominator is increased to include the number of dilutive Common Stock equivalents using the treasury stock method for options and warrants and the if-converted method for convertible debt.

  Three months ended
April 30,
  Nine months ended
April 30,
 
(in thousands, except per share data) 2022  2021  2022  2021 
NUMERATOR:            
NET INCOME (LOSS) $3,902  $(12,803) $(4,726) $(15,484)
                 
DENOMINATOR:                
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC  139,751,107   136,719,871   139,285,833   126,524,312 
INCOME (LOSS) PER COMMON SHARE - BASIC $0.03  $(0.09) $(0.03) $(0.12)

  Three months ended
April 30,
  Nine months ended
April 30,
 
(in thousands, except per share data)   2022  2021  2022  2021 
NUMERATOR:            
NET INCOME (LOSS) $3,902  $(12,803) $(4,726) $(15,484)
Less: adjustments to net income $(6,759) $-  $-  $- 
NET INCOME (LOSS) -  DILUTED SHARES OUTSTANDING CALCULATION $(2,857) $(12,803) $(4,726) $(15,484)
                 
DENOMINATOR:                
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC  139,751,107   136,719,871   139,285,833   126,524,312 
Warrants and Options to purchase common stock  100,352,766   -   -   - 
Convertible Debt  14,063,920   -   -   - 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED  254,167,793   136,719,871   139,285,833   126,524,312 
LOSS PER COMMON SHARE - DILUTED $(0.01) $(0.09) $(0.03) $(0.12)

The effective tax rate was 0%Company excluded the following securities from the calculation of basic and diluted net loss per share as the effect would have been antidilutive    

  Three months ended
April 30,
  Nine months ended
April 30,
 
  2022  2021  2022  2021 
Convertible Preferred Shares  56,745,216   

55,437,949

   56,745,216   

55,437,949

 
Convertible Debt  12,633,333   

21,021,795

   12,633,333   

21,021,795

 
Total  69,378,549   

76,459,744

   69,378,549   

76,459,744

 


Treasury Shares

As a result of entering into various convertible debt instruments which contained a variable conversion feature with no floor, warrants with fixed exercise price, and convertible notes with fixed conversion price or with a conversion price floor, we reserved 28,000,000 treasury shares for consideration for future conversions and exercise of warrants, for convertible notes with fixed conversion price, notes with variable conversion feature with a floor and warrants with a conversion price floor. The Company will evaluate the sixreserved treasury shares on a quarterly basis, and if necessary, reserve additional treasury shares. As of April 30, 2022, we believe that the treasury shares reserved are sufficient for any future conversions of these instruments. As a result, these debt instruments and warrants are excluded from derivative consideration.

Customers and Suppliers

We rely on various suppliers to provide services in connection with our VoIP and UCaaS offerings. Our customers include businesses in various industries including Healthcare, Banking, Financial Services, Legal, Real Estate, and Construction. We are not dependent upon any single supplier or customer.

During the nine months ended January 31, 2018April 30, 2022, and 2017, respectively.2021, the Company did not derive revenues of 10% or more from any single customer.

As of April 30, 2022, and 2021, the Company did not have outstanding accounts receivable of 10% or more from any single customer.

Sources of revenue:

Cloud-based hosted Services.The Company recognizes cloud-based hosted services revenue, mainly from subscription services for its cloud telephony applications that includes hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice, and web conferencing, call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized applications. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster recovery services. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s revenue derived from cloud-based hosted services is recognized at the time control of the products transfers to the customer.

Service Revenue

Service revenue from subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription services being rendered are recorded as deferred tax assetsrevenue. 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 liabilitiesare 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 differenceshistorical experience.


Disaggregation of Cloud software and service revenue

Summary of disaggregated revenue is as follows (in thousands):

  For the Three Months
ended April 30,
  For the Nine Months
ended April 30,
 
  2022  2021  2022  2021 
             
Cloud software and service revenue $8,092  $3,666  $15,677  $8,440 
Product revenue  71   85   282   189 
Total operating revenues $8,163  $3,751  $15,959  $8,629 

Contract Assets

Contract assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations are completed. The revenue is recognized when the customer receives services or equipment for a reduced consideration at the onset of an arrangement; for example, when the initial month’s services or equipment are discounted. Contract assets are included in prepaid and other current assets in the consolidated balance sheets, depending on if their reduction is recognized during the succeeding 12-month period or beyond. Contract assets as of April 30, 2022, and July 31, 2021, were $7,486 and $17,661, respectively.

Deferred Income

Deferred income represents billings or payment received in advance of revenue recognition and is recognized upon transfer of control. Balances consist primarily of annual plan subscription services, for services not yet provided as of the balance sheet date. Deferred revenues that will be recognized during the succeeding 12-month period are recorded as current deferred revenues in the consolidated balance sheets, with the remainder recorded as other noncurrent liabilities in the consolidated balance sheets. Deferred income as of April 30, 2022, and July 31, 2021, were $1,279,974 and $19,984, respectively.

Customer deposits

The Company in some instances requires customers to make deposits for the last month of services, equipment, installation charges and training. As equipment is installed and training takes places the deposits are then applied to revenue. The deposit for the last month of services is applied to any outstanding balances if services are cancelled. If the customer’s account is paid in full, the Company will refund the full deposit in the month following service termination. As of April 30, 2022, and July 31, 2021, Digerati’s customer deposits balance was $860,341 and $0, respectively. The customer deposit balance is included as part of deferred income on the consolidated balance sheet.

Costs to Obtain a Customer Contract

Direct incremental costs of obtaining a contract, consisting of sales commissions, are deferred, and amortized over the estimated life of the customer, which currently averages 36 months. The Company calculates the estimated life of the customer on an annual basis. The Company classifies deferred commissions as prepaid expenses or other noncurrent assets based on the timing of when it expects to recognize the expense. As of April 30, 2022, the Company had $744,000 in deferred commissions/contract costs. Sales commissions expensed for the nine months ended April 30, 2022, and April 30, 2021, were $1,463,989 and $576,476, respectively. The cost to obtain customer contract balance is included as part of prepaid expenses on the consolidated balance sheet.

Direct Costs - Cloud software and service

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


Contingencies

The Company acts as a collection agent for various government authorities, including but not limited to the Federal Communications Commissions (“FCC”), state authorities such as the California Public Utilities Commission (“PUC”), and other state and local taxes including the California Utility User Tax (“UUT”). The Company performed a review of the regulatory classification of its services and its federal and state regulatory and transactional tax obligations and determined the Company understated its remittances. As of April 30, 2022, the Company’s outstanding aggregate tax remittance liability, including penalties and interest, was $4,839,000, and is included as accrued taxes and penalties on the accompanying consolidated balance sheets. This was a liability assumed as part of the acquisition of Next Level Internet, Inc. (“Next Level” or “NLI”).

Derivative financial instruments.

Digerati does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, Digerati evaluates its convertible instruments and free-standing instruments such as warrants for derivative liability accounting.

For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date. Any changes in fair value are recorded as non-operating, non-cash income or expense for each reporting period. For derivative notes payable conversion options and tax baseswarrants Digerati uses the Black-Scholes option-pricing model to value the derivative instruments.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

Fair Value of Financial Instruments.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is used which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy based on the three levels of inputs that may be used to measure fair value are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the short maturity of these instruments. The carrying value of our long-term debt approximates its fair value based on the quoted market prices for the same or similar issues or the current rates offered to us for debt of the same remaining maturities.

Our derivative liabilities as of April 30, 2022, and July 31, 2021, are approximately $8,922,100 and $16,773,000, respectively.


The following table provides the fair value of the derivative financial instruments measured at fair value using significant unobservable inputs:

     Fair value measurements at reporting date using. 
Description Fair Value  Quoted
prices in
active
markets for
identical
liabilities
(Level 1)
  Significant
other
observable
inputs
(Level 2)
  Significant
unobservable
inputs
(Level 3)
 
             
Convertible promissory notes derivative liability at July 31, 2021 $16,773,383           -               -  $16,773,383 
                 
Convertible promissory notes derivative liability at April  30, 2022 $8,922,100   -   -  $8,922,100 

The fair market value of all derivatives during the year ended July 31, 2021 was determined using the enacted tax rates and laws that are expected to beBlack-Scholes option pricing model which used the following assumptions:

Expected dividend yield0.00%
Expected stock price volatility125.60% - 283.01%
Risk-free interest rate0.05% - 1.65%
Expected term0.03 - 10.00 years

The fair market value of all derivatives during the nine months ended April 30, 2022, was determined using the Black-Scholes option pricing model which used the following assumptions:

Expected dividend yield0.00%
Expected stock price volatility63.32% - 250.19%
Risk-free interest rate0.03% - 2.89%
Expected term0.05 – 9.50 years

The following table provides a summary of the changes in effect whenfair value of the differences are expected to be recovered. derivative financial instruments measured at fair value on a recurring basis using significant unobservable inputs:

Balance at July 31, 2020 $606,123 
Derivative from new convertible promissory notes recorded as debt discount  6,820,108 
Derivative liability resolved to additional paid in capital due to debt conversion  (588,097)
Derivative loss  9,935,249 
Balance at July 31, 2021 $16,773,383 
Derivative from new convertible promissory notes recorded as debt discount  60,292 
Derivative liability resolved to additional paid in capital due to payoff of convertible debt  (76,134)
Derivative gain  (7,835,441)
Balance at April 30, 2022 $8,922,100 

Noncontrolling interest

The Company 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, the Company accounts for uncertain tax positions in accordance with the authoritative guidance issued by thefollows Financial Accounting Standards Board on income taxes(“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, which addresses how an entity should recognize, measuregoverns the accounting for and presentreporting 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 financialparent’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 uncertain tax positions that have been takenof operations.


On May 1, 2018, T3 Communications, Inc. (“T3 Nevada”), a Nevada corporation, entered into a Stock Purchase Agreement (“SPA”), whereby in an exchange for $250,000, T3 Nevada agreed to sell to the buyers 199,900 shares of common stock equivalent to 19.99% of the issued and outstanding common shares of T3 Nevada. The $250,000 of the cash received under this transaction was recognized as an adjustment to the carrying amount of the noncontrolling interest and as an increase in additional paid-in capital in T3 Nevada. At the option of the Company, and for a period of five years following the date of the SPA, the 199,900 shares of common stock in T3 Nevada may be converted into Common Stock of Digerati at a ratio of 3.4 shares of DTGI Common stock for everyone (1) share of T3 Nevada at any time after the DTGI Common Stock has a current market price of $1.50 or more per share for 20 consecutive trading days.

For the nine months ending April 30, 2022, and 2021, the Company accounted for a noncontrolling interest of $1,306,000 and $223,000, respectively. Additionally, one of the buyers serves as a Board Member of T3 Communications, Inc., a Florida corporation, one of our operating subsidiaries.

Recently issued accounting pronouncements.

Recent accounting pronouncements, other than below, issued by the FASB (including its Emerging Issues Task Force), the AICPA and the SEC did not, or are expectednot, believed by management to be takenhave 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 tax return. Pursuant tomodified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this guidance,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 Company 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 January 31, 2018, we have no liability for unrecognized tax benefits.

Cash and cash equivalents

fiscal year beginning after December 15, 2020. The Company considers all bank deposits and highly liquid investments with original maturitiesis currently evaluating the potential impact of three months or less to be cash and cash equivalents.this ASU on its financial statements.

 

Reclassifications

For comparability, certain prior period amounts have been reclassified, where applicable, to conform to the financial statement presentation used in fiscal 2018. The reclassifications have no impact on net loss.

NOTE 2 – GOING CONCERN

 

Financial Condition

 

Digerati’sThe Company’s consolidated financial statements for the periodnine months ending January 31, 2018April 30, 2022 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. DigeratiSince the Company’s inception in 1993, the Company has incurred net losses and accumulated a deficit of approximately $79,475,000 since 1993 and$110,092,000, a working capital deficit of approximately $1,062,000$25,034,000 and total liabilities of $65,654,000, which raisesincludes $8,922,000 in derivative liabilities, which raise substantial doubt about Digerati’s ability to continue as a going concern.

 

4

Management Plans to Continue as a Going Concern

 

Management believes that current available resources as of April 30, 2022 will not be sufficient to fund the Company’s operations and corporate expenses over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, among 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 additional 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.

The Company will continue to work with various best-efforts 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 January 31, 2018 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 – 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 six months ended January 31, 2018, we issued:

644,731 common shares to various employees as part of the Company’s profit sharing plan contribution. The Company recognized stock-based compensation expense of approximately $226,000 equivalent to the value of the shares calculated based on the share’s closing price at the grant dates. (See Note 4)
515,493 common shares to management for services in lieu of cash compensation. The Company recognized stock-based compensation expense of approximately $155,000 equivalent to the value of the shares calculated based on the share’s closing price at the grant dates. (See Note 5)
1,025,000 options to purchase common shares to various employees with an exercise price of $0.35 per share and a term of 5 years. The options vest equally over a period of one year. The options have a fair market value of $218,800.
275,000 options to purchase common shares to various employees with an exercise price of $0.35 per share and a term of 5 years. The options vest equally over a period of two years. The options have a fair market value of $74,800.
545,000 options to purchase common shares to various employees with an exercise price of $0.35 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 $164,900.

The fair market value of all options issued was determined using the Black-Scholes option pricing model which used the following assumptions:

Expected dividend yield0.00%
Expected stock price volatility170.44%
Risk-free interest rate2.10%
Expected term1.0 - 3.0 years

5

Digerati recognized approximately $503,500 and $374,000 in stock-based compensation expense to employees during the six months ended January 31, 2018 and 2017, respectively. Unamortized compensation cost totaled $420,000 and $191,000 at January 31, 2018 and January 31, 2017, respectively.

NOTE 4 – NON-STANDARDIZED PROFIT SHARING PLAN

We currently provide a Non-Standardized Profit Sharing Plan (“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 period ended January 31, 2018 and January 31, 2017, the Company issued 644,731and 1,003,966, respectively, common shares to various employees as part of the Company’s profit sharing plan contribution. The Company recognized stock-based compensation expense for January 31, 2018 and January 31, 2017 of $226,000 and $241,000 respectively, equivalent to the value of the shares calculated based on the share’s closing price at the grant dates.

NOTE 5 – EQUITY

During the six months ended January 31, 2018, the Company issued the following shares of common stock and warrants:

In August, 2017, the Company issued an aggregate of 480,000 shares of common stock for $240,000 and 3-year warrants to purchase 90,000 shares of common stock at an exercise price of $0.50 per share.

In September, 2017, the Company issued an aggregate of 12,500 shares of common stock with a market value at time of issuance of $4,375. The shares were issued for consulting services.

In October, 2017, the Company issued an aggregate of 80,000 shares of common stock for $40,000 and 3-year warrants to purchase 15,000 shares of common stock at an exercise price of $0.50 per share.

In December, 2017 the Company issued an aggregate of 644,731 shares of common stock to various employees as part of the Company’s profit sharing plan contribution. The Company recognized stock-based compensation expense of approximately $226,000 equivalent to the value of the shares calculated based on the share’s closing price at the grant dates.

In December, 2017, the Company issued an aggregate of 500,000 shares of common stock with a market value of $175,000. The shares were issued under an Asset Purchase Agreement.

In December, 2017, the Company issued an aggregate of 100,000 shares of common stock with a market value at time of issuance of $40,000. The shares were issued for consulting services.

In January, 2018, the Company issued an aggregate of 250,000 shares of common stock with a market value at time of issuance of $135,000. The shares were issued under an Equity Purchase Agreement.

In January, 2018, the Company issued 515,493 shares of common stock to management for services in lieu of cash compensation. The Company recognized stock-based compensation expense of approximately $155,000 equivalent to the value of the shares calculated based on the share’s closing price at the grant dates.

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NOTE 6 - WARRANTS

During the six months ended January 31, 2018, the Company issued the following warrants:

In August 2017, the Company secured $240,000 from various accredited investors under a private placement and issued 480,000 shares of its common stock at a price of $0.50 per share and warrants to purchase an additional 90,000 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 October 2017, 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 December 2017, Digerati 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. At time of issuance the company recognized approximately $49,000 in warrant expense using Black-Scholes valuation. Additionally, Digerati 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 term of the Agreement is one year. As a result of the commitment to issue additional warrants in the future, the Company recorded a derivative liability at the origination of the Agreement of $77,000. This liability was re-measured at the January 31, 2018 which resulted in a gain on change in derivative value of $25,000.

In January 2018, Digerati issued 100,000 warrants to various consultants for services, the warrants vested at time of issuance. The warrants have a term of 5 years, with an exercise price of $0.50. At time of issuance the company recognized approximately $49,000 in warrant expense using Black-Scholes valuation.

In January 2018, Digerati issued 220,000 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 $0.001. At time of issuance the company recognized approximately $119,000 in warrant expense using Black-Scholes valuation.

The fair market value of all warrants issued was determined using the Black-Scholes option pricing model which used the following assumptions:

Expected dividend yield0.00%
Expected stock price volatility175.31% - 176.73%
Risk-free interest rate2.24% - 2.30%
Expected term5.0 years

A summary of the warrants as of January 31, 2018 and July 31, 2017 andthe changes during periodsarepresented below:

         Weighted-average 
      Weighted-average  remaining contractual 
   Warrants  exercise price  term (years) 
Outstanding at July 31, 2017   510,000  $0.29   2.87 
Granted   525,000  $0.29   5.00 
Exercised   -   -   - 
Cancelled   -   -   - 
Outstanding at January  31, 2018   1,035,000  $0.29   3.11 
Exercisable at January  31, 2018   1,035,000  $0.29   3.11 

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NOTE 7 – SIGNIFICANT CUSTOMERS

During the six months ended January 31, 2018, the Company derived a significant amount of revenue from four customers, comprising 12%, 9%, 7% and 5% of the total revenue for the period, respectively, compared to four customers, comprising 31%, 24%, 11% and 5% of the total revenue for the six months ended January 31, 2017.

During the six months ended January 31, 2018, the Company derived a significant amount of accounts receivable from four customers, comprising 26%, 15%, 13% and 11% of the total accounts receivable for the period, compared to three customers, comprising 52%, 13% and 12% of the total accounts receivable for the six months ended January 31, 2017.

NOTE 8 – AGREEMENT AND PLAN OF MERGER

On May 8, 2017, Shift8 Technologies, In., a Nevada corporation (“Shift8 Tech” or “Shift8”), a wholly owned subsidiary of Digerati Technologies, Inc., a Nevada corporation (the “Company”), and T3 Acquisition, Inc., a Florida corporation (Acquisition Sub”), and newly formed wholly-owned subsidiary of Shift8 Tech, entered into an Agreement and Plan Merger (the “Merger Agreement”) with T3 Communications, a Florida corporation (“T3”). The Merger Agreement provides that, upon the terms and subject to the conditions thereof, the Acquisition Sub will be merged with and into T3, with T3 continuing as the surviving corporation and as a wholly-owned subsidiary of Shift8 Tech. The Company anticipates closing the transaction during third quarter of fiscal year 2018, the Merger has been approved by the Shareholders of T3 and is subject to certain customary closing conditions. In November 2017, under an Amendment to the Agreement and Plan of Merger, Shift8 funded to T3 a nonrefundable extension fee of $200,000 to extend the closing date until December 22, 2017. In December 2017, Shift8 funded to T3 a nonrefundable extension fee payment of $25,000 to extend the closing date until January 5, 2018. In January 2018, Shift8 funded to T3 a nonrefundable extension fee payment of $50,000 to extend the closing date until January 19, 2018. In February 2018, Shift8 funded to T3 a nonrefundable extension fee payment of $70,000 to extend the closing date until February 28, 2018. The Company and T3 continue to work towards closing the Merger Agreement, and the Company believes that this will occur on or before April 6, 2018. Upon closing, the extension fee total of $345,000 will be credited towards the purchase price for the acquisition of T3.

NOTE 9 – PURCHASE AGREEMENT

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. Shift8 acquired Synergy to increase its customer base and obtain higher efficiency of its existing infrastructure. Shift8 paid $125,000 upon execution of the agreement, issued 500,000 shares of common stock with a market value of $175,000, and entered into a promissory note for $125,000 with an effective annual interest rate of 6% with 5 quarterly payments and a maturity date of February 28, 2019.

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 contract acquired, software licenses, and intangible assets based on their estimated fair values as of December 1, 2017. 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.

   Synergy 
    
Non-compete Agreement $100,000 
Customer contracts  220,000 
License - software  105,000 
     
Total identifiable assets $425,000 
     
Total Purchase price $425,000 

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The following table summarizes the cost of amortizable intangible assets related to the acquisition:

  Estimated  Useful life
  Cost  (years)
      
License - software $105,000  2
Non-compete Agreement  100,000  5
Customer contracts  220,000  2
       
Total $425,000   

The Company incurred approximately $10,000 in costs associated with the acquisition. These included legal, and accounting.

The Company expensed these cost during the period ended January 31, 2018.

Combined Proforma

The results of Synergy Telecom, are included in the consolidated financial statements effective December 1, 2017.

The following schedule contains pro-forma consolidated results of operations for the six months ended January 31, 2018 and 2017 as if the acquisitions occurred on August 1, 2017. The 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 November 1, 2017, or of results that may occur in the future.

  Six months ended January 31, 
  2018  2017 
  As Reported  Pro Forma  As Reported  Pro Forma 
Revenue $207  $345  $87  $349 
Income (loss) from operations  (1,738)  (1,766)  (995)  (1,052)
Net income (loss) $(1,838) $(1,866) $(995) $(1,052)
Earnings (loss) per common share-Basic and Diluted $(0.20) $(0.20) $(0.17) $(0.18)

NOTE 10 - CONVERTIBLE DEBENTURE

On January 12, 2018, the Company entered into a securities purchase agreement with Peak One Opportunity Fund, L.P., a Delaware limited partnership (“Peak One”). Under the agreement, Peak One agreed to purchase from us up to $600,000 aggregate principal amount of our convertible debentures (together the “Debentures” and each individual issuance a “Debenture”), bearing interest at a rate of 0% per annum, with maturity on the third anniversary of the respective date of issuance.

The Company issued the first debenture (the “Debenture”) to Peak One on January 17, 2018 in the principal amount of $200,000 for a purchase price of $180,000 and 0% percent stated interest rate. The Company paid Peak One $6,000 for legal and compliance fees. In addition, the Company paid $14,400 in other closing costs, these fees were deducted from the proceeds at time of issuance. The Company recorded these discounts and cost of $40,400 as a discount to the Debenture and they will be amortized over the term to interest expense.

The Debenture provides Peak One with the option to convert any outstanding balance under the Debenture into shares of Common Stock of the Company at a conversion price for each share of Common Stock equal to either: (i) if the date of conversion is prior to the date that is 180 days after the issuance date, $0.50, or (ii) if the date of conversion is on or after the date that is 180 days after the issuance date, the lesser of (a) $0.50 or (b) at70% of the lowest closing bid price of the Company’s Common Stock during the twenty trading days prior to conversion,provided, further, that if either the Company is not DWAC operational at the time of conversion or the Common Stock is traded on the OTC Pink at the time of conversion, then 70% shall automatically adjust to 65% of the lowest closing bid price.

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The Company may at its option call for redemption all or part of the Debentures, with the exception of any portion thereof which is the subject of a previously-delivered notice of conversion, prior to the maturity date for an amount equal to: (i) if the redemption date is 90 days or less from the date of issuance, 110% of the sum of the principal amount so redeemed plus accrued interest, if any; (ii) if the redemption date is greater than or equal to 91 days from the date of issuance and less than or equal to 120 days from the date of issuance, 115% of the sum of the principal amount so redeemed plus accrued interest, if any; (iii) if the redemption date is greater than or equal to 121 days from the date of issuance and less than or equal to 50 days from the date of issuance, 120% of the sum of the principal amount so redeemed plus accrued interest, if any; (iv) if the redemption date is greater than or equal to 151 days from the date of issuance and less than or equal to 180 days from the date of issuance, 130% of the sum of the principal amount so redeemed plus accrued interest, if any; and (v) if the redemption date is greater than or equal to 181 days from the date of issuance, 140% of the sum of the principal amount so redeemed plus accrued interest, if any.

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, as of the period ending January 31, 2018, the company recognized a net debt discount of $159,600 and $207,524as a charge to noncash interest expense.In addition, the Company recognized $283,845 in derivative liability as of January 31, 2018.

NOTE 11 - EQUITY PURCHASE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT

On January 12, 2018, the Companyentered into an equity purchase agreementwith Peak One, whereby, upon the terms and subject to the conditions thereof, the Peak One has agreed to purchase shares of our common stock at an aggregate price of up to $5,000,000 over the course of 24 months. In connection with the execution of the purchase agreement, we issued 250,000 shares of our common stock to Peak One as a commitment fee. At issuance, the Company recognized a non-cash expense for $135,000 for the market value of the shares issued to Peak One.

From time to time over the 24-month term, commencing on the date on which a registration statement registering the Purchase Shares becomes effective, we may, in our sole discretion, provide to Peak One with a put notice to purchase a specified number of the Purchase Shares subject to certain customary limitations. The actual amount of proceeds we receive pursuant to each put notice is to be determined by: (i) 88% of the lowest market price of the Common Stock during the ten trading days immediately prior to the date of the respective put date; and (ii) the valuation period, the period of seven trading days immediately following the clearing date associated with the respective drawdown notice; the purchase price per share shall mean the lesser of 88% of the lowest market price of the Common Stock during the valuation period or 88% of the lowest market price of the Common Stock during the initial pricing period.

The put amount requested pursuant to any single put notice must have an aggregate value of not less than $20,000 and a maximumamountup to the lesser of (a) $250,000 or (b) 250% of the average daily trading value of the common stock in the ten (10) trading days immediately preceding the Put Notice.

We also entered into a registration rights agreement with Peak One whereby we are obligated to file the registration statement to register the resale of the purchase shares. Pursuant to the registration rights agreement, we must ( i ) file the registration statement within thirty (30) calendar days from the closing date, (ii) use reasonable efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event no later than the 90th calendar day following the closing date, and (iii) use its reasonable efforts to keep such registration statement continuously effective under the Securities Act until all of the commitment shares and purchase shares have been sold there under or pursuant to Rule 144. To date, the Company has not filed a registration statement with the SEC.

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NOTE 12 - PROMISSORY NOTE

On January 17, 2018, the Company entered into a Promissory Note (the “Note”) for $30,000, bearing interest at a rate of 5% per annum, with maturity date of January 19, 2018. The Company paid the full principal amount outstanding and accrued interest on January 19, 2018.

NOTE 13 – SUBSEQUENT EVENTS

Promissory Notes

On February 21, 2018, the Company entered into a Promissory Note (the “Note”) for $35,000, bearing interest at a rate of 5% per annum, with maturity date of March 2, 2018. The Company paid the full principal amount outstanding and accrued interest on March 2, 2018.

On March 13, 2018, the Company entered into various Promissory Notes (the “Notes”) for $200,000, bearing interest at a rate of 12% per annum, with maturity date of April 13, 2018. In conjunction with the Notes, the Company issued 3-year warrants to purchase 80,000 shares of common stock at an exercise price of $0.15 per share.

In March 2018, the Company entered into two Promissory Note (the “Notes”) for $250,000 each, bearing interest at a rate of 12% per annum. The Notes have a maturity date of September 15, 2018, provided, however, the Company shall have the right to request that the maturity date to be extended by one (1) additional period of ninety (90) days, until December 14, 2018. The Notes are payable every month, commencing April 15, 2018, in monthly payments of interest only and a single payment of the principal amount outstanding plus accrued interest on September 15, 2018. The Company agreed to repay the Notes from the proceeds from the Company’s current private placement. As proceeds from the Private Placement are received, the Company shall direct all funds to the Note Holders until the principal amount outstanding and accrued interest are paid in full. In conjunction with the Notes, the Company issued two 3-year warrants to purchase 150,000 shares of common stock each at an exercise price of $0.10 per share. In addition, on March 15, 2018, the Company entered into a Note Conversion Agreement (the “Agreement”) with the Note holders, whereby, 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 (as defined herein) or (ii) the Fixed Conversion Price (as defined herein). TheVariable Conversion Priceshall 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. TheFixed Conversion Priceshall mean $0.50.

Other Matters

On March 2, 2018, the Company issued an aggregate of 80,000 shares of common stock for $40,000 and 3-year warrants to purchase 15,000 shares of common stock at an exercise price of $0.50 per share.

On March 16, 2018, the Company issued an aggregate of 80,000 shares of common stock for $40,000 and 3-year warrants to purchase 15,000 shares of common stock at an exercise price of $0.50 per share.

The sales and issuances of the securities described above were made pursuant to the exemptions from registration contained in to Section 4(a)(2) of the Securities Act and Regulation D under the Securities Act. Each purchaser represented that such purchaser’s intention to acquire the shares for investment only and not with a view toward distribution. We requested our stock transfer agent to affix appropriate legends to the stock certificate issued to each purchaser and the transfer agent affixed the appropriate legends. Each purchaser was given adequate access to sufficient information about us to make an informed investment decision. Except as described in this prospectus, none of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. “Forward-looking statements” are those statements that describe management’s beliefs and expectations about the future. We have identified forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” “plan,” and “intend.” Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties. Some of these risks include the availability and capacity of competitive data transmission networks and our ability to raise sufficient capital to continue operations. Additional risks are included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2017 filed with the Securities and Exchange Commission on December 14, 2017.

The following is a discussion of the unaudited interim consolidated financial condition and results of operations of Digerati for the three and six months ended January 31, 2018 and 2017.It should be read in conjunction with our audited Consolidated Financial Statements, the Notes thereto, and the other financial information included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended July 31, 2017 filed with the Securities and Exchange Commission on December 14, 2017.For purposes of the following discussion, fiscal 2018 or 2018 refers to the year ended July 31, 2018 and fiscal 2017 or 2017 refers to the year ended July 31, 2017.

Overview

Digerati Technologies, Inc., a Nevada corporation (including our subsidiaries, “we,” “us,” “Company” or “Digerati”), through our wholly-owned subsidiary, Shift8 Networks, Inc. (“Shift8”), provides a portfolio of Internet-based telephony products and services through our cloud application platform and session-based communication network, which is interconnected to numerous U.S. and foreign service providers. Our services are designed to provide enterprise-class, carrier-grade services to small-to-medium sized businesses (“SMB”) at affordable monthly rates. Our services, known as Unified Communications as a Service (“UCaaS”) or cloud communications, include fully hosted IP/PBX, mobile applications, Voice over Internet Protocol (“VoIP”) transport, SIP trunking, and customized VoIP services all deliveredOnly in the Cloud™.

History

Digerati was formed in 2004 as the successor to a business originally commenced by Latcomm International, Inc., a Canadian company formed in 1994. We began providing communication services in 1995 along the U.S.-Mexico corridor to capitalize on the opportunities created by the deregulation of the telecommunication industries within Latin America. Through FY 2012 our principal business was providing transportation of voice traffic for other telecommunication service providers, wireless carriers and regional Internet telephony providers using Voice over Internet Protocol (“VoIP”) technologies.

During FY 2016 Flagship Energy Company, a wholly-owned subsidiary of Digerati, entered into an Agreement with a Texas-based contract-for-hire oil and gas operator (“Operator”). Under the Agreement, Flagship utilized the Operator for the drilling, completion and the initial operations of a shallow oil and gas well in conjunction with the purchase of 100% of Operator’s working interest and 80% of its Net Revenue Interest. Under the Agreement, the Operator agreed to transfer all field-level operations and assign 100% of a certain oil, gas and mineral lease to Flagship upon demand, which included a tract of land located in South Texas. Additionally, Flagship entered into a Joint Operating Agreement (“JOA”) with Operator, whereby the parties agreed to develop the oil and gas well or wells for the production and retrieval of oil and gas commodities as provided for in the oil, gas and mineral lease. During the fiscal 2017 the Company recognized a loss of $248,000 for the total capitalized investment amount in the oil and gas properties.

In May 2017, Shift8 and T3 Acquisition, Inc., a Florida corporation (“Acquisition Sub”), and newly formed wholly owned subsidiary of Shift8, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with T3 Communications, Inc., a Florida corporation (“T3”).The Merger Agreement provides that, upon the terms and subject to the conditions thereof, the Acquisition Sub will be merged with and into T3, with T3 continuing as the surviving corporation and as a wholly owned subsidiary of Shift8. The Company anticipates closing the transaction during the third quarter of fiscal year 2018, the Merger has been approved by the Shareholders of T3 and is subject to certain customary closing conditions. In November 2017, under an Amendment to the Agreement and Plan of Merger, Shift8 funded to T3 a nonrefundable extension fee of $100,000 to extend the closing date until November 28, 2017. In November 2017, under an Amendment to the Agreement and Plan of Merger, Shift8 funded to T3 a nonrefundable extension fee of $200,000 to extend the closing date until December 22, 2017. In December 2017, Shift8 funded to T3 a nonrefundable extension fee payment of $25,000 to extend the closing date until January 5, 2018. In January 2018, Shift8 funded to T3 a nonrefundable extension fee payment of $50,000 to extend the closing date until January 19, 2018. In February 2018, Shift8 funded to T3 a nonrefundable extension fee payment of $70,000 to extend the closing date until February 28, 2018. The Company and T3 continue to work towards closing the Merger Agreement, and the Company believes that this will occur on or before April 6, 2018. Upon closing, the extension fee total of $345,000 will be credited towards the purchase price for the acquisition of T3.

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During the period ended January 31, 2018, we have raised $280,000 through the issuance of 560,000 shares of Digerati common stock and three-year warrants to purchase up to 105,000 shares of common stock at an exercise price of $0.50 per share.

Recent Developments

On December 1, 2017, Shift8 Technologies, In., a Nevada corporation (“Shift8”), a wholly owned subsidiary of Digerati Technologies, Inc., a Nevada corporation (the “Company”), and Synergy Telecom, Inc., a Texas corporation (“Synergy”), closed a transaction to acquire all the assets, assumed all customers, and critical vendor arrangements from Synergy. The agreed purchase price was $425,000. Shift8 paid $125,000 upon execution of the Agreement and issued 500,000 shares of common stock with a market value of $175,000. In addition, Shift8 entered into a promissory note with the seller for $125,000 with an effective annual interest rate of 6%, 5 quarterly payments and a maturity date of February 28, 2019.

Sources of Revenue and Direct Cost

Sources of revenue:

Global VoIP Services:We currently provide VoIP communication services on a limited basis to U.S. and foreign telecommunications companies that lack transmission facilities, require additional capacity or do not have the regulatory licenses to terminate traffic in Mexico, Asia, the Middle East and Latin America.Typically, these telecommunications companies offer their services to the public for domestic and international long-distance services.

Cloud-based hosted Services: We provideenhanced VoIP services to resellers and enterprise customers. The service includes fully hosted IP/PBX services, mobile applications, SIP trunking, call center applications, interactive voice response auto attendant, call recording, simultaneous calling, voicemail to email conversion, and multiple customized IP/PBX features in a hosted or cloud environment.

Direct Costs:

Global VoIP Services:We incur transmission and termination charges from our suppliers and the providers of the infrastructure and network. The cost is based on rate per minute, volume of minutes transported and terminated through the network. Additionally, we incur fixed Internet bandwidth charges and per minute billing charges. In some cases, we incur installation charges from certain carriers. These installation costs are passed on to our customers for the connection to our VoIP network.

Cloud-based hosted Services: We incur bandwidth and co-location charges in connection with enhanced VoIP services. The bandwidth charges are incurred as part of the connection between our customers to allow them access to our services.

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Results of Operations

Three Months ended January 31, 2018 Compared to Three Months ended January 31, 2017

Cloud-based hosted Services. Cloud-based hosted services revenue increased by $109,000, or 260%, from the quarter ended January 31, 2017 to the quarter ended January 31, 2018. The increase in revenue between periods is primarily attributed to theacquisition of the customer base from Synergy Telecom, which resulted in an increase in monthly recurring services revenue. Hosted services include the following, fully hosted IP/PBX services, IP trunking, call center applications, interactive voice response auto attendant, call recording, simultaneous calling, voicemail to email conversion, SIP trunking and multiple other IP/PBX features in a hosted environment.

Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $64,000, from the quarter ended January 31, 2017 to the quarter ended January 31, 2018. The increase in cost of services is as a result of the increase in variable cost associated with the increase in revenue as part of our recent acquisition, the increase in cost related to additional bandwidth added to our network and the increase in additional hardware/devices deployed for our Value-Added Resellers (“VAR’s”).

Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees).SG&A expenses increased by $48,000, or 21%, from the quarter ended January 31, 2017 to the quarter ended January 31, 2018. The increase is primarily attributed the increase in number of employees and associated salaries as part of the acquisition of Synergy Telecom. The increase was slightly offset by the reduction in cash compensation to the Company’s management team, the reduction in cash compensation was realized during the three months ended January 31, 2018.

Stock Compensation Expense.Stock compensation expense increased by $545,000, or 146%, from the quarter ended January 31, 2017 to the quarter ended January 31, 2018. The increase is primarily attributed to the recognition of stock option expense of $71,000 associated to the stock options granted to various employees during FY2018, in addition to the stock compensation expense of $226,000 associated with the Profit Sharing Plan contribution and stock compensation expense of $155,000 for the stock issued in lieu of cash to the Company’s management team. In addition, during the three months ended January 31, 2018 the Company recognized $292,000 in warrant expense for warrants issued to various professionals.

Legal and professional fees. Legal and professional fees increased by $77,000 from the quarter ended January 31, 2017 to the quarter ended January 31, 2018. The increase is attributed to professional and legal expenses incurred related to the professionals conducting the due diligence on an acquisition.

Depreciation and amortization. Depreciation and amortization remained comparable between periods.

Operating loss. The Company reported an operating loss of $1,368,000 for the three months ended January 31, 2018 compared to an operating loss of $712,000 for the three months ended January 31, 2017. The increase in operating loss between periods is primarily due to the $77,000 increase in legal and professional fees and the increase of $545,000 in stock compensation expense. The increase was slightly offset between periods by the increase in gross profit of $45,000.

Other income (expense). Other income (expense) increased by $100,000, or 100% from the quarter ended January 31, 2017 to the quarter ended January 31, 2018. The primary reason for the increase in other income (expenses) is attributed to the recognition of interest / accretion expense of $208,000 related to the adjustment to the present value of a convertible debenture. The increase we slightly offset by the recognition of $108,000 in a gain on derivative instruments, we are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market.

Net loss attributed to Digerati Technologies, Inc.Net loss attributed to Digerati Technologies, Inc. increased by $756,000 or 106%, from the quarter ended January 31, 2017 to the quarter ended January 31, 2018. The increase in operating loss between periods is primarily due to the $77,000 increase in legal and professional fees, the increase of $545,000 in stock compensation expense and the increase of $208,000 in interest expense. The increase was slightly offset between periods by the increase in gross profit of $45,000 and the recognition of $108,000 in a gain of derivative instruments, we are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market.

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Six Months ended January 31, 2018 Compared to Six Months ended January 31, 2017

Cloud-based hosted Services. Cloud-based hosted services revenue increased by $120,000, or 138%, from the six months ended January 31, 2017 to the six months ended January 31, 2018. The increase in revenue between periods is primarily attributed to theacquisition of the customer base from Synergy Telecom, which resulted in an increase in monthly recurring services revenue. Hosted services include the following, fully hosted IP/PBX services, IP trunking, call center applications, interactive voice response auto attendant, call recording, simultaneous calling, voicemail to email conversion, SIP trunking and multiple other IP/PBX features in a hosted environment.

Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $74,000, from the six months ended January 31, 2017 to the six months ended January 31, 2018. The increase in cost of services is as a result of the increase in variable cost associated with the increase in revenue as part of our recent acquisition, the increase in cost related to additional bandwidth added to our network and the increase in additional hardware/devices deployed for our Value-Added Resellers (“VAR’s”).

Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees).SG&A expenses decreased by $8,000, or 2%, from the six months ended January 31, 2017 to the six months ended January 31, 2018. The decrease is primarily attributed to the reduction in cash compensation to the Company’s management team for approximately $104,000. The reduction in SG&A expenses was slightly offset by the increase in salaries as part of the employees associated with the acquisition of Synergy Telecom.

Stock Compensation and Warrant Expense.Stock compensation expense increased by $601,000, or 161%, from the six months ended January 31, 2017 to the six months ended January 31, 2018. The increase is primarily attributed to the recognition of stock option expense of $123,000 associated to the stock options granted to various employees, in addition to the stock compensation expense of $226,000 associated with the Profit Sharing Plan contribution and stock compensation expense of $155,000 for the stock issued in lieu of cash to the Company’s management team. In addition, during the six months ended January 31, 2018 the Company recognized $292,000 in warrant expense for warrants issued to various professionals.

Legal and professional fees. Legal and professional fees increased by $166,000 from the six months ended January 31, 2017 to the six months ended January 31, 2018. The increase is attributed to professional and legal expenses incurred related to the professionals conducting the due diligence on an acquisition.

Depreciation and amortization. Depreciation and amortization remained comparable between periods.

Operating loss. The Company reported an operating loss of $1,738,000 for the six months ended January 31, 2018 and an operating loss of $995,000 for the six months ended January 31, 2018. The increase in operating loss between periods is primarily due to the $166,000 increase in legal and professional fees and the increase of $601,000 in stock compensation expense. The increase was slightly offset between periods by the increase in gross profit of $46,000.

Other income (expense). Other income (expense) increased by $100,000, or 100% from the six months ended January 31, 2017 to the six months ended January 31, 2018. The primary reason for the increase in other income (expenses) is attributed to the recognition of interest / accretion expense of $208,000 related to the adjustment to the present value of a convertible debenture. The increase we slightly offset by the recognition of $108,000 in a gain on derivative instruments, we are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market.

Net loss attributed to Digerati Technologies, Inc.Net loss attributed to Digerati Technologies, Inc. increased by $843,000 or 85%, from the six months ended January 31, 2017 to the six months ended January 31, 2018. The increase in operating loss between periods is primarily due to the $166,000 increase in legal and professional fees, the increase of $601,000 in stock compensation expense and the increase of $208,000 in interest expense . The increase was slightly offset between periods by the increase in gross profit of $46,000 and the recognition of $108,000 in a gain on derivative instruments, we are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market.

15

Liquidity and Capital Resources

Cash Position: We had a consolidated cash balance of $112,000 as of January 31, 2018. Net cash consumed by operating activities during the period ended January 31, 2018 was approximately $874,000, primarily as a result of operating losses. Additionally, we had an increase of $31,000 in accounts receivables, the Company advanced $275,000 into escrow for the acquisition of T3 Communications, had an increase in prepaid expenses and other assets of $26,000 and an increase in accounts payable and accrued liabilities for $182,000.

Cash used in investing activities during the period ended January 31, 2018 was $125,000 which was paid towards the acquisition of Synergy Telecom.

Cash provided by financing activities during the period ended January 31, 2018 was $439,000, the Company secured $280,000 from various accredited investors through the issuance of 560,000 restricted common shares with a price of $0.50 per share and 105,000 warrants with an exercise price of $0.50 per share. In addition, the Company secured $129,600, net of origination fees and cost under a convertible debenture. Overall, our net operating, investing and financing activities during the period ended January 31, 2018 consumed approximately $560,000 of our available cash.

We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During fiscal 2018 we anticipate reducing fixed costs, professional fees and general expenses, in addition, 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 invest in a new marketing and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers 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. On May 8, 2017 we entered into a definitive Agreement and Plan of Merger to acquire T3, a leading provider of cloud communication and broadband solutions in Southwest Florida. We anticipate closing the acquisition during the second quarter of fiscal year 2018. The acquisition of T3 will allow the Company to accelerate its revenue growth and expand into new markets.

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,amongother 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


We are currently taking initiatives to reduce our overall cash expenses are expecteddeficiencies on a monthly basis. During fiscal 2022 certain members of our executive management team have taken a significant portion of their compensation in common stock to be approximately $95,000 per month, including wages, rent, utilitiesreduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from our recent acquisitions and corporate professional fees.As described elsewhere herein,invest in a marketing and sales strategy to grow our monthly recurring revenue; we are not generating sufficient cash from operationsanticipate utilizing our value-added resellers and channel partners to pay fortap into new sources of revenue streams; and we have also secured numerous agent agreements through our ongoing operating expenses, or to pay our current liabilities. As of January 31, 2018, our total liabilities were approximately $1,994,000, which included $335,000 in derivative liabilities. Werecent acquisitions that we anticipate will accelerate revenue growth. In addition, we will continue to usefocus on selling a greater number of comprehensive services to our available cash on handexisting customer base. Further, in an effort to coverincrease our deficienciesrevenues, we will continue to evaluate the acquisition of various assets with emphasis in operating expenses.VoIP Services and Cloud Communication Services. As a result, during the due diligence process we anticipate incurring significant legal and professional fees.

 

We have been successful in raising debt and equity capital in the past and as described in Notes 6,7 and 8. We have financing efforts in place to continue to raise cash through debt and equity offerings. Although we have successfully completed financings and reduced expenses in the past, we cannot assure you that our plans to address these matters in the future will be successful. On November 17, 2020, the Company and T3 Nevada (the Company’s majority owned subsidiary), T3 Nevada’s subsidiaries (T3 Nevada and its subsidiaries, collectively, “the T3 Nevada Parties”) entered into a credit agreement (the “Credit Agreement”) with Post Road Administrative LLC (the “Agent”) and its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post Road”). Pursuant to the Credit Agreement, Post Road provided T3 Nevada with a secured loan of up to $20,000,000, with initial loans of $10,500,000 pursuant to the issuance of a Term Loan A Note and $3,500,000 pursuant to the issuance of a Term Loan B Note, each funded on November 17, 2020.

The Company used $14,000,000 of the credit facility for the payment of approximately $9.452 million for the purchase price for the merger of Nexogy, $1.190 million for the purchase price and transaction fees of certain assets of ActiveServe, Inc., $1.487 million for the payment in full of outstanding debts owed and accrued interest to various creditors, the payment of approximately $464,000 paid to Post Road, and recognized as deferred financing cost, and will be amortized over the terms of the notes. In addition, the Company expensed $430,000 in legal fees associated to the acquisitions and financing.

On December 20, 2021, the T3 Nevada Parties and Post Road entered into an amendment to the Credit Agreement (the “Amendment”) in connection with which T3 Nevada issued an Amended and Restated Term Loan A Note (the “A&R Term Loan A Note”) in replacement of the Term Loan A Note. Under the First Amendment, the Term Loan B Note principal of $3,500,000, accrued interest of $187,442, and amendment fee of $1,418,744 were recapitalized under the revised A&R Term Loan A Note).

Pursuant to the First Amendment, the proceeds of $6,000,000 were used to fund the acquisition of Skynet Telecom LLC’s assets and for general corporate and working capital purposes as well as professional fees and other fees and expenses with respect to the transactions contemplated by the Amendment. Under the first amendment, total new balance of the revised Term Loan A was $22,168,515.

On February 4, 2022, the T3 Nevada Parties and Post Road agreed that Post Road would provide T3 Nevada with a secured loan of $10,000,000 pursuant to a Term Loan C Note. The proceeds of $10,000,000 were used to fund the acquisition of Next Level and for general corporate and working capital purposes as well as professional fees and other fees and expenses with respect to the transactions contemplated by the Amendment.

The current Credit Agreement will allow the Company to continue acquiring UCaaS service providers that meet the Company’s acquisition criteria. Management anticipates that future acquisitions will provide additional operating revenues to the Company as it continues to execute on its consolidation strategy. There can be no guarantee that the planned acquisitions will close or that they will produce the anticipated revenues on the schedule anticipated by management.

The Company will continue to work with various funding sources to secure additional debt and equity financings. However, Digerati cannot offer any assurance that it will be successful in executing the aforementioned plans to continue as a going concern.

Digerati’s consolidated financial statements as of April 30, 2022, do not include any adjustments that might result from the inability to implement or execute Digerati’s plans to improve our ability to continue as a going concern.

16

 

 

We estimate that we need approximately $500,000 of additional working capital to fund our ongoing operations during Fiscal 2018.NOTE 3 – INTANGIBLE ASSETS

 

Below are summarized changes in intangible assets at April 30, 2022, and July 31, 2021:

  Gross
Carrying
 Accumulated Net Carrying
April 30, 2022 Value Amortization Amount
       
NetSapiens - license, 10 years $150,000  $(150,000) $- 
Customer relationships, 5 years  40,000   (34,682)  5,318 
Customer relationships, 7 years  1,480,262   (857,508)  622,754 
Customer relationships 7 years  15,110,341   (1,601,893)  13,508,448 
Trademarks, 7 years  9,562,916   (873,276)  8,689,640 
Non-compete, 2 & 3 years  2,456,360   (472,920)  1,983,440 
Marketing & Non-compete, 5 years  800,263   (639,985)  160,278 
Total Definite-lived Intangible Assets  29,600,142   (4,630,264)  24,969,878 
Goodwill  8,877,532   -   8,877,532 
Balance, April 30, 2022 $38,477,674  $(4,630,264) $33,847,410 

  Gross
Carrying
 Accumulated Net Carrying
July 31, 2021 Value Amortization Amount
       
NetSapiens - license, 10 years $150,000  $(150,000) $- 
Customer relationships, 5 years  40,000   (28,672)  11,328 
Customer relationships, 7 years  1,480,000   (698,934)  781,066 
Customer relationships 7 years  5,310,000   (611,786)  4,698,214 
Trademarks, 7 years  2,870,000   (307,500)  2,562,500 
Non-compete, 2 & 3 years  291,000   (97,500)  193,500 
Marketing & Non-compete, 5 years  800,000   (520,000)  280,000 
Total Definite-lived Intangible Assets  10,941,000   (2,414,392)  8,526,608 
Goodwill  3,931,298   -   3,931,298 
Balance, July 31, 2021 $14,872,298  $(2,414,392) $12,457,906 

Total amortization expense for the nine months ended April 30, 2022, and 2021 was $2,215,872 and $962,429, respectively.

NOTE 4 – STOCK-BASED COMPENSATION

In August 2017,November 2015, the Company raised $240,000 throughadopted the issuanceDigerati Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan authorizes the grant of 480,000up 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 and three-year warrants to purchase 90,000 sharesas of the date of grant. The stock options, restricted common stock, non-restricted common stock, and other awards vest based on the terms of the individual grant.

During the nine months ended April 30, 2022, the Company extended the expiration date on 1,150,000 previously issued stock options to various employees until July 31, 2025 and the exercise price of these options was set at $0.50$0.11 per share. The modification of these stock options created a nominal expense to the Company.

 

In October 2017,


During the nine months ended April 30, 2021, we issued:

7,608,820 common shares to various employees as part of the Company’s Non-Standardized profit-sharing plan contribution. The Company recognized stock-based compensation expense of $247,287 equivalent to the value of the shares calculated based on the share’s closing price at the grant dates.
250,000 common shares to a former member of the Management team for services in lieu of cash compensation. The Company recognized stock-based compensation expense of approximately $17,500 equivalent to the value of the shares calculated based on the share’s closing price at the grant dates.
500,000 options to purchase common shares to one of our members of the Board of Directors with an exercise price of $0.1475 per share and a term of 5 years. At issuance, 166,666 of the options vested and 333,334 of the options will vest equally over a period of two years. At the time of issuance, the options had a fair market value of $52,531.
3,730,000 options to purchase common shares to various employees with an exercise price of $0.04 per share and a term of 5 years. At issuance, 33,333 of the options vested, 66,667 of the options will vest equally over a period of two years, and 3,630,000 of the options will vest equally over a period of three years. The options have a fair market value of $214,812.

The Company recognized approximately $74,466 and $109,685 in stock-based compensation expense for stock options to employees for the nine months ended April 30, 2022, and 2021, respectively. Unamortized compensation stock option cost totaled $125,653 and $220,861 as of April 30, 2022, and April 30, 2021, respectively.

A summary of the stock options outstanding as of April 30, 2022, and July 31, 2021, and the changes during the nine months ended April 30, 2022, are presented below:

  Options  Weighted average
exercise
price
  Weighted average
remaining
contractual
term (years)
 
          
Outstanding at July 31, 2021  9,230,000  $0.17   2.93 
Granted  -   -   - 
Exercised  -   -   - 
Forfeited and cancelled  -   -   - 
Outstanding on April 30, 2022  9,230,000  $0.17   2.64 
Exercisable on April 30, 2022  7,153,530  $0.20   2.35 

The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) of the 9,230,000 and 9,230,000 stock options outstanding as of April 30, 2022, and July 31, 2021, was $141,367 and $392,891, respectively.

The aggregate intrinsic value of 7,153,530 and 6,091,863 stock options exercisable on April 30, 2022, and July 31, 2021, was $44,673 and $91,978, respectively.

NOTE 5 – WARRANTS

During the nine months ended April 30, 2022, the Company did not issue any warrants.

During the nine months ended April 30, 2021, the Company issued an aggregate of 80,000 shares of common stock for $40,000 and 3-year warrantsthe 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, 15,000initially, twenty-five percent (25%) of the Company’s total shares (the “Warrant”), calculated on a fully-diluted basis as of common stock atthe 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 $0.50$0.01 per share.share and the Warrant expires on November 17, 2030. Seventy-five percent (75%) of the Warrant Shares are immediately fully vested and not subject to forfeiture at any time for any reason. The remaining twenty-five percent (25%) of the Warrant Shares are subject to forfeiture based on the Company achieving certain performance targets which, if achieved, would result in twenty percent (20%) warrant coverage. If the minority shareholders of T3 Nevada convert their T3 Nevada shares into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), the Warrant Shares percentage shall also be lowered such that when combined with the achievement of the performance targets, the warrant coverage could be reduced to fifteen percent (15%).

  

In connection with the issuance of the Warrant, the three executives of the Company, Art Smith, Antonio Estrada, and Craig Clement entered into a Tag-Along Agreement (the “Tag-Along Agreement”) whereby they agreed that the holder of the Warrant or Warrant Share will have the right to participate or “tag-along” in any agreements to sell any shares of their Common Stock that such executives enter into. The Company also agreed, in connection with the issuance of the Warrant and pursuant to a Board Observer Agreement (the “Board Observer Agreement”), to grant Post Road the right to appoint a representative to the boards of directors of the Company and each of its subsidiaries to attend all board meeting in a non-voting observer capacity. In addition, at issuance the Company recognized $6,462,050 in Derivative liability associated with these warrants.

A summary of the warrants outstanding as of April 30, 2022, and July 31, 2021, and the changes during the nine months ended April 30, 2022, are presented below:

  Warrants  Weighted
average
exercise
price
  Weighted average
remaining
contractual
term (years)
 
          
Outstanding at July 31, 2021  109,506,179  $0.01   9.17 
Granted  -   -   - 
Exercised  -   -   - 
Forfeited and cancelled  (315,000) $0.15   - 
Outstanding on April 30, 2022  109,191,179  $0.01   8.45 
Exercisable on April 30, 2022 81,965,885  $0.01  8.44 

The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money warrants) of the 109,191,179 and 109,506,179 warrants outstanding as of April 30, 2022, and July 31, 2021, was $7,530,640 and $14,795,002, respectively.

The aggregate intrinsic value of 81,965,885 and 82,280,885 warrants exercisable on April 30, 2022, and July 31, 2021, were $5,663,592 and $11,108,930, respectively.

Warrant expense for the nine months ended April 30, 2022, and 2020 were $0 and $0, respectively. Unamortized warrant expense totaled $0 and $0 respectively as of April 30, 2022, and July 31, 2021.

For the nine months ended April 30, 2022, 315,000 warrants expired with an average exercise price of $0.15.


NOTE 6 – NOTES PAYABLE NON-CONVERTIBLE

On October 22, 2018, the Company issued a secured promissory note for $50,000, bearing interest at a rate of 8% per annum, with maturity date of December 31, 2018. The maturity date was extended multiple times and on February 26,2022, the lender agreed to extend the maturity until July 31, 2022. The promissory note is secured by a Pledge and Escrow Agreement, whereby the Company agreed to pledge rights to a collateral due under certain Agreement. The outstanding balance as of April 30, 2022, and July 31, 2021, was $50,000.

Credit Agreement and Notes

On November 17, 2020, T3 Nevada (a majority owned subsidiary of the Company) and T3 Nevada’s subsidiaries (T3 Nevada and its subsidiaries, collectively, “the T3 Nevada Parties”) entered into a credit agreement (the “Credit Agreement”) with Post Road Administrative LLC (the “Agent”) and its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post Road”). The Company is a party to certain sections of the Credit Agreement. Pursuant to the Credit Agreement, Post Road will provide T3 Nevada with a secured loan of up to $20,000,000, with initial loans of $10,500,000 pursuant to the issuance of a Term Loan A Note and $3,500,000 pursuant to the issuance of a Term Loan B Note, each funded on November 17, 2020, and an additional $6,000,000 on loans, in increments of $1,000,000 as requested by T3 Nevada before the 18 month anniversary of the initial funding date to be lent pursuant to the issuance of a Delayed Draw Term Note. After payment of transaction-related expenses and closing fees of $964,000, net proceeds to the Company from the Note totaled $13,036,000. The Company recorded these discounts and cost of $964,000 as a discount to the Notes and will be amortized as interest expense over the term of the notes

During the nine months ended April 30, 2022, the Company amortized $1,294,201 of the total debt discount as interest expense for the Term Loan A Note and the Term Loan B Note. The total debt discount outstanding on the notes as of April 30, 2022, and July 31, 2021, were $0 and $5,355,322, respectively.

Term Loan A Note has maturity dates of November 17, 2024, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%). Term Loan A is non-amortized (interest only payments) through the maturity date and contains an option for the Company to pay interest in kind (PIK) for up to five percent (5%) of the interest rate in year one, four percent (4%) in year two and three percent (3%) in year three.

Term Loan B had a maturity date of December 31, 2021, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%). Term Loan B is non-amortized (interest only payments) through the maturity date and contains an option for the Company to pay interest in kind (PIK) for up to five percent (5%) of the interest rate in year one, four percent (4%) in year two and three percent (3%) in year three. The Term Loan B was recapitalized under the revised A&R Term Loan A Note as indicated below.

On December 20, 2021, T3 Nevada and Post Road entered into an amendment to the Credit Agreement (the “Amendment”) in connection with which T3 Nevada issued an Amended and Restated Term Loan A Note (the “A&R Term Loan A Note”) in replacement of the Term Loan A Note. Under the First Amendment, the Term Loan B Note principal of $3,500,000, accrued interest of $187,442, and amendment fee of $1,418,744 were recapitalized under the revised A&R Term Loan A Note.

Pursuant to the First Amendment, the additional proceeds of $6,000,000 were used to fund the acquisition of Skynet Telecom LLC’s assets and for general corporate and working capital purposes as well as professional fees and other fees and expenses with respect to the transactions contemplated by the Amendment. The Company evaluated the amendment and the recapitalization of the notes and accounted for these changes as an extinguishment of debt and recognized a loss on extinguishment of debt of $5,479,865, the loss is composed of the full amortization debt discount of $4,061,121, and the amendment fees of $1,418,744.

The A&R Term Loan A Note has maturity dates of November 17, 2024, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%). The principal balance and accrued PIK interest outstanding on the A&R Term Loan A Note were $22,168,515 and $302,425, respectively as of April 30, 2022.

On February 4, 2022, the T3 Nevada Parties and Post Road agreed that Post Road would provide T3 Nevada with a secured loan of $10,000,000 pursuant to a Term Loan C Note. The proceeds of $10,000,000 were used to fund the acquisition of Next Level and for general corporate and working capital purposes as well as professional fees and other fees and expenses with respect to the transactions contemplated by the Amendment. At issuance the company recognized $250,000 in OID and $220,000 in debt issuance cost which were fully amortized to expense. The principal balance and accrued PIK interest outstanding on the Term Loan C Note were $10,000,000 and $96,977, respectively as of April 30, 2022.


The Term Loan C Note has a maturity date of August 4, 2023, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%).

The Credit Agreement contains customary representations, warranties, and indemnification provisions. The Credit Agreement also contains affirmative and negative covenants with respect to operation of the business and properties of the loan parties as well as financial performance. Below are key covenants requirements, (measured quarterly):

1.Maximum Allowed - Senior Leverage Ratio of 4.05 to 1.00

2.Minimum Allowed - EBITDA of $3,696,175

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

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

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

6.Maximum Allowed - Churn of 3.00% at any time

On June 13, 2022, the lender agreed to forbear the financial covenants that were not complied with during the quarter ending April 30, 2022.

T3 Nevada’s obligations under the Credit Agreement are secured by a first-priority security interest in all of the assets of T3 Nevada and guaranteed by the other subsidiaries of the Company pursuant to the Guaranty and Collateral Agreement, dated November 17, 2020, subsequently amended on December 31, 2021, and February 4, 2022, by and among T3 Nevada, T3’s Nevada’s subsidiaries, and the Agent (the “Guaranty and Collateral Agreement”). In addition, T3 Nevada’s obligations under the Credit Agreement are, pursuant to a Pledge Agreement (the “Pledge Agreement”), secured by a pledge of a first priority security interest in T3 Nevada’s 100% equity ownership of each of T3 Nevada’s operating companies.

Promissory Notes – Next Level Internet Acquisition

On February 4, 2022, as per the acquisition of Next Level Internet, Inc. (“Next Level” or “NLI”), the Company entered into two unsecured promissory notes (the “Unsecured Adjustable Promissory Notes”) for $1,800,000 and $200,000, respectively. The notes are payable in eight equal quarterly installments in the aggregate amount of $250,000 each commencing on June 4, 2022, through and including March 7, 2024. With a base annual interest rate of 0% and a default annual interest rate of 18%. The amount owed is subject to change based on certain revenue milestones required to be achieved by Next Level. The total principal balance outstanding as of April 30, 2022 on the Unsecured Adjustable Promissory Notes was $2,000,000.

NOTE 7 – RELATED PARTY TRANSACTIONS

During the nine months ended April 30, 2022, and 2021, the Company provided VoIP Hosted and fiber services to a company owned by one of the Board members of T3 Communications, Inc., a Florida corporation, for $144,687 and $130,029, respectively.

On November 17, 2020, as a result of the of the acquisition of ActiveServe’s asset, the two sellers became related parties as they continued to be involved as consultants to manage the customer relationship, the Company paid on an annual basis $90,000 to each of the consultants. These agreements expired as of January 17, 2022, and the parties agreed not to extend. As of April 30, 2022, there’s no balance outstanding under the consulting agreements. In addition, part of the Purchase Price is payable in 8 equal quarterly payments to the sellers. During the nine months ended April 30, 2022, the Company paid $589,648 of the principal balance outstanding. In addition, on January 7, 2022, the Company recognized a reduction of $120,621 on the note balance due to the sellers not achieving certain requirement under the “Customer renewal Value”. As a result, the Company recognized a reduction of $120,621 in Goodwill associated with the ActiveServe asset acquisition. The total principal outstanding on the notes as of April 30, 2022, and July 31, 2021, were $424,022 and $1,134,291, respectively.

On December 31, 2021, as a result of the of the acquisition of Skynet Telecom LLC’s assets, the two sellers became related parties as they continued to be involved as consultants for 12 months to manage the customer relationship, the Company will pay on an annual basis $100,000 to each of the consultants. A of April 30, 2022, there’s no balance outstanding under the consulting agreements. Part of the Purchase Price of $600,000 (the “Earn-out Amount”) was retained by the Company at the Closing and will be paid to Seller in 6 equal quarterly payments. An additional $100,000 (the “Holdback Amount”) was retained by the Company at the Closing and will be paid to Seller in accordance with the Skynet Telecom LLC asset purchase agreement. The total principal outstanding on the notes as of April 30, 2022 was $700,000.


Acquisition Payable – Skynet

As part of the acquisition of Skynet Telecom LLC’s assets, the Company will pay to the Sellers $1,000,000 (the “Share Payment”) by issuance of restricted shares of the Company’s common stock to the Owners. The Share Payment will be made via the issuance of shares on the earlier of (i) the effective date of that certain Registration Statement on Form S-1 filed by the Company with the Securities and Exchange Commission on August 11, 2021 (in which case the stock will be valued at the price set forth in the prospectus that is a part of such Registration Statement, without underwriter discounts) and (ii) 180 days after December 31, 2021 (in which case the stock will be valued at the average of the last transaction price on the OTCQB for each of the 10 trading days immediately preceding such issuance date). The total principal outstanding on the acquisitions payable as of April 30, 2022, was $1,000,000.

NOTE 8 – CONVERTIBLE NOTES PAYABLE

As of April 30, 2022, and July 31, 2021, convertible notes payable consisted of the following:

  April 30,  July 31, 
CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE 2022  2021 
On October 13, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $330,000, annual interest rate of 8% and an original maturity date of October 13, 2021, the maturity date was extended until December 15, 2021, and subsequently the maturity date was extended until July 31, 2022. After payment of transaction-related expenses and closing fees of $32,000, net proceeds to the Company from the Note totaled $298,000. The Company recorded $32,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 1,000,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $45,003 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $134,423 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a fix conversion price at issuance, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $17,620 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, and July 31, 2021, were $0 and $17,620, respectively. The total principal balance outstanding as of April 30, 2022 and July 31, 2021 was $165,000. (See below variable conversion terms No.1) $165,000  $165,000 
         
On January 27, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, annual interest rate of 8% and a maturity date of January 27, 2022. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $24,368 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $44,368 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.05 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. On January 27, 2022, the lender agreed to extend the maturity date until July 31, 2022. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $25,000. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of amendment date, the total unamortized discount on the Note was $0. The Company recognized a loss on extinguishment of debt of $25,000 and charged to interest expense at the time of the extension. The Company amortized $34,368 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022 and July 31, 2021, were $0 and $34,368, respectively. The total principal balance outstanding as of April 30, 2022 and July 31, 2021, were $275,000 and $250,000, respectively.  275,000   250,000 


  April 30,  July 31, 
CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE 2022  2021 
On April 14, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, annual interest rate of 8% and a maturity date of April 14, 2022. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $63,433 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $96,766 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily VWAP for the ten (10) trading day period immediately preceding the conversion date. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. On April 14, 2022, the lender agreed to extend the maturity date until October 14, 2022. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $25,000. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of amendment date, the total unamortized discount on the Note was $0. The Company recognized a loss on extinguishment of debt of $25,000 and charged to interest expense at the time of the extension. The Company amortized $106,799 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022 and July 31, 2021, were $0 and $106,799, respectively. The total principal balance outstanding as of April 30, 2022 and July 31, 2021, were $275,000 and $250,000, respectively.  275,000   250,000 
         
On August 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of August 31, 2022. In connection with the execution of the note, the Company issued 150,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $13,635 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily VWAP for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $9,090 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, was $4,545. The total principal balance outstanding as of April 30, 2022, was $75,000.  75,000   - 
         
On September 29, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of September 29, 2022. In connection with the execution of the note, the Company issued 150,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $10,788 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily VWAP for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $6,293 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, was $4,495. The total principal balance outstanding as of April 30, 2022, was $75,000.  75,000   - 


  April 30,  July 31, 
CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE 2022  2021 
On October 22, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $150,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of October 22, 2022. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $13,965 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily VWAP for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $6,983 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, was $6,982. The total principal balance outstanding as of April 30, 2022, was $150,000.  150,000   - 
         
On February 4, 2022, as part the acquisition of Next Level, the Company entered into two unsecured convertible promissory notes (the “Unsecured Convertible Promissory Notes”) for $1,800,000 and $200,000, respectively. The notes are payable in eight equal quarterly installments in the aggregate amount of $250,000 each commencing on April 30, 2022, through and including January 31, 2024. With a base annual interest rate of 0% and a default annual interest rate of 18%. The Sellers have a onetime right to convert all or a portion of the Convertible Notes commencing on the six-month anniversary of the notes being issued and ending 30 days after such six-month anniversary. The conversion price means an amount equal to the volume weighted average price per share of Stock on the Nasdaq Stock Market for the ten (10) consecutive trading days on which the conversion notice is received by the Company; provided, however, that if the stock is not then listed for trading on the Nasdaq Stock Market, the Conversion Price shall be the volume weighted average transaction price per share reported by the OTC Reporting Facility for the ten (10) consecutive trading days immediately preceding the date on which such Conversion Notice is received by the Company. The Company analyzed the Notes for derivative accounting consideration and determined that since the notes are convertible on the six-month anniversary from issuance and ending 30 days after such six-month anniversary, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any of the provisions for conversion are met and if the notes need to be classified as a derivative instrument. The total principal balance outstanding on the Unsecured Convertible Promissory Notes as of April 30, 2022, was $2,000,000.  2,000,000   - 
Total convertible notes payables non-derivative: $3,015,000  $665,000 
         
CONVERTIBLE NOTES PAYABLE - DERIVATIVE        
On July 27, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $275,000, annual interest rate of 8% and a maturity date of March 27, 2021. After payment of transaction-related expenses and closing fees of $35,000, net proceeds to the Company from the Note totaled $240,000. The Company recorded these discounts and cost of $35,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $11,626 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in this Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.05 (five) cents or (b). 75% of the lowest traded price in the prior fifteen trading days immediately preceding the Notice of Conversion. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. The Company recognized $61,678 of derivative liability and directly amortized all associated debt discount of $61,678 as interest expense. On July 31, 2021, the holder agreed to extend the maturity date until January 31, 2022. On February 14, 2022, the holder agreed to extend the maturity date until July 31, 2022. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $75,000 and issued 250,000 shares of common stock with a market value of $34,150. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of amendment date, the total unamortized discount on the Note was $0. The Company recognized a loss on extinguishment of debt for both the $75,000 increase in principal and $34,150 fair value of shares issued and charged the total $109,150 to interest expense at the time of the extension. The total principal balance outstanding as of April 30, 2022, and July 31, 2021, were $430,000 and $355,000, respectively.  430,000   355,000 


  April 30,  July 31, 
CONVERTIBLE NOTES PAYABLE - DERIVATIVE 2022  2021 
On January 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $80,235, annual interest rate of 8% and a maturity date of February 17, 2022. Subsequently, on March 7, 2022, the holder agreed to extend the maturity date until July 31, 2022. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or seventy-five percent (75%) of the lowest daily VWAP over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. The Company analyzed the note for derivative accounting consideration and determined that  the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $61,819, of which $61,819 was recorded as debt discount and amortized over the term of the note. The Company amortized $27,840 of debt discount as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, and July 31, 2021, were $0 and $27,840, respectively. The total principal balance outstanding as of April 30, 2022, and July 31, 2021, was $80,235.  80,235   80,235 
         
On February 17, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $175,000, annual interest rate of 8% and a maturity date of February 17, 2022. After payment of transaction-related expenses and closing fees of $5,000, net proceeds to the Company from the Note totaled $170,000. Additionally, the Company recorded $5,000 as a discount to the Note and amortized over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or seventy-five percent (75%) of the lowest daily VWAP over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $346,091, of which $170,000 was recorded as debt discount and amortized over the term of the note, and $176,091 was recorded as day 1 derivative loss. The total unamortized discount on the Note as of April 30, 2022, and July 31, 2021, were $0 and $102,083, respectively. The Company amortized $102,083 of debt discount as interest expense during the nine months ended April 30, 2022. On March 7, 2022, the Company paid in full the total principal balance outstanding of $175,000 and accrued interest and prepayment penalty of $30,000. As part of the payoff of the note, the Company resolved $76,134 of the derivative liability against additional paid in capital. The total principal balance outstanding as of April 30, 2022, and July 31, 2021, were $0 and $175,000, respectively.  -   175,000 


  April 30,  July 31, 
CONVERTIBLE NOTES PAYABLE - DERIVATIVE 2022  2021 
On April 15, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $113,000, annual interest rate of 8% and a maturity date of January 15, 2022. After payment of transaction-related expenses and closing fees of $13,000, net proceeds to the Company from the Note totaled $100,000. Additionally, the Company recorded $13,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 100,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $14,138 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.15 (fifteen) cents or (b). seventy-five percent (75%) of the lowest traded price in the prior fifteen (15) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”). Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $64,561, of which $42,822 was recorded as debt discount and amortized over the term of the note. On January 15, 2022, the lender agreed to extend the maturity date until March 31, 2022. As consideration for the extension on the note, the Company agreed to add 15,000 to the principal amount outstanding. On March 31, 2022, the lender agreed to extend the maturity date until July 31, 2022. As consideration for the extension on the note, the Company agreed to add $15,000 to the principal amount outstanding. The Company evaluated the amendments and accounted for these changes as an extinguishment of debt. As of both amendment date, the total unamortized discount on the Note was $0. The Company recognized a loss on extinguishment of debt for both $15,000 increase in principal and charged the total $30,000 to interest expense at the time of the extension. The total unamortized discount on the Note as of April 30, 2022, and July 31, 2021, were $0 and $50,945, respectively. The Company amortized $50,945 of debt discount as interest expense during the nine months ended April 30, 2022. The total principal balance outstanding as of April 30, 2022, and July 31, 2021, were, $143,000 and $113,000, respectively.  143,000   113,000 
         
On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, annual interest rate of 8% and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder and recorded $300 as debt discount and amortized over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $55,866. The Company recorded $30,146 debt discount from derivative. The total unamortized discount on the Note as of April 30, 2022, was $37,831. The Company amortized $18,915 of debt discount as interest expense during the nine months ended April 30, 2022. The total principal balance outstanding as of April 30, 2022, was $230,000.  230,000   - 


 April 30,  July 31, 
CONVERTIBLE NOTES PAYABLE - DERIVATIVE 2022  2021 
On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, annual interest rate of 8% and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder and recorded $300 as debt discount and amortized over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $55,866. The Company recorded $30,146 debt discount from derivative. The total unamortized discount on the Note as of April 30, 2022, was $37,831. The Company amortized $18,915 of debt discount as interest expense during the nine months ended April 30, 2022. The total principal balance outstanding as of April 30, 2022, was $230,000.  230,000   - 
         
Total convertible notes payable - derivative: $1,113,235  $723,235 
         
Total convertible notes payable derivative and non-derivative  4,128,235   1,388,235 
Less: discount on convertible notes payable  (91,685)  (339,654)
Total convertible notes payable, net of discount  4,036,550   1,048,581 
Less: current portion of convertible notes payable  (3,286,550)  (1,048,581)
Long-term portion of convertible notes payable $750,000  $- 

Additional terms No.1: The Holder shall have the right at any time on or after six (6) months from the Issue Date to convert any portion of the outstanding and unpaid principal balance into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal (1) $0.05 (five) cents provided however that in the event the Borrower fails to complete the acquisition of Nexogy, Inc., the Conversion Price shall equal (2) the Variable Conversion Price (as defined herein) (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Borrower relating to the Borrower’s securities or the securities of any subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The “Variable Conversion Price” shall mean eighty-five percent (85%) multiplied by the Market Price (as defined herein) (representing a discount rate of fifteen percent (15%)). “Market Price” means the lowest Trading Price for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.

The total unamortized discount on the convertible notes as of April 30, 2022, and July 31, 2021, were $91,685 and $339,654, respectively. The total principal balance outstanding as of April 30, 2022, and July 31, 2021, were $4,128,235 and $1,388,235, respectively. During the nine months ended April 30, 2022, and April 30, 2021, the Company amortized $399,849 and $528,645, respectively, of debt discount as interest expense.


NOTE 9 - LEASES

The leased properties have a remaining lease term of twelve to thirty-seven months as of August 1, 2021 (Beginning on the current fiscal year). At the option of the Company, it can elect to extend the term of the leases. See table below:

Location Annual
Rent
  Lease
Expiration
Date
 Business Use Approx.
Sq. Ft.
 
           
825 W. Bitters, Suite 104, San Antonio, TX 78216 $26,529  Jul-22 Executive offices  1,546 
8023 Vantage Dr., Suite 660, San Antonio, Texas 78230 $49,752  Sep-22 Office space  2,843 
10967 Via Frontera, San Diego, CA 92127 $366,767  Mar-26 Office space  18,541 
1610 Royal Palm Avenue, Suite 300, Fort Myers, FL 33901 $82,102  Dec-25 Office space and network facilities  6,800 
2121 Ponce de Leon Blvd., Suite 200, Coral Gables FL 33134 $164,475  Jul-22 Office space & wireless internet network  4,623 
7218 McNeil Dr., FL-1, Austin, TX  78729 $21,000  Mar-24 Network facilities  25 
6606 Lyndon B. Johnson, Fwy., FL1, Suite 125, Dallas, TX 75240 $14,200  May-22 Network facilities  25 
9701 S. John Young Parkway, Orlando, FL 32819 $30,528  May-23 Network facilities  540 
50 NE 9th St, Miami, FL 3313 $49,560  May-23 Network facilities  25 
350 NW 215 St., Miami Gardens, FL 33169 $23,403  May-22 Wireless internet network  100 
8333 NW 53rd St, Doral, FL 33166 $13,612  Jul-25 Wireless internet network  100 
100 SE 2nd Street, Miami, FL 33131 $36,024  Jan-24 Wireless internet network  100 
9055 SW 73rd Ct, Miami, FL 33156 $8,674  Dec-23 Wireless internet network  100 
9517 Fontainebleau Blvd., Miami, FL 33172 $11,860  Aug-24 Wireless internet network  100 

The Company has not entered into any sale and leaseback transactions during the nine months ended April 30, 2022

In February 2022, as part of the acquisition of NLI, the Company secured an office lease, with a monthly base lease payment of $30,222. The lease expires in March 2026. At the option of the Company, the lease can be extended for two additional five-year terms, with a base rent at the prevailing market rate at the time of the renewal.

In December 2021, as part of the acquisition of Skynet Telecom LLC’s assets, the Company assumed an office lease in San Antonio, Texas. The lease expires in September 2022, and at the option of the Company, the lease can be extended for a period of five years, with a base rent at the prevailing market rate at the time of the renewal.

In January 2021, the Company entered into a new office lease, with a monthly base lease payment and applicable shared expenses of $4,750 and $2,140, respectively. The base rent will increase on an annual basis by 2% of the base lease payment. The lease expires on December 31, 2025., and at the option of the Company, the lease can be extended for one (1) five (5) year term with a base rent at the prevailing market rate at the time of the renewal.

In November 2020, as part of the acquisition of Nexogy, Inc., the Company assumed an office lease in Coral Gable Florida, two network facilities and five wireless internet network leases. The leases’ expiration dates range from May 2022 to July 2025, and at the option of the Company, the leases can be extended for various periods ranging from one to five years, with a base rent at the prevailing market rate at the time of the renewal.


Amounts recognized on July 31, 2021, and April 30, 2022, for operating leases are as follows:

ROU Asset July 31, 2021 $934,260 
Amortization   $(213,662)
Addition - Asset   $1,246,262 
ROU Asset April 30, 2022 $1,966,860 
       
Lease Liability July 31, 2021 $934,260 
Amortization   $(268,000)
Addition - Liability   $1,455,978 
Lease Liability April 30, 2022 $2,122,238 
       
Lease Liability Short term $773,233 
Lease Liability Long term $1,349,005 
Lease Liability Total: $2,122,238 

Operating  lease cost: $470,935 
     
Cash paid for amounts included in the measurement of lease labilities    
     
Operating cashflow from operating leases: $470,935 
     
Weighted-average remain lease term-operating lease:  3.4 years 
     
Weighted-average discount rate  5.0%

For the nine months ended April 30, 2022, the amortization of operating ROU assets was$213,662.

For the nine months ended April 30, 2022, the amortization of operating lease liabilities was $268,000

The future minimum lease payment under the operating leases are as follows:

Period Ending July 31, Lease Payments 
2022* $218,569 
2023  658,144 
2024  532,546 
2025  491,145 
2026  260,209 
Total: $2,160,613 

*remaining 3 Months

NOTE 10 – PREFERED STOCK

SERIES A CONVERTIBLE PREFERRED STOCK

In August 2020, the Company’s Board of Directors designated and authorized the issuance of up to 1,500,000 shares of the Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock has a par value of $0.001 per share and a stated value equal to one dollar ($1.00) (the “Stated Value”) and is entitled to a dividend at an annual rate of eight percent (8%) per share. The Company had 225,000 shares of the Series A Convertible Preferred Stock outstanding as of April 30, 2022. During the nine months ended April 30, 2022, the Company declared a dividend of $13,463 and had $51,397 as accumulated dividends as of April 30, 2022.


The “Conversion Price” at which shares of Common Stock shall be issuable upon conversion of any shares of Series A Convertible Preferred Stock shall initially be $0.30 per share

During the nine months ended April 30, 2022, the Company evaluated Series A Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during the period and determined that the convertible shares were classified as equity instruments.

SERIES B CONVERTIBLE PREFERRED STOCK

In April 2020, the Company’s Board of Directors designated and authorized the issuance up to 1,000,000 shares of the Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock is only issuable to the Company’s debt holders as of March 25, 2020 (“Existing Debt Holders”) who may purchase shares of Series B Convertible Preferred Stock at the Stated Value by converting all or part of the debt owed to them by the Company as of March 25, 2020. Each share of Series B Convertible Preferred Stock has a par value of $0.001 per share and a stated value equal to one dollar ($1.00) (the “Stated Value”). In April 2020, the Company issued a total of 407,477 shares of Series B Convertible Preferred Stock for settlement of debt of $370,000 on various promissory notes and $37,477 in accrued interest. In March 2021, the Company issued a total of 17,965 shares of Series B Convertible Preferred Stock for settlement of debt of $16,000 on a promissory note and $1,965 in accrued interest.

The Company had 425,442 shares of Series B Convertible Preferred Stock outstanding as of April 30, 2022. No dividends are payable on the Series B Convertible Preferred Stock.

The terms of our Series B Convertible Preferred Stock allow for:

Mandatory Conversion. Upon (i) an up-listing of the Company’s Common Stock to Nasdaq or a US national securities exchange, (ii) an underwriting involving the sale of $5,000,000 or more of the Company’s Common Stock or Common Stock equivalents (a “Material Underwriting”), (iii) the Company ceases to be a public corporation as the result of a going private transaction, (iv) the Company, directly or indirectly, effects any sale, lease, exclusive license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions (including a transaction involving the Company’s spin-off of its operating subsidiary, T3 Nevada), (v) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (vi) the Company, directly or indirectly, in one or more related transactions, effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (vii) the Company, directly or indirectly, in one or more related transactions, consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person, other than an officer or director of the Company, whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) , all shares of Series B Convertible Preferred Stock shall be automatically converted, without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Company or its transfer agent, into the number of fully paid and nonassessable shares of Common Stock in an amount equal, following conversion, to 18% of the Company’s issued and outstanding shares of Common Stock . Each of (i)-(vii) above shall be hereafter referred to as a “Conversion Event” and the date of a Conversion Event shall be hereafter referred to as a “Conversion Date”. Upon any such mandatory conversion and the issuance of conversion shares further thereto, the shares of Series B Convertible Preferred Stock shall be deemed cancelled and of no further force or effect. A mandatory conversion is the only means by which Series B Convertible Preferred Stock is convertible as the shares of Series B Convertible Preferred Stock are not convertible at the option of the Holder. For purposes of the foregoing Conversion Events, conversion will be deemed to have taken place immediately prior to the Conversion Event. By way of example, if the Company engages in a Material Underwriting, the Series B Convertible Preferred Stock will be treated as having been converted immediately prior to the issuance of the securities in the Material Underwriting.


During the nine months ended April 30, 2022, the Company evaluated Series B Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during the period and determined that the convertible shares were classified as equity instruments.

SERIES C CONVERTIBLE PREFERRED STOCK

In July 2020, the Company’s Board of Directors designated and authorized the issuance up to 1,000,000 shares of the Series C Convertible Preferred Stock. Each share of Series C Convertible Preferred Stock has a par value of $0.001 per share and a stated value equal to ten dollars ($10.00) (the “Stated Value”).

On February 25, 2021, Digerati’s Board of Directors approved the issuance of the following shares of Series C Convertible Preferred Stock.:

Arthur L. Smith – 28,928 shares of Series C Convertible Preferred Stock
Antonio Estrada – 19,399 shares of Series C Convertible Preferred Stock
Craig Clement – 7,073 shares of Series C Convertible Preferred Stock

The Series C Convertible Preferred Stock was issued for accrued compensation to the management team of $554,000.

The Company had 55,400 shares of Series C Convertible Preferred Stock outstanding as of April 30, 2022. No dividends are payable on the Series C Convertible Preferred Stock.

The terms of our Series C Convertible Preferred Stock allow for:

Automatic Conversion. Upon (i) an up-listing of the Company’s Common Stock to Nasdaq or a US national securities exchange, (ii) a financing or offering involving the sale of $5,000,000 or more of the Company’s Common Stock or Common Stock equivalents (a “Material Financing”), (iii) the Company ceases to be a public corporation as the result of a going private transaction, (iv) the Company, directly or indirectly, effects any sale, lease, exclusive license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions (including a transaction involving the Company’s spin-off of T3 Nevada), (v) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (vi) the Company, directly or indirectly, in one or more related transactions, effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (vii) the Company, directly or indirectly, in one or more related transactions, consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person, other than an officer or director of the Company, whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination), all issued shares of Series C Convertible Preferred Stock shall be automatically converted, without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Company or its transfer agent, into the number of fully paid and nonassessable shares of Common Stock in an amount equal, following conversion, to 22% of the Company’s issued and outstanding shares of Common Stock. Each of (i)-(vii) above shall be hereafter referred to as a “Conversion Event” and the date of a Conversion Event shall be hereafter referred to as a “Conversion Date”. Upon any such mandatory conversion and the issuance of conversion shares further thereto, the shares of Series C Convertible Preferred Stock shall be deemed cancelled and of no further force or effect. A mandatory conversion is the only means by which Series C Convertible Preferred Stock is convertible as the shares of Series C Convertible Preferred Stock are not convertible at the option of the Holder. For purposes of the foregoing Conversion Events, conversion will be deemed to have taken place immediately prior to the Conversion Event. By way of example, if the Company engages in a Material Financing, the Series C Convertible Preferred Stock will be treated as having been converted immediately prior to the issuance of the securities in the Material Underwriting.


SERIES F SUPER VOTING PREFERRED STOCK

In July 2020, the Company’s Board of Directors designated and authorized the issuance up to 100 shares of the Series F Super Voting Preferred Stock. Each share of Series F Super Voting Preferred Stock has a par value of $0.001 per share and a stated value equal to one cent ($0.01) (the “Stated Value”).

On November 17, 2020, Digerati’s Board of Directors approved the issuance of the following shares of Series F Super Voting Preferred Stock:

Arthur L. Smith - 34 shares of Series F Super Voting Preferred Stock

Antonio Estrada - 33 shares of Series F Super Voting Preferred Stock

Craig Clement - 33 shares of Series F Super Voting Preferred Stock

The Company had 100 shares outstanding of the Series F Super Voting Preferred Stock as of April 30, 2022. No dividends are payable on the Series F Super Voting Preferred Stock.

The terms of our Series F Super Voting Preferred Stock allow for:

Voting Rights. As long as any shares of Series F Super Voting Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares of the Series F Super Voting Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series F Super Voting Preferred Stock or alter or amend its Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (c) increase the number of authorized shares of Series F Super Voting Preferred Stock, (d) sell or otherwise dispose of any assets of the Company not in the ordinary course of business, (e) sell or otherwise effect or undergo any change of control of the corporation, (f) effect a reverse split of its Common Stock, or (g) enter into any agreement with respect to any of the foregoing.

Holders of the Series F Super Voting Preferred Stock shall be entitled to vote on all matters subject to a vote or written consent of the holders of the Company’s Common Stock, and on all such matters, the shares of Series F Super Voting Preferred Stock shall be entitled to that number of votes equal to the number of votes that all issued and outstanding shares of Common Stock and all other securities of the Company are entitled to, as of any such date of determination, on a fully diluted basis, plus one million (1,000,000) votes, it being the intention that the Holders of the Series F Super Voting Preferred Stock shall have effective voting control of the Company. The Holders of the Series F Super Voting Preferred Stock shall vote together with the holders of Common Stock as a single class on all matters requiring approval of the holders of the Company’s Common Stock and separately on matters not requiring the approval of holders of the Company’s Common Stock.

Conversion. No conversion rights apply to the Series F Super Voting Preferred Stock.

NOTE 11 – EQUITY

During the nine months ended April 30, 2022, the Company issued the following shares of common stock:

On August 31, 2021, the Company entered into a $75,000 promissory note, with a maturity date of August 31, 2022, and annual interest rate of 8%. In conjunction with the promissory note, we issued 150,000 shares of common stock. At the time of issuance, the Company recognized the relative fair market value of the shares of $13,635 as debt discount, and it will be amortized to interest expense during the term of the promissory note.


On September 29, 2021, the Company entered into a $75,000 promissory note, with a maturity date of September 29, 2022, and annual interest rate of 8%. In conjunction with the promissory note, we issued 150,000 shares of common stock. At the time of issuance, the Company recognized the relative fair market value of the shares of $10,788 as debt discount, and it will be amortized to interest expense during the term of the promissory note.

On October 22, 2021, the Company entered into a $150,000 promissory note, with a maturity date of October 22, 2022, and annual interest rate of 8%. In conjunction with the promissory note, we issued 300,000 shares of common stock. At the time of issuance, the Company recognized the relative fair market value of the shares of $13,965 as debt discount, and it will be amortized to interest expense during the term of the promissory note.

On January 21, 2022, the Company secured two promissory notes for $460,000, with a maturity date of October 21, 2022, and annual interest rate of 8%. In conjunction with the promissory notes, we issued 600,000 shares of common stock. At the time of issuance, the Company recognized $600 as debt discount, and it will be amortized to interest expense during the term of the promissory note

On February 14, 2022, the Company entered into a note extension agreement, and as consideration for the extension, the Company issued 250,000 shares of common stock. At the time of issuance, the Company recognized the fair market value of the shares of $34,150 as interest expense. In addition, the Company agreed to add $75,000 to the principal amount outstanding and the Company recognized $75,000 as interest expense. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. The Company recognized a loss on extinguishment of debt for both the $75,000 increase in principal and $34,150 fair value of shares issued and charged the total $109,150 to interest expense at the time of the extension.

On March 7, 2022, the Company paid in full the total principal balance outstanding on a convertible promissory note of $175,000 and accrued interest and prepayment penalty of $30,000. As part of the payoff of the convertible promissory note, the Company resolved $76,134 of the derivative liability against additional paid in capital.

NOTE 12 – ACQUISITIONS

Skynet Asset Purchase Agreement

On December 31, 2021, our indirect, wholly owned subsidiary, Shift8 Networks, Inc., a Texas corporation (“Shift8”), executed and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with Skynet Telecom LLC, a Texas limited liability company (“Seller” or “Skynet”), and Paul Golibart and Jerry Ou, each an individual resident in the State of Texas (each, an “Owner” and collectively, the “Owners”).

Pursuant to the Purchase Agreement, Shift8 acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s communications business, including but not limited to subscriber-based Interconnected Voice Over Internet Protocol communication services (“I-VoIP”), Unified Cloud Communications Services (“UCCS”), and IPPBX based systems of telephony (collectively, the “Purchased Assets”).


The aggregate purchase price for the Purchased Assets was $5,800,000, subject to adjustment as provided in the Purchase Agreement (the “Purchase Price”). An amount of $4,100,000 in cash, subject to a Net Working Capital Adjustment as defined in the Purchase Agreement, was paid by Shift8 on the Closing Date. Included within the $4.1 million cash payment were amounts paid by Shift8 directly to creditors of the Seller as set forth in payoff letters. An additional $600,000 (the “Earn-out Amount”) was retained by Shift8 at the Closing and will be paid to Seller in accordance with the Purchase Agreement. An additional $100,000 (the “Holdback Amount”) was retained by Shift8 at the Closing and will be paid to Seller in accordance with the Purchase Agreement. Finally, $1,000,000 (the “Share Payment”) will be paid by Shift8 to Seller by issuance of restricted shares of the Company’s common stock to the Owners. The Share Payment will be made via the issuance of shares on the earlier of (i) the effective date of that certain Registration Statement on Form S-1 (File No. 333-258733) filed by the Company with the Securities and Exchange Commission on August 11, 2021 (in which case the stock will be valued at the price set forth in the prospectus that is a part of such Registration Statement, without underwriter discounts) and (ii) 180 days after December 31, 2021 (in which case the stock will be valued at the average of the last transaction price on the OTCQB for each of the 10 trading days immediately preceding such issuance date).

The acquisition was accounted for under the purchase method of accounting, with Digerati identified as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed by Digerati was allocated to customer contracts acquired and intangible assets based on their estimated fair values as of December 31, 2021. Allocation of the purchase price is based on the best estimates of management.

The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the acquisition of Skynet. The allocation of fair values is preliminary and is subject to change in the future during the measurement period.

  Skynet 
  (in thousands) 
    
Accounts receivable, net $134 
Inventory  8 
Intangible assets and Goodwill  5,800 
Property and Equipment, net  16 
Operating lease right-of-use asset  45 
Deposits and other assets  6 
     
Total identifiable assets $6,009 
     
Less: Liabilities assumed  209 
Total Purchase price $5,800 

The following table summarizes the cost of intangible assets related to the acquisition: 

  Skynet  Useful Life 
  (in thousands)  (in Years) 
       
Customer Relationships $2,378  7 
Trade Names and Trademarks  1,624  7 
Non-Compete Agreement  174  2-3 
Goodwill  1,624  - 
Total intangible assets $5,800   

In addition, the Company incurred approximately $276,000 in costs associated with the acquisition of Skynet. These included legal, regulatory, and accounting, these costs of $276,000 were expensed during the nine months ended April 30, 2022.

As part of the acquisitions of Skynet’s assets, the Company secured an office lease, with monthly base lease payment of $3,909 from July 1, 2021, through June 30, 2022, and a monthly base lease payment of $4,027 from July 1, 2022, through September 30, 2022. The lease expires in September 2022, and at the option of the Company, the lease can be extended for a period of five years, with a base rent at the prevailing market rate at the time of the renewal.


Proforma

The following schedule contains proforma consolidated results of operations for the nine months ended April 30, 2022, and 2021 as if the acquisition occurred on August 1, 2020. The proforma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on August 1, 2020, or of results that may occur in the future.

  (In thousands) 
  Nine months ended April 30, 
  2022  2021 
  Reported  Proforma  Reported  Proforma 
Revenue $15,959  $17,501  $8,629  $11,216 
Income (loss) from operations  (3,525)  (3,280)  (1,978)  (1,502)
Net income (loss) $(4,726) $(4,479) $(15,484) $(14,845)
                 
Earnings (loss) per common share-Basic and Diluted $(0.03) $(0.03) $(0.12) $(0.12)

Next Level Internet Equity Purchase Agreement

On February 4, 2022, the Company, T3 Nevada and the two owners of NLI (the “Sellers”), entered into and closed on an Equity Purchase Agreement (the “Equity Purchase Agreement”). Pursuant to the Equity Purchase Agreement, T3 Nevada bought all of the equity interests in NLI from the Sellers. NLI is engaged in the business of providing cloud based Unified Communications as a Service, collaboration, contact center, managed connectivity and other voice and data services to small, medium, and large enterprises.

The total purchase price is up to $12.90 million consisting of: (i) $8.9 million in cash which includes payoff of certain indebtedness held at closing by NLI and certain transaction expenses; (ii) unsecured promissory notes in the aggregate principal amount of $2 million issued by T3 Nevada to the Sellers (the “Unsecured Notes”) with such notes payable in eight equal quarterly installments in the aggregate amount of $250,000 each starting on June 15, 2022 through and including March 16, 2024. With a base annual interest rate of 0% and a default annual interest rate of 18%.The amount owed is subject to change based on certain revenue milestones needing to be met by NLI; and (iii) unsecured convertible promissory notes (the “Convertible Notes”) in the aggregate principal amount of $2 million issued by T3 Nevada to the Sellers with such notes payable in eight equal quarterly installments in the aggregate amount of $250,000 each starting on April 30, 2022 through and including January 31, 2024, with a base annual interest rate of 0% and a default annual interest rate of 18%. The Sellers have a onetime right to convert all or a portion of the Convertible Notes commencing on the six-month anniversary of the notes being issued and ending 30 days after such six-month anniversary. The conversion price is the volume weighted average price per share for the ten (10) consecutive trading days immediately preceding the date on which a conversion notice is received by T3 Nevada.

T3 Nevada paid $8.69 million in cash to the Sellers on the closing date of February 4, 2022.

In addition, 120 days after the closing of the transaction, T3 Nevada will pay the Sellers the amount by which net working capital deficit is better than $2.16 million or the Sellers will pay T3 Nevada the amount by which net working capital deficit is worse than $2.36 million. As of April 30, 2022, the Company and the sellers agreed that there’s no purchase price adjustment required.

The acquisition was accounted for under the purchase method of accounting, with Digerati identified as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed by Digerati was allocated to customer contracts acquired and intangible assets based on their estimated fair values as of February 4, 2022. Allocation of the purchase price is based on the best estimates of management.


The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the Next Level acquisition. The allocation of fair values is preliminary and is subject to change in the future during the measurement period.

  Next Level 
  Internet 
  (in thousands) 
    
Cash $171 
Accounts receivable, net  469 
Prepaid and other current assets  541 
Intangible assets and Goodwill  18,103 
Property and Equipment, net  1,302 
Deposits and other assets  339 
Operating lease right-of-use asset  1,246 
Total identifiable assets $22,171 
     
Less: Liabilities assumed  7,902 
Less: Operating lease liability  1,408 
Total Purchase price $12,861 

The following table summarizes the cost of intangible assets related to the acquisition:

  Next Level    
  Internet  Useful Life 
  (in thousands)  (in Years) 
       
Customer Relationships $7,422  7 
Trade Names and Trademarks  5,069  7 
Non-Compete Agreement  1,991  2 
Goodwill  3,621  - 
        
Total intangible assets $18,103    

In addition, the Company incurred approximately $845,000 in costs associated with the Next Level acquisition. These included legal, regulatory, and accounting costs which were expensed during the nine months ended April 30, 2022.

Proforma

The following schedule contains proforma consolidated results of operations for the nine months ended April 30, 2022, and 2021 as if the acquisition occurred on August 1, 2020. The proforma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on August 1, 2020, or of results that may occur in the future.

  (In thousands) 
  Nine months ended April 30, 
  2022  2021 
  Reported  Proforma  Reported  Proforma 
Revenue $15,959  $23,291  $8,629  $18,007 
Income (loss) from operations  (3,525)  (3,165)  (1,978)  (2,260)
Net income (loss) $(4,726) $(4,382) $(15,484) $(15,800)
                 
Earnings (loss) per common share-Basic and Diluted $(0.03) $(0.03) $(0.12) $(0.12)

As part of the acquisition of NLI., the Company secured an office lease, with a monthly base lease payment of $30,222. The lease expires on March 11, 2026. At the option of the Company, the lease can be extended for two additional five-year terms, with a base rent at the prevailing market rate at the time of the renewal.


NOTE 13 – SUBSEQUENT EVENTS

Unsecured Convertible Promissory Notes payment

On May 2, 2022, the Company made a quarterly principal payment of $250,000 towards the NLI Unsecured Convertible Promissory Notes.

Unsecured Adjustable Promissory Notes payment

On June 6, 2022, the Company made a quarterly principal payment of $250,000 towards the NLI Unsecured Adjustable Promissory Notes.

Forbearance Agreement and Third Amendment to Credit Agreement

On February 4, 2022, the T3 Nevada Parties and NLI (collectively, the “Loan Parties”) and Post Road entered into a Joinder and Second Amendment to Credit Agreement (the “Joinder”) whereby, among other terms, NLI became a guarantor of T3’s obligations pursuant to the Credit Agreement and notes issued pursuant thereto.

On June 13, 2022, the parties to the Joinder entered into a Forbearance Agreement and Third Amendment to Credit Agreement (“Forbearance Agreement”).

The Forbearance Agreement was entered into because certain events of default related to both the Credit Agreement and the Joinder have occurred. The events of default related to financial covenants were failure to maintain a Senior Leverage Ratio (as defined in the Credit Agreement) of less than 4.05 to 1.00 and failure to comply with a Credit Agreement provision whereby the Loan Parties are not allowed to make annual Capital Expenditures (as defined in the Credit Agreement) greater than $379,190.

The events of default unrelated to financial covenants were the Loan Parties’ failure to: (a) deliver certain certificates, financial information and projections, lease, landlord, and control agreements, and evidence of a UCC-3 filing; (b) close or consolidate certain bank accounts; (c) provide ten (10) business days’ notice prior to the Company filing certain filings with the Securities and Exchange Commission (the “SEC”) and the Nevada Secretary of State; and (d) engage an industry consultant acceptable to the Agent to consult with the Loan Parties on integration strategy, future acquisitions, operating performance, and various business issues.

Pursuant to the Forbearance Agreement, Post Road agreed to forbear through the Forbearance Period (as defined below) from (i) exercising its rights and remedies with regard to the existing events of default and (ii) requiring compliance with the financial covenants set forth in Section 11.12 of the Credit Agreement (related to leverage, EBITDA, liquidity, capital expenditures, fixed charge coverage ratio, and churn). The “Forbearance Period” is from June 13, 2022 through the earlier of (a) August 8, 2022, (b) the date on which any other event of default not enumerated in the Forbearance Agreement occurs or is deemed to have occurred, or (c) the date of any failure of any Loan Party to comply with any aspect of the Forbearance Agreement. The forbearance does not constitute a waiver of the defaults enumerated nor does it impair the ability of Post Road to exercise its rights and remedies after the expiration of the Forbearance Period.

In addition, the Forbearance Agreement amends the Credit Agreement to clarify Section 10.15 with regard to the Company’s affirmative covenant to comply with its SEC reporting obligations. It also amends the Credit Agreement to clarify the provisions of the Section 10 (affirmative covenants) whose violation constitute an event of default. Finally, the Forbearance Agreement amends the Joinder to allow T3 Nevada to give the Agent draft copies of its 10-Ks and 10-Qs and 8-Ks for the Agent and its advisors review only five business days (10-Ks) or two business days (10-Qs and 8-Ks) in advance rather than ten business days in advance as originally required by the Joinder.

The Company anticipates implementing remedies by July 31, 2022 to resolve the financial covenants breaches and the breaches regarding delivering a compliance certificate, financial projections, and a landlord agreement along with engaging an industry consultant. The Company and Post Road have agreed to work in good faith to adjust the financial covenants set forth in Section 11.12 of the Credit Agreement to include the financial impact of the acquisition of Skynet and Next Level. As of the date of this filing, the Company cannot predict the final outcome of the negotiations with Post Road.

The other non-financial events of default were covenants that were complied with, however, the compliance was not timely pursuant to the provisions of the Credit Agreement and Joinder. These events of default have not been waived by Post Road.

The foregoing summary of the Forbearance Agreement contains only a brief description of the material terms of the Forbearance Agreement and such description is qualified in its entirety by reference to the full text of the Forbearance Agreement, filed herewith as Exhibit 10.3 and incorporated by reference herein.

Expired Leases

As detailed in Note 9, two of the Company’s lease agreements (one for a property in Dallas, Texas and one for a property in Miami Gardens, Florida) expired in May 2022. Those leases are now on a month to month basis with the monthly lease payment remaining the same as it was in May 2022. The Company is currently negotiating long-term extensions of those lease agreements although no guarantees can be made that such extensions will be reached.

Series A Convertible Preferred Stock Certificate of Correction

On May 24, 2022, the Company filed a Certificate of Correction with the Nevada Secretary of State with regard to the Company’s Series A Convertible Preferred Stock Certificate of Designation originally filed in August 2020.

The Certificate of Correction was filed to correct, among other provisions, certain dates, to correct the Series A Convertible Preferred Stock’s initial conversion price (it is $0.30 and the conversion price is not related to any offering), the date that dividends commenced being paid, to correct the mandatory conversion provisions (with such provision not related to a listing of the Common Stock on a national securities exchange).

The foregoing summary of the Certificate of Correction contains only a brief description of the material terms of the Certificate of Correction and such description is qualified in its entirety by reference to the full text of the Certificate of Correction, filed herewith as Exhibit 3.1 and incorporated by reference herein.


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. “Forward-looking statements” are those statements that describe management’s beliefs and expectations about the future. We have identified forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” “plan,” and “intend.” Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties. Some of these risks include the availability and capacity of competitive data transmission networks and our ability to raise sufficient capital to continue operations. Additional risks are included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021, filed with the Securities and Exchange Commission on October 26, 2021.

The following is a discussion of the unaudited interim consolidated financial condition and results of operations of Digerati for the three and nine months ended April 30, 2022, and 2021. It should be read in conjunction with our audited Consolidated Financial Statements, the Notes thereto, and the other financial information included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2021, filed with the Securities and Exchange Commission on October 26, 2021. For purposes of the following discussion, fiscal 2022 or 2022 refers to the year that will end on July 31, 2022, and fiscal 2021 or 2021 refers to the year ended July 31, 2021.

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 and T3 Communications, Inc., respectively, and Nexogy Inc., a Florida corporation, 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 events

On December 31, 2021, the Company closed on an Asset Purchase Agreement (the “Purchase Agreement”) with Skynet Telecom LLC (“Skynet”). Pursuant to the Purchase Agreement, the Company acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s communications business, including but not limited to subscriber-based Interconnected Voice Over Internet Protocol communication services (“I-VoIP”), Unified Cloud Communications Services (“UCCS”), and IPPBX based systems of telephony.

On February 4, 2022, the Company acquired the equity interest in San Diego based Next Level Internet, Inc. (“Next Level” or “NLI”), a service provider engaged in the business of providing cloud based Unified Communications as a Service, collaboration, contact center, managed connectivity and other voice and data services to small, medium, and large enterprises. The acquisition of Next Level expands the Company’s growing nationwide footprint and adds a strong West Coast presence with nearly 1,000 SMB clients in California.


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, 2022, Compared to Three Months ended April 30, 2021.

Cloud Software and Service Revenue. Cloud software and service revenue increased by $4,412,000 or 118% from the three months ended April 30, 2021, to the three months ended April 30, 2022. The increase in revenue is primarily attributed to the increase in total customers between periods due to the acquisition of Skynet in December 2021 and the acquisition of Next Level in February 2022. Our total number of customers increased from 2,612 for the three months ended April 30, 2021, to 3,963 customers for the three months ended April 30, 2022.

Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $1,635,000 or 107%, from the three months ended April 30, 2021, to the three months ended April 30, 2022. The increase in cost of services is primarily attributed to the consolidation of various networks as part of the increase in total customers between periods due to the acquisition of Skynet in December 2021 and the acquisition of Next Level in February 2022. Our total number of customers increased from 2,612 for the three months ended April 30, 2021, to 3,963 customers for the three months ended April 30, 2022. However, our consolidated gross margin improved by $2,777,000 from the three months ended April 30, 2021, to the three months ended April 30, 2022.

Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A expenses increased by $2,457,000, or 136%, from the three months ended April 30, 2021, to the three months ended April 30, 2022. The increase in SG&A is attributed to the acquisition of Skynet in December 2021 and the acquisition of Next Level in February 2022. As part of the consolidation, the Company absorbed all of the employees responsible for service delivery for the customer base, technical support, sales, customer service, and administration.

Stock Compensation expense. Stock compensation expense decreased by $154,000, from the three months ended April 30, 2021, to the three months ended April 30, 2022. The decrease between periods is attributed to the recognition during the three months ended April 30, 2021, the Company recognized $57,000 in stock options expense associated with stock options awarded to various employees and $125,000 in stock compensation for consulting services. During the three months ended April 30, 2022, the Company only recognized $23,000 in stock compensation for the amortization of stock options issued various employees, in addition the Company recognized $5,000 in stock option expense for the modification of stock options previously issued.

Legal and professional fees. Legal and professional fees increased by $552,000, from the three months ended April 30, 2021, to the three months ended April 30, 2022. The increase between periods is attributed to the recognition during the three months ended April 30, 2022, of $589,000 in professional fees for audits, quality of earnings and due diligence related to the acquisition of Skynet and Next Level.

Bad debt. Bad debt increased by $31,000, from the three months ended April 30, 2021, to the three months ended April 30, 2022. The increase is attributed to the recognition of $36,000 in bad debt for accounts deemed uncollectible during the period ended April 30, 2022.

Depreciation and amortization. Depreciation and amortization increased by $929,000, from the three months ended April 30, 2021, to the three months ended April 30, 2022. The increase is primarily attributed to the acquisition of Skynet and Next Level and the related amortization of intangible assets for $915,000.


Operating loss. The Company reported an operating loss of $1,626,000 for the three months ended April 30, 2022, compared to an operating loss of $588,000 for the three months ended April 30, 2021. The increase in operating loss between periods is primarily due to the increase in cost of services of $1,635,000, the increase in SG&A of $2,457,000, the increase in legal fees of $552,000, the increase in depreciation and amortization of $929,000, and the increase in bad debt expense of $31,000. These increases were slightly offset by the decrease in stock compensation expense of $154,000, and the improvement in gross margin of $2,777,000.

Gain (loss) on derivative instruments. Gain (loss) on derivative instruments improved by $17,705,000 from the three months ended April 30, 2021, to the three months ended April 30, 2022. We are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re- measurement of all derivative instruments we recognized a gain or loss between periods.

Gain (loss) on settlement of debt. Gain (loss) on settlement of debt decreased by $150,000 from the three months ended April 30, 2021, to the three months ended April 30, 2022. The Company determined that a previously accrued obligations was satisfied with our vendors and recognized a gain of $150,000 during the three months ended April 30, 2021.

Income tax benefit (expense). During the three months ended April 30, 2022, the Company recognized an income tax expense of $167,000. During the three months ended April 30, 2021, the Company recognized an income tax expense of $63,000.

Other income (expense). Other income (expense) improved by $2,000 from the three months ended April 30, 2021, to the three months ended April 30, 2022. During the three months ended April 30, 2022, the Company recognized other income of $2,000 and during the period ended April 30, 2021, the Company did not recognize other income.

Interest expense. Interest expense increased by $99,000 from the three months ended April 30, 2021, to the three months ended April 30, 2022. During the quarter ended April 30, 2022, the Company recognized non-cash interest / accretion expense of $89,000 related to the adjustment to the present value of various convertible notes and debt. Additionally, the Company recognized $814,000 in interest expense for cash interest payments on various promissory notes, accrual of $373,000 for interest expense for various promissory notes and $34,000 fair value of shares issued as well as $115,000 added to the principal balance of various promissory notes, all recognized as loss on debt extinguishment charged to interest expense as consideration for extension of the maturity dates. The Company also directly amortized $250,000 original issuance discount on a new promissory note as interest expense.

Net income (loss) including noncontrolling interest. Net income including noncontrolling interest for the three months ended April 30, 2022, was $3,360,000, an improvement in net (loss) of $16,316,000, as compared to a net (loss) for the three months ended April 30, 2021, of $12,956,000. The improvement in net loss including noncontrolling interest between periods is primarily due to the improvement in derivative gain of $17,705,000, the decrease of $154,000 in stock compensation expense and the improvement of $2,777,000 in gross margin. The improvement in net income including noncontrolling interest was slightly offset by the increase of $2,457,000 in SG&A, the increase of $552,000 in legal and professional fees, increase in bad debt of $31,000, and the increase of $929,000 in depreciation and amortization expense.

Net Income attributable to the noncontrolling interest. During the three months ended April 30, 2022, and 2021, the consolidated entity recognized net income in noncontrolling interest of $546,000 and $158,000, respectively. The noncontrolling interest is presented as a separate line item in the Company’s stockholders equity section of the balance sheet.

Net income (loss) attributable to Digerati’s shareholders. Net income for the three months ended April 30, 2022, was $3,906,000 compared to a net loss for the three months ended April 30, 2021, of $12,798,000.

Deemed dividend on Series A Convertible Preferred Stock. Dividend declared on convertible preferred stock for the three months ended April 30, 2022, and 2021, were, $4,000 and $5,000, respectively.

Net income (loss) attributable to Digerati’s common shareholders. Net income for the three months ended April 30, 2022, was $3,902,000 compared to a net (loss) for the three months ended April 30, 2021, of $12,803,000.


Nine Months ended April 30, 2022, Compared to Nine Months ended April 30, 2021.

Cloud Software and Service Revenue. Cloud software and service revenue increased by $7,330,000, or 85% from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The increase in revenue is primarily attributed to the increase in total customers between periods due to the acquisition of Skynet in December 2021 and the acquisition of Next Level in February 2022. Our total number of customers increased from 2,612 for the nine months ended April 30, 2021, to 3,963 customers for the nine months ended April 30, 2022.

Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $2,495,000, or 67%, from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The increase in cost of services is primarily attributed to the consolidation of various networks as part of the increase in total customers between periods due to the acquisition of Skynet in December 2021 and the acquisition of Next Level in February 2022. Our total number of customers increased from 2,612 for the nine months ended April 30, 2021, to 3,963 customers for the nine months ended April 30, 2022. However, our consolidated gross margin improved by $4,835,000 from the nine months ended April 30, 2021, to the nine months ended April 30, 2022.

Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A expenses increased by $3,725,000, or 84%, from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The increase in SG&A is attributed to the acquisition of Skynet in December 2021 and the acquisition of Next Level in February 2022. As part of the consolidation, the Company absorbed all the employees responsible for service delivery, technical support, sales, customer service, and administration.

Stock Compensation expense. Stock compensation expense decreased by $483,000, from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The decrease between periods is attributed to the recognition during the nine months ended April 30, 2021, of stock option expense of $110,000, the recognition of $247,000 in stock compensation expense associated with the funding of the 401(K)-profit sharing plan, the recognition of $18,000 in stock compensation for stock issued in lieu of cash payments to an employee and the recognition of $183,000 in stock issued consultants for professional services. During the nine months ended April 30, 2022, the Company only recognized $70,000 in stock compensation expense for the amortization of stock options issued various employees, in addition the Company recognized $5,000 in stock option expense for the modification of stock options previously issued.

Legal and professional fees. Legal and professional fees increased by $1,788,000, from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The increase between periods is attributed to the recognition during the nine months ended April 30, 2022, of $1,788,260 in professional fees for the audits, quality of earnings and due diligence related to the acquisition of Skynet and Next Level.

Bad debt. Bad debt increased by $42,000, from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The increase is attributed to the recognition of $51,000 in bad debt for accounts deemed uncollectible during the period ended April 30, 2022.

Depreciation and amortization. Depreciation and amortization increased by $1,310,000, from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The increase is primarily attributed to the acquisition of Skynet and Next Level and related amortization of intangible assets for $915,000.

Operating loss. The Company reported an operating loss of $3,525,000 for the nine months ended April 30, 2022, compared to an operating loss of $1,978,000 for the nine months ended April 30, 2021. The increase in operating loss between periods is primarily due to the increase in cost of services of $2,495,000, increase in SG&A of $3,725,000, the increase in legal fees of $1,788,000, the increase in depreciation and amortization of $1,310,000 and the increase of $42,000 in bad debt. These increases were slightly offset by the decrease in stock compensation expense of $483,000 and the improvement in gross margin of $4,835,000.


Gain (loss) on derivative instruments. Gain (loss) on derivative instruments improved by $18,695,000 from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. We are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re-measurement of all derivative instruments we recognized a gain or loss between periods.

Loss on extinguishment of debt. Loss on extinguishment of debt increased by $5,480,000 from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. On December 20, 2021, the Company and our lender entered into an amendment to a Credit Agreement, as described in Note 6, 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.

Gain (loss) on settlement of debt. Gain (loss) on settlement of debt decreased by $347,000 from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The Company determined that a previously accrued obligation was satisfied with our vendors and recognized a gain of $347,000 during the nine months ended April 30, 2021.

Income tax benefit (expense). During the nine months ended April 30, 2022, the Company recognized an income tax expense of $285,000. During the six months ended January 31, 2021, the Company recognized an income tax expense of $122,000.

Interest expense. Interest expense increased by $1,484,000 from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. During the nine months ended April 30, 2022, the Company recognized non-cash interest / accretion expense of $1,694,000 related to the adjustment to the present value of various convertible notes and debt. Additionally, the Company recognized $1,675,000 in interest expense for cash interest payments on various promissory notes, accrual of $754,000 for interest expense for various promissory notes and $34,000 fair value of shares issued as well as $115,000 added to the principal balance of various promissory notes, all recognized as loss on debt extinguishment charged to interest expense as consideration for extension of the maturity dates. The Company also directly amortized $250,000 original issuance discount on a new promissory note as interest expense.

Net income (loss) including noncontrolling interest. Net loss including noncontrolling interest for the nine months ended April 30, 2022, was $6,018,000, an improvement in net loss of $9,674,000, as compared to a net loss for the nine months ended April 30, 2021, of $15,692,000. The increase in cost of services of $2,495,000, the increase in SG&A of $3,725,000, the increase of $1,788,000 in legal and professional fees, the increase of $42,000 in bad debt expense, the increase of $1,310,000 in depreciation and amortization expense and the increase of $5,480,000 in loss on extinguishment of debt. These increases were slightly offset by the decrease of $483,000 in stock compensation expense, the improvement of $18,695,000 in derivative loss, and the improvement of $4,835,000 in gross margin.

Net loss attributable to the noncontrolling interest. During the nine months ended April 30, 2022, and 2021, the consolidated entity recognized net (loss) in noncontrolling interest of $1,306,000 and $223,000, 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, 2022, was $4,712,000 compared to a net loss for the nine months ended April 30, 2021, of $15,469,000.

Deemed dividend on Series A Convertible Preferred Stock. Dividend declared on convertible preferred stock for the nine months ended April 30, 2022, and 2021, were $14,000 and $15,000, respectively.

Net income (loss) attributable to Digerati’s common shareholders. Net loss for the nine months ended April 30, 2022, was $4,726,000 compared to a net loss for the nine months ended April 30, 2021, of $15,484,000.


Liquidity and Capital Resources

Cash Position: We had a consolidated cash balance of $2,384,000 as of April 30, 2022. Net cash consumed by operating activities during the nine months ended April 30, 2022 was approximately $1,741,000, primarily as a result of operating expenses, that included $75,000 in stock compensation and warrant expense, bad debt expense of $51,000, loss on extinguishment of debt of $5,480,000, amortization of debt discount of $1,943,000, gain on derivative liability of $7,835,000, depreciation and amortization expense of $2,514,000, shares issued for debt extension for $34,000, addition to principal for debt extension charged to interest expense for $155,000, increase in accrued expense of $1,003,000, increase in accounts payable of $1,385,000, increase in accounts receivable of $443,000, and decrease in deferred income of $22,000. Additionally, we had a decrease in prepaid expenses and other current assets of $96,000, increase in inventory of $10,000 and the increase in other assets of $23,000.

Cash used in investing activities during the nine months ended April 30, 2022, was $12,805,000, $193,000 was used for the purchase of VoIP equipment, $4,100,000 was used to acquire Skynet’s assets, $8,690,000 was used to acquire Next Level, and the Company received $178,000 from Nexogy as an adjustment consideration for payables from the acquisition.

Cash provided by financing activities during the nine months ended April 30, 2022, was $15,441,000. The Company secured $706,000 from convertible notes, net of issuance costs and discounts and secured $15,530,000 from debt financing, net of issuance costs and discounts. The Company made principal payments of $590,000 on related party notes, $175,000 in principal payments on convertible notes and $30,000 in principal payments on equipment financing. Overall, our net operating, investing, and financing activities during the nine months ended April 30, 2022, contributed approximately $895,000 of our available cash.

Digerati’s consolidated financial statements for the periodnine months ending January 31, 2018April 30, 2022, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Since the Company’s inception in 1993, Digerati has incurred net losses and accumulated a deficit of approximately $79,475,000$110,092,000 and a working capital deficit of approximately $1,062,000$25,034,000 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 fiscal 2022 certain members of our management team will continue to receive a portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from or recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams, 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, 2022, will not be sufficient to fund the Company’s operations, debt service and corporate expenses over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off its obligations, if and when they come due.


Our current cash expenses are expected to be approximately $700,000 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, 2022, our total liabilities were approximately $65,654,000, which included $8,922,000 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 $80,000 per month of additional working capital to fund our corporate expenses during Fiscal 2022.

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.

Recent Developments Related to the Credit Agreement, A&R Term Loan A Note, and Term Loan C Note

As described in Note 13 to the financial statements under the heading Forbearance Agreement and Third Amendment to Credit Agreement, on June 13, 2022, the parties to the Joinder entered into a Forbearance Agreement and Third Amendment to Credit Agreement (“Forbearance Agreement”).

Prior to the Forbearance Agreement being signed, Post Road did not send a notice of default with regard to or accelerate the maturity of the loans issued pursuant to the Credit Agreement, A&R Term Loan A Note, and Term Loan C Note (collectively, the “PRG Loans”).

Pursuant to the Forbearance Agreement, Post Road agreed to forbear through the Forbearance Period (as defined below) from (i) exercising its rights and remedies with regard to the existing events of default and (ii) requiring compliance with the financial covenants set forth in Section 11.12 of the Credit Agreement (related to leverage, EBITDA, liquidity, capital expenditures, fixed charge coverage ratio, and churn). The “Forbearance Period” is from June 13, 2022, through the earlier of (a) August 8, 2022, (b) the date on which any other event of default not enumerated in the Forbearance Agreement occurs or is deemed to have occurred, or (c) the date of any failure by the Company to comply with any aspect of the Forbearance Agreement. The forbearance does not constitute a waiver of the defaults enumerated nor does it impair the ability of Post Road to exercise its rights and remedies after the expiration of the Forbearance Period.

The events of default related to financial covenants were failure to maintain a Senior Leverage Ratio (as defined in the Credit Agreement) of less than 4.05 to 1.00 and failure to comply with a Credit Agreement provision whereby the Loan Parties are not allowed to make annual Capital Expenditures (as defined in the Credit Agreement) greater than $379,190.

The events of default unrelated to financial covenants were the Loan Parties’ failure to: (a) deliver certain certificates, financial information and projections, lease, landlord, and control agreements, and evidence of a UCC-3 filing; (b) close or consolidate certain bank accounts; (c) provide ten (10) business days’ notice prior to the Company filing certain filings with the Securities and Exchange Commission (the “SEC”) and the Nevada Secretary of State; and (d) engage an industry consultant acceptable to the Agent to consult with the Loan Parties on integration strategy, future acquisitions, operating performance, and various business issues.

The Forbearance Agreement amends the Joinder to allow T3 Nevada to give the Agent draft copies of its 10-Ks and 10-Qs and 8-Ks for the Agent and its advisors review only five business days (10-Ks) or two business days (10-Qs and 8-Ks) in advance rather than ten business days in advance as originally required by the Joinder. T3 Nevada complied with this obligation with regard to this Quarterly Report on Form 10-Q.

The Company anticipates implementing remedies by July 31, 2022 to resolve the financial covenants breaches and the breaches regarding delivering a compliance certificate, financial projections, and a landlord agreement along with engaging an industry consultant. The Company and Post Road have agreed to work in good faith to adjust the financial covenants set forth in Section 11.12 of the Credit Agreement to include the financial impact of the acquisitions of Skynet’s assets and. and the acquisition of Next Level Internet, Inc. As of the date of this filing, the Company cannot predict the final outcome of the negotiations with Post Road.

The other non-financial events of default were covenants that were complied with, however, the compliance was not timely pursuant to the provisions of the Credit Agreement and Joinder. These events of default have not been waived by Post Road.

The PRG Loans are secured by a first-priority security interest in all of the assets of T3 Nevada and guaranteed by T3 Nevada’s subsidiaries. As a result, if Post Road accelerates the maturity of the PRG Loans due to existing or new events of default pursuant to the Credit Agreement, Post Road could foreclose on their security interest and liquidate some or all of these assets, which would harm our business, financial condition and results of operations and could require us to curtail or cease operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risks.

Not Applicable.

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this quarterly report on Form 10-Q for the quarter ended January 31, 2018,April 30, 2022, our Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”) evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our PEO and PFO concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our Chief Executive OfficerPEO and Principal Financial Officer,PFO, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b) Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting, as there has been no implementation to date of processes and/or procedures to remedy internal control weaknesses and deficiencies.

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

NoneOn September 21, 2021, T3 Nevada, a subsidiary of the Company, entered into a settlement agreement with Carolina Financial Securities, LLC (“CFS”). Under the settlement agreement the parties agreed to resolve all issues and claims related to the lawsuit. Pursuant to the settlement agreement, T3 Nevada agreed to pay CFS a total of $300,000, payable as follows: $100,000 by October 15, 2021, and $200,000 payable in 15 monthly installments of $13,333.33 beginning November 15, 2021. On October 15, 2021, the Company submitted a payment of $100,000 and as of the date of this filing, the Company submitted five (5) monthly payment for $13,333.33 each.

 

Item 1A. Risk Factors.

 

Not Applicable

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

In December, 2017, the Company issued an aggregate of 100,000 shares of common stock with a market value at time of issuance of $40,000. The shares were issued for consulting services.Not Applicable

 

In January, 2018, the Company issued an aggregate of 250,000 shares of common stock with a market value at time of issuance of $135,000. The shares were issued as part of a commitment fee under an equity purchase agreement.

In March, 2018, the Company issued an aggregate of 80,000 shares of common stock for $40,000 and 3-year warrants to purchase 15,000 shares of common stock at an exercise price of $0.50 per share.

The sales and issuances of the securities described above were made pursuant to the exemptions from registration contained in to Section 4(a)(2) of the Securities Act and Regulation D under the Securities Act. Each purchaser represented that such purchaser’s intention to acquire the shares for investment only and not with a view toward distribution. We requested our stock transfer agent to affix appropriate legends to the stock certificate issued to each purchaser and the transfer agent affixed the appropriate legends. Each purchaser was given adequate access to sufficient information about us to make an informed investment decision. Except as described in this prospectus, none of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved.

Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures.

Not Applicable

Item 5. Other Information.

 

NoneForbearance Agreement

 

We are reporting the following information in lieu of reporting on a Current Report on Form 8-K under Item 1.01 Entry into a Material Definitive Agreement.

Item 1.01 Entry into a Material Definitive Agreement.

As disclosed in a Current Report on Form 8-K filed by the Company in November 2020, on November 17, 2020, T3 Nevada (the Company’s majority owned subsidiary), T3 Nevada’s subsidiaries (T3 Nevada and its subsidiaries, collectively, “the T3 Nevada Parties”) entered into a credit agreement (the “Credit Agreement”) with Post Road Administrative LLC (the “Agent”) and its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post Road”). The Company is a party to certain sections of the Credit Agreement. Pursuant to the Credit Agreement, Post Road was to provide T3 Nevada with a secured loan of up to $20,000,000.

As disclosed in a Current Report on Form 8-K filed in December 2021, on December 20, 2021, the parties to the Credit Agreement entered into an amendment to the Credit Agreement.


As disclosed in a Current Report on Form 8-K filed in February 2022 (the “February 8-K”), on February 4, 2022, the parties to the Credit Agreement agreed that Post Road would lend a further $10 million to T3 Nevada pursuant to a Term Loan C Note. T3 Nevada received net proceeds of $9.75 million pursuant to the Term Loan C Note. T3 Nevada used such loan proceeds to acquire all of the equity interests in Next Level Internet, Inc. (“Next Level”) from its two owners.

As also disclosed in the February 8-K, in connection with the issuance of the Term Loan C Note, on February 4, 2022, the T3 Nevada parties to the Credit Agreement and Next Level (collectively, the “Loan Parties”) and Post Road entered into a Joinder and Second Amendment to Credit Agreement (the “Joinder”) whereby, among other terms, Next Level became a guarantor of T3’s obligations pursuant to the Credit Agreement and notes issued pursuant thereto.

On June 13, 2022, the parties to the Joinder entered into a Forbearance Agreement and Third Amendment to Credit Agreement (“Forbearance Agreement”).

The Forbearance Agreement was entered into because certain events of default related to both the Credit Agreement and the Joinder have occurred. The events of default related to financial covenants were failure to maintain a Senior Leverage Ratio (as defined in the Credit Agreement) of less than 4.05 to 1.00 and failure to comply with a Credit Agreement provision whereby the Loan Parties are not allowed to make annual Capital Expenditures (as defined in the Credit Agreement) greater than $379,190.

The events of default unrelated to financial covenants were the Loan Parties’ failure to: (a) deliver certain certificates, financial information and projections, lease, landlord, and control agreements, and evidence of a UCC-3 filing; (b) close or consolidate certain bank accounts; (c) provide ten (10) business days’ notice prior to the Company filing certain filings with the Securities and Exchange Commission (the “SEC”) and the Nevada Secretary of State; and (d) engage an industry consultant acceptable to the Agent to consult with the Loan Parties on integration strategy, future acquisitions, operating performance, and various business issues.

Pursuant to the Forbearance Agreement, Post Road agreed to forbear through the Forbearance Period (as defined below) from (i) exercising its rights and remedies with regard to the existing events of default and (ii) requiring compliance with the financial covenants set forth in Section 11.12 of the Credit Agreement (related to leverage, EBITDA, liquidity, capital expenditures, fixed charge coverage ratio, and churn). The “Forbearance Period” is from June 13, 2022 through the earlier of (a) August 8, 2022, (b) the date on which any other event of default not enumerated in the Forbearance Agreement occurs or is deemed to have occurred, or (c) the date of any failure of any Loan Party to comply with any aspect of the Forbearance Agreement. The forbearance does not constitute a waiver of the defaults enumerated nor does it impair the ability of Post Road to exercise its rights and remedies after the expiration of the Forbearance Period.

In addition to the forbearance, the Forbearance Agreement amends the Credit Agreement to clarify Section 10.15 with regard to the Company’s affirmative covenant to comply with its SEC reporting obligations. It also amends the Credit Agreement to clarify the provisions of the Section 10 (affirmative covenants) whose violation constitute an event of default. Finally, the Forbearance Agreement amends the Joinder to allow T3 Nevada to give the Agent draft copies of its 10-Ks and 10-Qs and 8-Ks for the Agent and its advisors review only five business days (10-Ks) or two business days (10-Qs and 8-Ks) in advance rather than ten business days in advance as originally required by the Joinder.

The Company anticipates implementing remedies by July 31, 2022 to resolve the financial covenants breaches and the breaches regarding delivering a compliance certificate, financial projections, and a landlord agreement along with engaging an industry consultant. The Company and Post Road have agreed to work in good faith to adjust the financial covenants set forth in Section 11.12 of the Credit Agreement to include the financial impact of the acquisitions of Skynet’s assets and. and the acquisition of Next Level Internet, Inc. As of the date of this filing, the Company cannot predict the final outcome of the negotiations with Post Road.

The other non-financial events of default were covenants that were complied with, however, the compliance was not timely pursuant to the provisions of the Credit Agreement and Joinder. These events of default have not been waived by Post Road.

The foregoing summary of the Forbearance Agreement contains only a brief description of the material terms of the Forbearance Agreement and such description is qualified in its entirety by reference to the full text of the Forbearance Agreement, filed herewith as Exhibit 10.3 and incorporated by reference herein.

Item 6. Exhibits

 

Exhibit Number 
NumberExhibit Title
   
10.13.1* Securities Purchase Agreement with Peak One for Debenture dated January 12, 2018.Certificate of Correction to the Series A Convertible Preferred Stock Certificate of Designation.
   
10.24.1^ 

DebentureForm of Unsecured Promissory Note for a Total of $2,000,000 issued by T3 Communications, Inc. to Peak Onethe Next Level Sellers, dated January 12, 2018.February 4,2022. (Filed as Exhibit 4.1 to the Form 8-K filed with the SEC on February 10, 2022).

   
10.34.2 

Equity Purchase AgreementForm of Unsecured Convertible Promissory Note for a Total of $2,000,000 by T3 Communications, Inc. to the Next Level Sellers, dated February 4, 2022. (Filed as Exhibit 4.2 to the Form 8-K filed with Peak One dated January 12, 2018.the SEC on February 10, 2022).

   
10.44.3^ 

Registration RightsTerm Loan C Note for $10,000,000 issued by T3 Communications, Inc. to Post Road Special Opportunity Fund II LP, dated February 4, 2022. (Filed as Exhibit 4.3 to the Form 8-K filed with the SEC on February 10, 2022).


10.1#

Equity Purchase Agreement by and among the Company, T3 Communications, Inc., and the Sellers of Next Level Internet, Inc. (Filed as Exhibit 10.1 to the Form 8-K filed with Peak One dated January 12, 2018.the SEC on February 10, 2022).

   
31.110.2#^ 

Joinder and Second Amendment to Credit Agreement by and among T3 Communications, Inc., the Subsidiaries of T3 Communications (including Next Level Internet, Inc.), Post Road Administrative LLC, and Post Road Special Opportunity Fund II LP, dated February 4, 2022. (Filed as Exhibit 10.2 to the Form 8-K filed with the SEC on February 10, 2022).

10.3*Forbearance Agreement and Third Amendment to Credit Agreement by and among T3 Communications, Inc., the Subsidiaries of T3 Communications (including Next Level Internet, Inc.), Post Road Administrative LLC, and Post Road Special Opportunity Fund II LP, dated June 13, 2022
31.1*Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.231.2* Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.132.1+ Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.232.2+ Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*Inline XBRL Instance Document
101.SCH*Inline XBRL Taxonomy Extension Schema Document
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

#Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish supplementally copies of omitted schedules and exhibits to the Securities and Exchange Commission or its staff upon its request.

 

^Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because such information is (i) not material and (ii) would likely be competitively harmful if publicly disclosed. The Company will furnish supplementally an unredacted copy of such exhibit to the Securities and Exchange Commission or its staff upon its request.

18*Filed herewith

+In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.


 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 DIGERATI TECHNOLOGIES, INC.
                       (Registrant)INC.
  

Date: March 22, 2018June 21, 2022

By:/s/ Arthur L. Smith
 Name:Arthur L. Smith
 Title:President and
Chief Executive Officer
  

(Duly Authorized Officer and

Principal Executive Officer)

   

Date: March 22, 2018June 21, 2022

By:/s/ Antonio Estrada Jr.
 Name:Antonio Estrada Jr.
Title:Chief Financial Officer
  

(Duly Authorized Officer and

Principal Financial Officer)

 

 

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