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 ~~October 31, 2019~~April 30, 2020

☐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 or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer
~~Incorporation or Organization)~~		Identification No.)

825 W. Bitters, Suite 104
San Antonio, Texas		78216
~~(Address~~(Address of Principal Executive Offices)		(Zip Code)

(210) 614-7240

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
N/A		N/A		N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

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 filer ☐		Accelerated filer ☐
Non-accelerated filer☒		Smaller reporting Company ☒
Emerging growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

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

Number of Shares	Class:	As of:

~~35,585,663~~88,344,144	Common Stock $0.001 par value	~~December 13, 2019~~June 9, 2020

DIGERATI TECHNOLOGIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED ~~OCTOBER 31, 2019~~APRIL 30, 2020

INDEX

DIGERATI TECHNOLOGIES, INC.

CONTENTS

PAGE 1		CONSOLIDATED BALANCE SHEETS AS OF ~~OCTOBER 31, 2019~~APRIL 30, 2020 AND JULY 31, 2019 (UNAUDITED)

PAGE 2		CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED ~~OCTOBER 31,~~APRIL 30, 2020 AND 2019 ~~AND 2018~~ (UNAUDITED)

PAGE 3-4		CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT FOR THE THREE AND NINE MONTHS ENDED ~~OCTOBER 31,~~APRIL 30, 2020 AND 2019 ~~AND 2018~~ (UNAUDITED)

PAGE 5		CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE ~~THREE~~NINE MONTHS ENDED ~~OCTOBER 31,~~APRIL 30, 2020 AND 2019 ~~AND 2018~~ (UNAUDITED)

PAGES ~~6-26~~6-32		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, unaudited)

	October 31,			July 31,			April 30,			July 31,
	2019			2019			2020			2019

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	469		$	406		$	445		$	406
Accounts receivable, net		277			262			397			262
Prepaid and other current assets		114			107			176			107
Right-of-use asset		139			-
Total current assets		999			775			1,018			775

LONG-TERM ASSETS:
Intangible assets, net		1,736			1,832			1,546			1,832
Goodwill, net		810			810			810			810
Property and equipment, net		536			579			456			579
Other assets		73			58			73			58
Investment in Itellum		185			185			185			185
Right-of-use asset		144			-			213			-
Total assets	$	4,483		$	4,239		$	4,301		$	4,239

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable	$	1,307		$	1,264		$	1,516		$	1,264
Accrued liabilities		1,570			1,493			1,813			1,493
Equipment financing		66			65			68			65
Convertible note payable, current, net $460 and $547, respectively		1,162			1,005
Note payable, current, related party, net of $6 and $7, respectively		366			383
Convertible note payable, current, net $376 and $547, respectively								407			1,005
Note payable, current, related party, net of $0 and $7, respectively								131			383
Note payable, current, net $0 and $0, respectively		1,218			1,218			837			1,218
Deferred income		243			285			318			285
Derivative liability		1,302			927			1,099			927
Lease liability		139			-			114			-
Total current liabilities		7,373			6,640			6,303			6,640

LONG-TERM LIABILITIES:
Convertible debenture, net $0 and $29, respectively		-			21			-			21
Notes payable, related party, net $15 and $17, respectively		122			136
Notes payable, related party, net $12 and $17, respectively								95			136
Note payable, net $0 and $0, respectively								693			-
Equipment financing		83			100			48			100
Lease liability		144			-			99			-
Total long-term liabilities		349			257			935			257

Total liabilities		7,722			6,897			7,238			6,897

Commitments and contingencies

STOCKHOLDERS’ DEFICIT:
Preferred stock, $0.001, 50,000,000 shares authorized, 225,000 and 0 issued and outstanding, respectively		-			-
Common stock, $0.001, 150,000,000 shares authorized, 33,212,707 and 23,740,406 issued and outstanding, respectively (6,000,000 reserved in Treasury)		33			24
Preferred stock, $0.001, 50,000,000 shares authorized
Series A Preferred stock, $0.001, 1,000,000 shares designated, 225,000 and 225,000 issued and outstanding, respectively								-			-
Series B Preferred stock, $0.001, 1,000,000 shares designated, 424,165 and 0 issued and outstanding, respectively								-			-
Common stock, $0.001, 150,000,000 shares authorized, 84,844,144 and 23,740,406 issued and outstanding, respectively (6,000,000 reserved in Treasury)								85			24
Additional paid in capital		83,903			82,972			85,762			82,972
Accumulated deficit		(86,828	)		(85,320	)		(88,392	)		(85,320	)
Other comprehensive income		1			1			1			1
Total Digerati’s stockholders’ deficit		(2,891	)		(2,323	)		(2,544	)		(2,323	)
Noncontrolling interest		(348	)		(335	)		(393	)		(335	)
Total stockholders’ deficit		(3,239	)		(2,658	)		(2,937	)		(2,658	)
Total liabilities and stockholders’ deficit	$	4,483		$	4,239		$	4,301		$	4,239

See accompanying notes to consolidated unaudited financial statements

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

	Three months ended October 31,						Three months ended April 30,						Nine months ended April 30,
	2019			2018			2020			2019			2020			2019
OPERATING REVENUES:
Cloud software and service revenue	$	1,589		$	1,522		$	1,566		$	1,485		$	4,712		$	4,493

Total operating revenues		1,589			1,522			1,566			1,485			4,712			4,493

OPERATING EXPENSES:
Cost of services (exclusive of depreciation and amortization)		803			757			764			770			2,343			2,322
Selling, general and administrative expense		1,192			887			1,047			1,220			3,357			3,040
Legal and professional fees		102			124			98			95			408			305
Bad debt		-			(3	)		(19	)		-			(19	)		(3	)
Depreciation and amortization expense		163			170			148			167			465			505
Total operating expenses		2,260			1,935			2,038			2,252			6,554			6,169

OPERATING LOSS		(671	)		(413	)		(472	)		(767	)		(1,842	)		(1,676	)

OTHER INCOME (EXPENSE):
Loss on derivative instruments		(465	)		(139	)
Income (tax) benefit		39			(13	)
Gain (loss) on derivative instruments								(249	)		903			69			(594	)
Gain on settlement of debt								134			-			134			-
Income tax benefit (expense)								(10	)		(10	)		22			(37	)
Interest expense		(424	)		(376	)		(511	)		(376	)		(1,513	)		(1,414	)
Total other expense		(850	)		(528	)
Total other income (expense)								(636	)		517			(1,288	)		(2,045	)

NET LOSS INCLUDING NONCONTROLLING INTEREST		(1,521	)		(941	)		(1,108	)		(250	)		(3,130	)		(3,721	)

Less: Net loss attributable to the noncontrolling interests		13			27			1			29			58			87

NET LOSS ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS		(1,508	)		(914	)		(1,107	)		(221	)		(3,072	)		(3,634	)

Deemed dividend on Series A Convertible preferred stock		-			-			-			(2	)		-			(2	)

NET LOSS ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS	$	(1,508	)	$	(914	)	$	(1,107	)	$	(223	)	$	(3,072	)	$	(3,636	)

LOSS PER COMMON SHARE - BASIC	$	(0.06	)	$	(0.07	)	$	(0.02	)	$	(0.01	)	$	(0.07	)	$	(0.24	)

LOSS PER COMMON SHARE - DILUTED	$	(0.06	)	$	(0.07	)	$	(0.02	)	$	(0.01	)	$	(0.07	)	$	(0.24	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC		25,061,210			12,905,639			61,624,640			18,184,442			41,445,900			15,163,082

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED		25,061,210			12,905,639			61,624,640			18,184,442			41,445,900			15,163,082

See accompanying notes to consolidated unaudited financial statements

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

For the ~~Three~~Nine Months Ended ~~October 31, 2019~~April 30, 2020

(In thousands, except for share amounts, unaudited)

																										Equity Digerati’s Shareholders
	Equity Digerati’s Shareholders																																						Additional						Other
									Additional						Other											Convertible Preferred									Common				Paid-in			Accumulated			Comprehensive		Stockholders			Noncontrolling
	Convertible Preferred				Common				Paid-in			Accumulated			Comprehensive		Stockholders			Noncontrolling						A Shares			Par		B Shares		Par		Shares		Par		Capital			Deficit			Income		Deficit			Interest			Totals
	Shares		Par		Shares		Par		Capital			Deficit			Income		Deficit			Interest			Totals
BALANCE, July 31, 2019		225,000		-		23,740,406	$	24	$	82,972		$	(85,320	)	$	1	$	(2,323	)	$	(335	)	$	(2,658	)		225,000			-		-		-		23,740,406	$	24	$	82,972		$	(85,320	)	$	1	$	(2,323	)	$	(335	)	$	(2,658	)
Stock issued for services, to employees		-				5,289,420		5		365			-			-		370			-			370			-			-		-		-		5,289,420		5		365			-			-		370			-			370
Amortization of employee stock options		-				-		-		141			-			-		141			-			141			-			-		-		-		-		-		141			-			-		141			-			141
Stock issued for convertible debt		-				3,782,881		4		153			-			-		157			-			157			-			-		-		-		3,782,881		4		153			-			-		157			-			157
Derivative liability resolved to APIC due to note conversion		-		-		-		-		240			-			-		240			-			240			-			-		-		-		-		-		240			-			-		240			-			240
Stock issued, extension of debt		-				400,000		-		40			-			-		40			-			40			-			-		-		-		400,000		-		40			-			-		40			-			40
Dividends declared		-				-		-		(8	)		-			-		(8	)		-			(8	)		-			-		-		-		-		-		(8	)		-			-		(8	)		-			(8	)
Net Ioss		-				-		-		-			(1,508	)		-		(1,508	)		(13	)		(1,521	)
Net loss																											-			-		-		-		-		-		-			(1,508	)		-		(1,508	)		(13	)		(1,521	)
BALANCE, October 31, 2019		225,000		-		33,212,707	$	33	$	83,903		$	(86,828	)	$	1	$	(2,891	)	$	(348	)	$	(3,239	)		225,000			-		-		-		33,212,707	$	33	$	83,903		$	(86,828	)	$	1	$	(2,891	)	$	(348	)	$	(3,239	)
Stock issued for services, to employees																											-			-						5,012,658		5		193			-			-		198			-			198
Amortization of employee stock options																											-			-						-		-		110			-			-		110			-			110
Stock issued for services																											-			-						400,000		1		15			-			-		16			-			16
Stock issued for convertible debt																											-			-						8,539,179		9		144			-			-		153			-			153
Derivative liability resolved to APIC due to note conversion																											-			-						-		-		145			-			-		145			-			145
Stock issued for accrued interest payments on debt																											-			-						282,885		-		15			-			-		15			-			15
Stock issued, extension of debt																											-			-						80,000		-		3			-			-		3			-			3
Stock issued for conversion of Series A convertible preferred stock																											(25,000	)								86,667		-		-			-			-		-			-			-
Dividends declared																											-									-		-		(4	)		-			-		(4	)		-			(4	)
Net loss																											-									-		-		-			(457	)		-		(457	)		(44	)		(501	)
BALANCE, January 31, 2020																											200,000			-		-		-		47,614,096	$	48	$	84,524		$	(87,285	)	$	1	$	(2,712	)	$	(392	)	$	(3,104	)
Stock issued for services, to employees																											-			-		-		-		11,509,022		12		222			-			-		234			-			234
Amortization of employee stock options																											-			-		-		-		-		-		63			-			-		63			-			63
Preferred Stock Series A and warrants issued for AP settlement																											25,000			-		-		-		-		-		25			-			-		25			-			25
Preferred Stock Series B issued for debt settlement																											-			-		424,165		-		-		-		424			-			-		424			-			424
Stock issued for convertible debt																											-			-		-		-		25,110,999		25		352			-			-		377			-			377
Derivative liability resolved to APIC due to note conversion																											-			-		-		-		-		-		139			-			-		139			-			139
Stock issued for accrued interest payments on debt																											-			-		-		-		110,027		-		4			-			-		4			-			4
Stock issued, extension of debt																											-			-		-		-		300,000		-		7			-			-		7			-			7
Stock issued, settlement of debt																											-			-		-		-		200,000		-		5			-			-		5			-			5
Dividends declared																											-			-		-		-		-		-		(3	)		-			-		(3	)		-			(3	)
Net loss																											-			-		-		-		-		-		-			(1,107	)		-		(1,107	)		(1	)		(1,108	)
BALANCE, April 30, 2020																											225,000			-		424,165		-		84,844,144	$	85	$	85,762		$	(88,392	)	$	1	$	(2,544	)	$	(393	)	$	(2,937	)

See accompanying notes to consolidated unaudited financial statements

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

~~For the Three Months~~Nine-Month Period Ended ~~October 31, 2018~~April 30, 2019

(In thousands, except for share amounts, unaudited)

	Equity Digerati’s Shareholders																				Equity Digerati’s Shareholders
					Additional					Other											Convertible								Additional								Other
	Common				Paid-in		Accumulated			Comprehensive		Stockholders			Noncontrolling						Preferred				Common				Paid-in			Subscription		Accumulated			Comprehensive		Stockholders			Noncontrolling
	Shares		Par		Capital		Deficit			Income		Deficit			Interest			Totals			Shares		Par		Shares		Par		Capital			Receivable		Deficit			Income		Equity			Interest			Totals
BALANCE, July 31, 2018		12,775,143	$	13	$	79,993	$	(80,800	)	$	1	$	(793	)	$	(207	)	$	(1,000	)		-				12,775,143	$	13	$	79,993		$	-	$	(80,800	)	$	1	$	(793	)	$	(207	)	$	(1,000	)
Amortization of employee stock options		-		-		95		-			-		95			-			95			-				-		-		95			-		-			-		95			-			95
Stock issued for AP settlement		21,672		-		6		-			-		6			-			6			-				21,672		-		6			-		-			-		6			-			6
Stock issued for cash		80,000		-		47		-			-		47			-			47			-		-		80,000		-		47			-		-			-		47			-			47
Stock issued, for debt		240,000		-		36		-			-		36			-			36			-				240,000		-		36			-		-			-		36			-			36
Value of warrants issued		-		-		79		-			-		79			-			79			-				-		-		79			-		-			-		79			-			79
Net Ioss		-		-		-		(914	)		-		(914	)		(27	)		(941	)
Net loss																						-				-		-		-			-		(914	)		-		(914	)		(27	)		(941	)
BALANCE, October 31, 2018		13,116,815	$	13	$	80,256	$	(81,714	)	$	1	$	(1,444	)	$	(234	)	$	(1,678	)		-		-		13,116,815	$	13	$	80,256			-	$	(81,714	)	$	1	$	(1,444	)	$	(234	)	$	(1,678	)
Amortization of employee stock options																						-				-		-		41			-		-			-		41			-			41
Stock issued for services, to employees																						-				635,156		1		113			-		-			-		114			-			114
Stock issued for services																						-				200,000		-		70			-		-			-		70			-			70
Stock issued for AP settlement																						-				56,327		-		18			-		-			-		18			-			18
Stock issued for cash																						-		-		258,621		-		75			-		-			-		75			-			75
Stock issued, for debt																						-				28,000		-		-			-		-			-		-			-			-
Stock issued for convertible debt																						-				1,642,020		2		225			-		-			-		227			-			227
Stock issued, extension of debt																						-				105,000		-		24			-		-			-		24			-			24
Value of warrants issued																						-				-		-		16			-		-			-		16			-			16
Net loss																						-				-		-		-			-		(2,499	)		-		(2,499	)		(31	)		(2,530	)
BALANCE, January 31, 2019																						-		-		16,041,939	$	16	$	80,838			-	$	(84,213	)	$	1	$	(3,358	)	$	(265	)	$	(3,623	)
Amortization of employee stock options																						-				-		-		153			-		-			-		153			-			153
Stock issued for services																						-				725,000		1		178			-		-			-		179			-			179
Stock issued for AP settlement																						-				60,715		-		13			-		-			-		13			-			13
Stock issued for cash																						-		-		600,000		1		149			-		-			-		150			-			150
Preferred stock issued for cash																						50,000		-		-		-		50			-		-			-		50			-			50
Stock issued for convertible debt																						-				1,288,777		1		360			-		-			-		361			-			361
Stock issued, extension of debt																						-				85,000		-		16			-		-			-		16			-			16
Stock issued, exercise of warrants																						-				75,000		-		7			-		-			-		7			-			7
Beneficial conversion feature on convertible preferred stock																						-				-		-		2					-			-		2			-			2
Deemed dividend on Series A Convertible preferred stock																						-				-		-		(2	)				-			-		(2	)		-			(2	)
Net loss																						-				-		-		-			-		(221	)		-		(221	)		(29	)		(250	)
BALANCE, April 30, 2019																						50,000		-		18,876,431	$	19	$	81,764			-	$	(84,434	)	$	1	$	(2,650	)	$	(294	)	$	(2,944	)

See accompanying notes to consolidated unaudited financial statements

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Three months ended October 31,						Nine months ended April 30,
	2019			2018			2020			2019

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,521	)	$	(941	)	$	(3,130	)	$	(3,721	)
Adjustments to reconcile net loss to cash used in by operating activities:
Depreciation and amortization		163			170			465			505
Stock compensation and warrant expense		511			144			1,132			716
Stock issued for extension of debt		-			-
Bad debt recovery		-			(3	)		(18	)		(3	)
Loss on AP settled with stock								-			5
Interest expense from stock issued for debt extension								-			24
Amortization of ROU - operating		89			-			159			-
Amortization of debt discount		324			259			1,046			959
Loss (Gain) on derivative liabilities		465			139			(69	)		594
Gain settlement of debt								(134	)		-
Changes in operating assets and liabilities:
Accounts receivable		(15	)		39			(116	)		(13	)
Escrow deposit related to acquisition								-			(55	)
Prepaid expenses and other current assets		(21	)		42			18			45
Right of use operating lease liability		(49	)		-			(159	)		-
Accounts payable		42			26			277			54
Accrued expenses		80			153			532			539
Deferred income		(42	)		128			33			52
Net cash provided by operating activities		26			156
Net cash provided by (used in) operating activities								36			(299	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in acquisition of equipment		(24	)		(15	)		(57	)		(43	)
Cash paid for escrow deposit related to acquisition								(102	)		-
Net cash used in investing activities		(24	)		(15	)		(159	)		(43	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock and warrants		-			40			-			322
Borrowings from convertible debt, net of original issuance cost and discounts		150			-			195			509
Borrowings from related party note, net								70			25
Borrowings from 3rd party promissory notes, net		-			100			322			100
Payments on ROU - liability		(40	)		-
Principal payments on convertible notes, net		-			(40	)		-			(301	)
Principal payments on related party notes, net		(33	)		(31	)		(376	)		(94	)
Principal payments on 3rd party promissory notes, net								-			(125	)
Principal payment on equipment financing		(16	)		(7	)		(49	)		(22	)
Net cash provided by financing activities		61			62			162			414

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		63			203			39			72
CASH AND CASH EQUIVALENTS, beginning of period		406			388			406			388

CASH AND CASH EQUIVALENTS, end of period	$	469		$	591		$	445		$	460

SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	66		$	89		$	323		$	355
Income tax paid	$	-		$	-		$	-		$	-

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Debt discount from warrants issued with debt	$	-		$	38		$	-		$	38
Debt discount from common stock issued with debt	$	-		$	36		$	-		$	36
Debt discount from derivative liabilities	$	150		$	-		$	765		$	509
Debt from assignment of accrued interest							$	99
Capitalization of ROU assets and liabilities - operating	$	372		$	-		$	372		$	-
Preferred Stock Series A and warrants issued for AP settlement							$	25		$	-
Preferred Stock Series B issued for debt conversion and settlement							$	424		$	-
Common Stock issued for debt conversion	$	157		$	-		$	692		$	155
Common Stock issued for interest payment							$	19		$	-
Common Stock issued for debt extension	$	40		$	-		$	50		$	17
Common Stock issued to settle accounts payable	$	-		$	5
Deemed dividend on Series A Convertible preferred stock							$	-		$	2
Dividends	$	8		$	-		$	15		$	-
Derivative liability resolved to APIC due to debt conversion	$	240		$	-		$	524		$	432

See accompanying notes to consolidated unaudited financial statements

DIGERATI TECHNOLOGIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of Digerati Technologies, Inc. (“we;” “us,” “our,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the United States Securities and Exchange Commission. In the opinion of management, these interim financial statements contain all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of financial position and the results of operations for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosure contained in the audited consolidated financial statements for the year ended July 31, 2019 contained in the Company’s Form 10-K filed on October 28, 2019 have been omitted.

Customers and Suppliers

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

During the ~~three~~nine months ended ~~October 31,~~April 30, 2020 and 2019, ~~and 2018,~~ the Company did not derive a significant amount of revenue from one single customer.

As of the ~~three~~nine months ended ~~October 31,~~April 30, 2020 and 2019, ~~and 2018,~~ the Company did not derive a significant amount of accounts receivable from one single customer.

Sources of revenue:

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

Service Revenue

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

Product Revenue

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

Disaggregation of Cloud software and service revenue

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

Three months ended
October 31,
2019 2018
Cloud software and service revenue $ 1,555 $ 1,474
Product revenue 34 48
Total operating revenues $ 1,589 $ 1,522
Three months ended
April 30, Nine months ended
April 30,
2020 2019 2020 2019
Cloud software and service revenue $ 1,556 $ 1,455 $ 4,653 $ 4,340
Product revenue 10 30 59 153
Total operating revenues $ 1,566 $ 1,485 $ 4,712 $ 4,493

Contract Assets

Contract assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations are completed. The revenue is recognized when the customer receives services or equipment for a reduced consideration at the onset of an arrangement; for example, when the initial month’s services or equipment are discounted. Contract assets are included in prepaid and other current assets in the consolidated balance sheets, depending on if their reduction is recognized during the succeeding 12-month period or beyond. Contract assets as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019, were ~~$13,725~~$5,084 and $22,967, respectively.

Deferred Income

Deferred income represents billings or payment received in advance of revenue recognition and is recognized upon transfer of control. Balances consist primarily of annual plan subscription services, for services not yet provided as of the balance sheet date. Deferred revenues that will be recognized during the succeeding 12-month period are recorded as current deferred revenues in the consolidated balance sheets, with the remainder recorded as other noncurrent liabilities in the consolidated balance sheets. Deferred income as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019, were ~~$243,000~~$318,000 and $285,000, respectively.

Costs to Obtain a Customer Contract

Sales commissions are paid upon collections of related revenue and are expensed during the same period. Sales commissions for the ~~period~~nine months ended ~~October 31,~~April 30, 2020 and April 30, 2019, were $51,953 and ~~October 31, 2018, were $16,253 and $10,621,~~$39,828, respectively.

Direct Costs - Cloud software and service

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

Noncontrolling interest.The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, which governs the accounting for and reporting of non-controlling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance.

7
The net income (loss) attributed to the NCI is separately designated in the accompanying consolidated statements of operations and other comprehensive income (loss). For the ~~three~~nine months ended ~~October 31,~~April 30, 2020 and 2019, ~~and 2018,~~ the Company recognized a noncontrolling deficits of ~~$13,000~~$58,000 and ~~$27,000,~~$87,000, respectively.

Recently issued accounting pronouncements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments under this pronouncement will change the way all leases with a duration of one year or more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized like capital leases are under current accounting, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. This update is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2018. In July 2018 the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provided additional implementation guidance on the previously issued ASU. The Company evaluated this amendment and it was adopted as of August 1, 2019 and concluded that did not have a material effect on the presentation of our consolidated financial statements (See footnote 8).

NOTE 2 – GOING CONCERN

Financial Condition

~~Digerati’s~~The Company’s consolidated financial statements for the ~~three~~nine months ending ~~October 31, 2019~~April 30, 2020 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Since the Company’s inception in 1993, ~~Digerati~~the Company has incurred net losses and accumulated a deficit of approximately ~~$86,828,000~~$88,392,000 and a working capital deficit of approximately ~~$6,374,000~~$5,285,000 which raises substantial doubt about Digerati’s ability to continue as a going concern.

Management Plans to Continue as a Going Concern

Management believes that current available resources will not be sufficient to fund the Company’s operations over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, among other things, raising additional capital or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such additional funding from various possible sources, including the public equity market, private financings, sales of assets, collaborative arrangements and debt. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to delay or reduce the scope of its operations, and the Company may not be able to pay off its obligations, if and when they come due.

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

~~Digerati’s~~The Company’s consolidated financial statements as of ~~October 31, 2019~~April 30, 2020 do not include any adjustments that might result from the inability to implement or execute ~~Digerati’s~~the Company’s plans to improve our ability to continue as a going concern.
8

NOTE 3 – INTANGIBLE ASSETS

Below are summarized changes in intangible assets at ~~October 31, 2019~~April 30, 2020 and July 31, 2019:

Gross
Carrying Accumulated Net Carrying Gross
October 31, 2019 Value Amortization Amount
Carrying Accumulated Net Carrying
April 30, 2020 Value Amortization Amount

NetSapiens - license, 10 years $ 150,000 $ (150,000 ) $ - $ 150,000 $ (150,000 ) $ -
Customer relationships, 5 years 40,000 (14,672 ) 25,328 40,000 (18,672 ) 21,328
Customer relationships, 7 years 1,480,000 (328,934 ) 1,151,066 1,480,000 (434,648 ) 1,045,352
Marketing & Non-compete, 5 years 800,000 (240,000 ) 560,000 800,000 (320,000 ) 480,000
Total Define-lived Assets 2,470,000 (733,606 ) 1,736,394 2,470,000 (923,320 ) 1,546,680
Goodwill, Indefinite 810,353 - 810,353 810,353 - 810,353
Balance, October 31, 2019 $ 3,280,353 $ (733,606 ) $ 2,546,748
Balance, April 30, 2020 $ 3,280,353 $ (923,320 ) $ 2,357,033

Gross
Gross
Carrying Accumulated Net Carrying Carrying Accumulated Net Carrying
July 31, 2019 Value Amortization Amount Value Amortization Amount

NetSapiens - license, 10 years $ 150,000 $ (150,000 ) $ - $ 150,000 $ (150,000 ) $ -
Customer relationships, 5 years 40,000 (12,672 ) 27,328 40,000 (12,672 ) 27,328
Customer relationships, 7 years 1,480,000 (276,077 ) 1,203,923 1,480,000 (276,077 ) 1,203,923
Marketing & Non-compete, 5 years 800,000 (200,000 ) 600,000 800,000 (200,000 ) 600,000
Total Define-lived Assets 2,470,000 (638,749 ) 1,831,251 2,470,000 (638,749 ) 1,831,251
Goodwill, Indefinite 810,353 - 810,353 810,353 - 810,353
Balance, July 31, 2019 $ 3,280,353 $ (638,749 ) $ 2,641,605 $ 3,280,353 $ (638,749 ) $ 2,641,604

Total amortization expense for the ~~three~~nine months ended ~~October 31,~~April 30, 2020 and 2019 was $284,571 and ~~2018 was approximately $94,857 and $94,857,~~$284,571, respectively.

NOTE 4 – STOCK-BASED COMPENSATION

In November 2015, ~~Digerati~~the Company adopted the Digerati Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan authorizes the grant of up to 7.5 million stock options, restricted common shares, non-restricted common shares and other awards to employees, directors, and certain other persons. The Plan is intended to permit ~~Digerati~~the Company to retain and attract qualified individuals who will contribute to the overall success of ~~Digerati. Digerati’s~~the Company. The Company’s Board of Directors determines the terms of any grants under the Plan. Exercise prices of all stock options and other awards vary based on the market price of the shares of common stock as of the date of grant. The stock options, restricted common stock, non-restricted common stock and other awards vest based on the terms of the individual grant.

During the ~~three~~nine months ended ~~October 31, 2019,~~April 30, 2020, we issued:

·● ~~3,972,055~~7,313,827 common shares to ~~members of~~ the ~~Management team~~Executive Officers for services in lieu of cash compensation. The Company recognized stock-based compensation expense of approximately ~~$278,044~~$410,044 equivalent to the value of the shares calculated based on the share’s closing price at the grant dates.
·● ~~1,317,365~~2,988,251 shares of common stock to the Executive Officers, with a market value at time of issuance of ~~$92,216,~~$158,216 the stock was issued as payment for outstanding compensation.
·● 60,000 options to purchase common shares to an employee with an exercise price of $0.12 per share and a term of 5 years. The options vest equally over a period of three years. The options have a fair market value of $7,158.
● 11,509,020 common shares to various employees as part of the Company’s Non-Standardized profit-sharing plan contribution. The Company recognized stock-based compensation expense of approximately $233,633 equivalent to the value of the shares calculated based on the share’s closing price at the grant date.
9


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

Expected dividend yield 0.00 %
Expected stock price volatility 317.52 %
Risk-free interest rate 1.47 %
Expected term 3.0 year

During the ~~three~~nine months ended ~~October 31, 2018~~April 30, 2019, we ~~issued the following to settle accounts payables:~~issued:

·● ~~In September 2018,~~635,155 common shares to various employees as part of the ~~Company issued an aggregate of 21,672 shares of common stock with a market value at time of issuance of $5,794.~~Company’s Non-Standardized profit-sharing plan contribution. The ~~shares were issued to settle accounts payables of $5,287 to a professional, the~~ Company recognized ~~a loss of $507 upon issuance of the shares. This loss is immaterial, thus presented in~~ stock-based compensation expense of approximately $115,000 equivalent to the value of the shares calculated based on the ~~statement~~share’s closing price at the grant dates.
● 100,000 options to purchase common shares to a member of ~~cash flows.~~the Board of Directors with an exercise price of $0.18 per share and a term of 5 years. The options vest equally over a period of one year. The options have a fair market value of $11,406.
● 1,725,000 options to purchase common shares to members of the Management team with an exercise price of $0.19 per share and a term of 5 years. The options vest equally over a period of one year. The options have a fair market value of $217,263.

~~Digerati~~The Company recognized approximately ~~$141,647~~$315,000 and ~~$95,000~~$403,000 in ~~stock-based compensation~~stock option amortization expense to employees during the ~~three~~nine months ended ~~October 31,~~April 30, 2020 and 2019, ~~and 2018,~~ respectively. Unamortized compensation cost totaled ~~$299,118~~$126,182 and ~~$294,000 at October 31,~~$388,732 on April 30, 2020 and April 30, 2019, respectively. In addition, during the nine months ended April 30, 2020 and ~~October 31, 2018, respectively.~~2019 Digerati recognized approximately $817,000 and $313,000, respectively in stock compensation expense to employees as part of the Company’s Non-Standardized profit-sharing plan contribution and other stock compensation to employees.

A summary of the stock options as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 and the changes during the ~~three~~nine months ended ~~October 31, 2019~~April 30, 2020 are presented below:

�� Weighted-average Weighted average
Weighted-average remaining contractual Weighted average remaining contractual
Options exercise price term (years) Options exercise price term (years)

Outstanding at July 31, 2019 4,940,000 $ 0.27 3.65 4,940,000 $ 0.27 3.65
Granted 60,000 $ 0.12 4.82 60,000 $ 0.12 4.57
Exercised - - - - - -
Forfeited and cancelled - - - - - -
Outstanding at October 31, 2019 5,000,000 $ 0.27 3.41
Exercisable at October 31, 2019 4,018,038 $ 0.27 3.22
Outstanding at April 30, 2020 5,000,000 $ 0.27 2.92
Exercisable at April 30, 2020 4,681,507 $ 0.26 2.86

The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) of the 5,000,000 and 4,940,000 stock options outstanding at ~~October 31, 2019~~April 30, 2020 and July 31, 2019 was $0 and $0, respectively.

The aggregate intrinsic value of ~~4,018,038~~4,681,507 and 3,452,405 stock options exercisable at ~~October 31, 2019~~April 30, 2020 and July 31, 2019 was $0 and $0, respectively.

10
NOTE 5 – WARRANTS

During the ~~three~~nine months ended ~~October 31, 2019,~~April 30, 2020, we issued the wefollowing warrants.
In March 2020, the Company received $25,000 in professional services and issued 25,000 shares of Series A Convertible Preferred Stock at an conversion price of $0.30 per share and warrants to purchase an additional 50,000 shares of its common stock at an exercise price of $0.20 per share. We determined that the warrants issued in connection with the services received were equity instruments and did not ~~issue any warrants.~~represent derivative instruments. The Company adopted a sequencing policy and determined that the warrants with fixed exercise price were excluded from derivative consideration.

During the ~~three~~nine months ended ~~October 31, 2018,~~April 30, 2019, we issued the following warrants:

In August 2018, ~~Digerati~~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. The Company adopted a sequencing policy and determined that the warrants with fixed exercise price were excluded from derivative consideration.

In October 2018, ~~Digerati~~the Company issued 200,000 warrants under an extension of payments to existing promissory notes, with a combined current principal balance of $75,000, the warrants vested at time of issuance. The warrants have a term of 3 years, with an exercise price of $0.10. Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance was approximately $31,000 and was recognized as a discount on the promissory note, the ~~Company amortized~~company will amortize the fair market value as interest expense over 3 months. The Company adopted a sequencing policy and determined that the warrants with fixed exercise price were excluded from derivative consideration.
In January 2019, the Company cancelled 260,000 warrants with an exercise price of $0.15. Additionally, the Company issued 260,000 common shares to replace these warrants, in conjunction with two promissory notes with a principal balance of $50,000, in addition at the time of issuance we recognized a discount of $36,000.
In February 2019, the Company secured $50,000 from accredited investors under a private placement and issued 50,000 shares of Series A Convertible Preferred Stock at an conversion price of $0.30 per share and warrants to purchase an additional 100,000 shares of its common stock at an exercise price of $0.20 per share. We determined that the warrants issued in connection with the private placement were equity instruments and did not represent derivative instruments. The Company adopted a sequencing policy and determined that the warrants with fixed exercise price were excluded from derivative consideration.
In February 2019, the Company received $1,500 for the exercise of 15,000 warrants, with an exercise price of $0.10 per warrant.
In March 2019, the Company received $6,000 for the exercise of 60,000 warrants, with an exercise price of $0.10 per warrant.

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

Expected dividend yield 0.00 %
Expected stock price volatility 153.99% - 237.00 %
Risk-free interest rate 2.05% -2.93 %
Expected term 3.0 - 5.0 years

11
A summary of the warrants as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 and the changes during the ~~three~~six months ended ~~October 31, 2019~~April 30, 2020 are presented below:

Weighted-average Weighted average
Weighted-average remaining contractual Weighted average remaining contractual
Warrants exercise price term (years) Warrants exercise price term (years)

Outstanding at July 31, 2019 2,700,000 $ 0.32 2.19 2,700,000 $ 0.32 2.19
Granted - - - 50,000 $ 0.20 3.00
Exercised - - - - - -
Forfeited and cancelled - - - (300,000 ) $ 0.14 -
Outstanding at October 31, 2019 2,700,000 $ 0.32 1.93
Exercisable at October 31, 2019 2,400,000 $ 0.24 1.83
Outstanding at April 30, 2020 2,450,000 $ 0.34 1.73
Exercisable at April 30, 2020 2,150,000 $ 0.25 1.59

The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money warrants) of the ~~2,700,000~~2,450,000 and 2,700,000 warrants outstanding at ~~October 31, 2019~~April 30, 2020 and July 31, 2019 was ~~$15,180~~$5,060 and $63,602, respectively.

The aggregate intrinsic value of ~~2,400,000~~2,150,000 and 2,400,000 warrants exercisable at ~~October 31, 2019~~April 30, 2020 and July 31, 2019 was ~~$15,180~~$4,290 and ~~$64,000,~~$63,602, respectively.
In January 2020, 300,000 warrants expired with an exercise price pf $0.136. These warrants were issued in January 2015.

In December 2017, ~~Digerati~~the Company issued 100,000 warrants to a consultant for services, the warrants vested at time of issuance. The warrants have a term of 5 years, with an exercise price of $0.50. Under a Black-Scholes valuation the fair market value of the warrants at time of issuance was approximately $49,000, the Company will amortize the fair market value as warrant expense over 12 months. Additionally, ~~Digerati~~the Company committed to issue 100,000 warrants if the Company’s stock price traded at $0.75 per share for 10 consecutive days, to issue 100,000 warrants if the Company’s stock price traded at $1.00 per share for 10 consecutive days, and to issue 100,000 warrants if the Company’s stock price traded at $1.25 per share for 10 consecutive days. Under a Black-Scholes valuation the fair market value of the warrants at time of issuance was approximately $143,000, the Company amortized the fair market value as warrant expense over 12 months. The 200,000 commitment warrants have not been issued since the requirements were not achieved during the nine months ending April 30, 2020.

NOTE 6 - DEBT

Non-convertible - debt

On April 30, 2018, T3 Communications, Inc., a Nevada corporation (“T3”), our majority owned subsidiary, entered into a secured promissory note for $650,000 with an effective annual interest rate of 0% and a maturity date of May 14, 2018, provided, however, the Maturity Date will automatically be extended by one (1) additional period of thirty (30) days, until June 14, 2018. In addition, T3 entered into a Security Agreement, whereby T3 agreed to pledge one third of the outstanding shares of its Florida operations, T3 Communications, Inc., the secured interest will continue until the principal balance is paid in full. Furthermore, a late fee of $3,000 per calendar week will be accessed beginning on May 15, 2018 and will continue until hethe principal balance is paid in full. ~~The~~On May 6, 2020, the Company received an additional $50,000 from the lender and increased the principal of the promissory note to $700,000 and the lender agreed to extend the maturity date until ~~January 31,~~June 30, 2020, we are currently paying a ~~$3,000~~$3,250 per week late fee. As of ~~October 31, 2019~~April 30, 2020, and July 31, 2019, the outstanding principal balance ~~was $650,000.~~were $700,000 and $650,000, respectively.
1112

On April 30, 2018, T3 entered into a credit facility under a secured promissory note of $500,000, interest payment for the first twenty-three months with a balloon payment on the twenty-fourth month and a maturity date of April 30, 2020. Collateralized by T3’s accounts receivables and with an effective annual interest rate of prime plus 5.25%, adjusted quarterly on the first day of each calendar quarter. However, the rate will never be less than 9.50% per annum. In the event of default, the interest rate will be the maximum non-usurious rate of interest per annum permitted by whichever of applicable United States federal law or Louisiana law permits the higher interest rate. T3 agreed to pay the lender a commitment fee of 1.00% upon payment of the first interest payment under the credit facility and 1.00% on the first anniversary of the credit facility. In addition, T3 agreed to pay a monitoring fee of 0.33% of the credit facility, payable in arrears monthly. T3 also agreed to pay an over-advance fee of 3.00% of the amount advanced in excess of the borrowing base or maximum amount of the credit facility, payable in arrears monthly. T3 is required to maintain the following financial covenants: 1) A consolidated debt service coverage ratio, as of the last day of each fiscal quarter, of at least 1.25 to 1.00, 2) A fixed charge coverage ratio, as of the last day of each fiscal quarter, of at least 1.25 to 1.00, and 3) A tangible net worth, at all times of at least $100,000. On April 10, 2020, the Company increased the credit facility to $600,000 and the lender agreed to extend the maturity date until April 10, 2022. In addition, the Company agreed to a revised effective annual interest rate of prime plus 5.75%, adjusted quarterly on the first day of each calendar quarter. However, the rate will never be less than 11.00% per annum. During the period ended April 30, 2020, the Company received an additional $93,820 from the lender. As of ~~October 31, 2019~~April 30, 2020, and July 31, 2019, the outstanding principal balance ~~was $500,000.~~were $593,820 and $500,000, respectively.

On October 22, 2018, the Company issued a secured promissory note for $50,000, bearing interest at a rate of 8% per annum, with maturity date of December 31, 2018. In February 2020, the maturity date was extended to December 31, 2020. In conjunction with the extension, the Company issued 40,000 shares of common stock. At issuance, the fair market value of the shares was recorded as interest expense of $800. The promissory note is secured by a Pledge and Escrow Agreement, whereby the Company agreed to pledge rights to a collateral due under certain Agreement. ~~In June 2019, the maturity date was extended to July 31, 2019. As of the date of this filing, we are working with the lender to extend the maturity date on the note.~~ The outstanding balance as of ~~October 31, 2019~~April 30, 2020 was $50,000.

On June 14, 2019, the Company, entered into a Stock Purchase Agreement (the “Agreement”) to acquire a 12% minority interest in Itellum Comunicacions Costa Rica, S.R.L. In conjunction with this transaction, we entered into a non-recourse promissory note for $17,500 with an effective annual interest rate of 8% and an initial maturity date of September 14, 2019. AsOn February 15, 2020, the maturity date was extended to July 31, 2020. In addition, the holder agreed to accept 200,000 shares of common stock as a principal payment on the note for $10,000. The outstanding balance as of April 30, 2020 was $7,500.
On February 26, 2020, the Company entered into a secured promissory note for $30,000 with an effective annual interest rate of 12% and a maturity date of ~~this filing, we are working with~~May 1, 2020. Subsequently, the ~~lender~~note holder agreed to extend the maturity date onuntil August 31, 2020. The proceeds from this note were used to extend the ~~note.~~closing date of the acquisition of Nexogy, the funds are held in an escrow account for the benefit of owners of Nexogy, and therefore, the Company included the prepaid amounts in other current assets as of April 30, 2020. The promissory note is secured by the Company’s receivables. The outstanding balance as of ~~October 31, 2019~~April 30, 2020 was ~~$17,500.~~$30,000.
On April 22, 2020, the Company, entered into two unsecured promissory notes (the “Notes”) for $62,500 and $86,500 made to the Company under the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The loans to the Company was made through The Bank of San Antonio (the “Lender”).
The Notes provide for an interest rate of 1.00% per year and matures two years after the issuance date. Beginning on the seventh month following the date of the Notes, the Company is required to make 18 monthly payments of principal and interest in the amount of $8,316. The Notes may be used for payroll costs, costs related to certain group health care benefits and insurance premiums, rent payments, utility payments, mortgage interest payments and interest payments on any other debt obligation that were incurred before February 15, 2020. The Notes contain events of default and other conditions customary for a Note of this type.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. The terms of any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt. While the Company currently believes that its use of the Note proceeds will meet the conditions for forgiveness under the PPP, no assurance is provided that the Company will obtain forgiveness of the Notes in whole or in part.
13

Notes payable, related party

On April 30, 2018, T3 entered into a convertible secured promissory note for $525,000 with an effective annual interest rate of 8% and a maturity date of April 30, 2020. With a principal payment of $100,000 due on June 1, 2018 and a principal payment of $280,823 due on April 30, 2020. Payment are based on a 60-month repayment schedule. At any time while this Note is outstanding, but only upon: (i) the occurrence of an Event of Default under the Note or the Pledge and Escrow Agreement; or (ii) mutual agreement between the Borrower and the Holder, the Holder may convert all or any portion of the outstanding principal, accrued and unpaid interest, Premium, if applicable, and any other sums due and payable hereunder (such total amount, the “Conversion Amount”) into shares of Common Stock (the “Conversion Shares”) at a price equal to: (i) the Conversion Amount (the numerator);divided by(ii) a conversion price of $1.50 per share of Common Stock, which price shall be indicated in the conversion notice (the denominator) (the “Conversion Price”). The Holder shall submit a Conversion Notice indicating the Conversion Amount, the number of Conversion Shares issuable upon such conversion, and where the Conversion Shares should be delivered. The promissory note is secured by a Pledge and Escrow Agreement, whereby T3 agreed to pledge 51% of the securities owned in its Florida operations, T3 Communications, Inc., until the principal payment is paid in full. In conjunction with the promissory note, the Company issued 3-year warrants to purchase 75,000 shares of common stock at an exercise price of $0.50 per share. Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance was $19,267 and was recognized as a discount on the promissory note. The Company amortized ~~$1,475~~$7,297 as interest expense during the ~~three~~nine months ended ~~October 31, 2019.~~April 30, 2020. The total unamortized discount as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 were ~~$5,823~~$0 and ~~$7,298,~~$7,297, respectively. In addition, during the ~~three~~nine months ended ~~October 31, 2019,~~April 30, 2020, the Company paid ~~$19,236~~in full the total outstanding balance of ~~the principal outstanding balance.~~$332,985. The total principal outstanding as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 were ~~$313,749~~$0 and $332,985, respectively. In May 2020, the Company executed a Settlement Agreement and Mutual release, whereby the lender released the Company of any pledged collateral and any other obligation under the promissory note. One of the note holders also serves as President, CEO and Board Member of T3 Communications, Inc., the Florida entity that is one of our operating subsidiaries.
12

On February 27, 2020, the Company entered into an unsecured promissory note for $70,000 with an effective annual interest rate of 12% and a maturity date of May 1, 2020. Subsequently, the note holder agreed to extend the maturity date until August 31, 2020. In addition, the Company agreed to pay the lender in services provided by the Company, and any unpaid principal and accrued interest will be paid in cash. The proceeds from this note were used to extend the closing date of the acquisition of Nexogy, the funds are held in an escrow account for the benefit of owners of Nexogy, and therefore, the Company included the prepaid amounts in other current assets as of April 30, 2020. The note holder also serves as President, CEO and Board Member of T3 Communications, Inc., the Florida entity that is one of our operating subsidiaries.

On May 1, 2018, T3 entered into a secured promissory note for $275,000 with an effective annual interest rate of 0% with an interest and principal payment of $6,000 per month and shall continue perpetuity until the entire principal amount is paid in full. The promissory note is guaranteed to the lender by 15% of the stock owned by T3 in its Florida operations, T3 Communications, Inc., the secured interest will continue until the principal balance is paid in full. In conjunction with the promissory note, the Company issued 3-year warrants to purchase 100,000 shares of common stock at an exercise price of $0.50 per share. Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance was approximately $26,543 and was recognized as a discount on the promissory note, the company amortized ~~$1,731~~$5,193 as interest expense during the ~~three~~nine months ended ~~October 31, 2019.~~April 30, 2020. The total unamortized discount as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 were ~~$14,955~~$11,495 and $16,686, respectively. During the ~~three~~nine months ended ~~October 31, 2019,~~April 30, 2020, the Company paid ~~$13,823,~~$42,369, of the principal balance. The total principal outstanding as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 were ~~$195,909~~$167,363 and $209,732, respectively. The note holder also serves as Board Member of T3 Communications, Inc., the Florida entity that is one of our operating subsidiaries.
14

Convertible debt non-derivative

In March 2018, the Company entered into two (2) Promissory Notes (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 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). The“Variable Conversion Price”shall be equal to the average closing price for Digerati’s Common Stock (the “Shares”) for the ten (10) Trading Day period immediately preceding the Conversion Date. “Trading Day” shall mean any day on which the Common Stock is tradable for any period on the OTCQB, or on the principal securities exchange or other securities market on which the Common Stock is then being traded. The“Fixed Conversion Price”shall mean $0.50. In conjunction with the notes, the Company issued 300,000 warrants, the warrants vested at time of issuance. The warrants have a term of 3 years, with an exercise price of $0.10. Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance was approximately $126,538 and was recognized as a discount on the promissory notes. ~~The Company amortized the total discount of $126,433 during the years ended July 31, 2019 and 2018.~~ Additionally, during the year ended July 31, 2019 the Company issued 375,000 shares of common stock for payment of $60,000 in accrued interest for the notes. On December 27, 2018, the Company entered into an Amendment to the Loan Agreements, under the amendments the note holders agreed to extend the maturity date until September 14, 2019. In addition, as part of the amendment, the Company agreed to modify the“Fixed Conversion Price” to $0.35, all other terms under the Promissory Notes remained the same. We accounted for the extensions to the Notes as debt modifications and not extinguishment of debt since the changes in fair value are not substantial in accordance with ASC 470-50. ~~Subsequently, on~~In November 2019, the Company issued 110,830 shares of common stock for payment of $7,500 in accrued interest. On October 7, 2019, the holders agreed to extend the maturity date until March 30, 2020. ~~In addition, as~~As part of the amendments, the Company agreed to issue 400,000 shares of common stock. Under a Black-Scholes valuation the relative fair market value of the shares of common at time of issuance was approximately $40,000 and was recognized as a discount on the promissory ~~notes.~~notes over the extended period. The Company amortized the total discount of ~~$13,334~~$40,000 during the ~~three~~nine months ~~ended October 31, 2019.~~ending April 30, 2020. The total unamortized discount as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 were ~~$26,666~~$0 and $0, respectively. On April 30, 2020, the Company and the debtholder agreed to settle the debt, as a result the Company issued 8,958,333 shares of common stock for the settlement of $250,000 of the outstanding principal balance and $18,750 in accrued interest. At the time of issuance, the Company recognized a gain in settlement of debt $85,104. The gain on settlement was generated from the difference between principal and accrued interest settled and fair value of the common stock on settlement date. In addition, as part of the settlement the Company issued 268,750 shares of Series B Convertible Preferred Stock for payment in full and the settlement of $250,000 of the outstanding principal balance and $18,750 in accrued interest. The total principal outstanding balance as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 ~~was $500,000.~~were $0 and $500,000, respectively.
13

On June 19, 2018, the Company entered into various Promissory Notes (the “Notes”) for $272,000, bearing interest at a rate of 10% per annum, with an initial maturity date of April 10, 2019. In conjunction with the Notes, the Company issued 255,000 warrants under the promissory notes, the warrants vested at time of issuance. The warrants have a term of 3 years, with an exercise price of $0.10. Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance was approximately $118,400 and was recognized as a discount on the promissory notes. The Company amortized $109,552 ~~and $8,848~~ as a non-cash interest during the ~~years~~year ended July 31, ~~2019 and 2018, respectively. The total unamortized discount as of July 31, 2019 and 2018 were $0 and $109,552, respectively.~~2019. On March 29, 2019, the Company entered into a First Amendment to the Promissory Notes, under the amendments the note holders agreed to extend the maturity date until June 30, 2019. In addition, as part of the amendments, the Company agreed to issue 85,000 shares of common stock. The shares were recorded as debt discount of $17,425 and amortized over the remaining term of the notes. The Company amortized $17,425 as a non-cash interest during the years ended July 31, 2019. On June 30, 2019, the Company entered into a Second Amendment to the Promissory Notes, under the amendments the note holders agreed to extend the maturity date until November 30, 2019. In addition, as part of the amendments, the Company agreed to issue 85,000 shares of common stock. The shares were recorded as debt discount of $14,450 and amortized over the remaining term of the notes. The Company amortized ~~$8,662~~$11,560 as a non-cash interest during the ~~three~~nine months ended ~~October 31, 2019.~~April 30, 2020. The total unamortized discount as ~~October 31, 2019~~April 30, 2020 and July 31, 2019 for the issuance of the second amendment shares were ~~$2,898~~$0 and $11,560, respectively. AsIn addition, in November 2019, the Company issued 172,055 shares of common stock for payment of $6,882 in accrued interest. Also, in November 2019 and February 2020, the ~~date of this filing, we are working with the lenders~~holders agreed to extend the maturity date of the notes until April 30, 2020. As part of the amendments, the Company agreed to issue 340,000 shares of common stock. The shares were recorded as debt discount of $10,090 and amortized during the note extension agreement. On April 30, 2020, the Company and the debtholder agreed to settle the debt, as a result the Company issued 5,180,493 shares of common stock for the settlement of $136,000 of the outstanding principal balance and $19,414 in accrued interest. At the time of issuance, the Company recognized a gain in settlement of debt $49,215. The gain on settlement was generated from the ~~notes.~~difference between principal and accrued interest settled and fair value of the common stock on settlement date. In addition, as part of the settlement, the Company issued 155,415 shares of Series B Convertible Preferred Stock for payment in full and the settlement of $136,000 of the outstanding principal balance and $19,414 in accrued interest. The total principal outstanding balance as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 ~~was $272,000.~~were $0 and $272,000, respectively.
15

Convertible debt - derivative

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. On July 25, 2018, the securities purchase agreement was amended to increase to $620,000 the aggregate principal amount of the convertible debentures.
~~Peak One - First Debenture~~
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 was amortized to interest expense.
~~On July 17, 2018, the Company redeemed $120,000 of the principal outstanding, at a redemption price of $156,000. The Company recognized the redemption price as interest expense during the period.~~
The Company analyzed the Debenture for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. Therefore, the Company recognized derivative liability of $112,000 at July 31, 2018, of which $80,000 was recorded as debt discount and was amortized during the term of the note, and $32,000 was recorded as derivative loss. In connection with the execution of the Debenture, we issued 250,000 shares of our common stock to Peak One, the shares were recorded with a relative fair value of $0, the Company also recorded debt discount of $80,000 and amortized to interest expense.
On August 2, 2018, the Company redeemed $40,000 of the principal outstanding under the convertible debenture, dated January 12, 2018 with Peak One Opportunity Fund, L. P., at a redemption price of $56,000. The Company recognized the difference between the redemption price and principal balance paid as interest expense of $16,000. On November 26, 2018, the Company issued 139,860 shares of common stock for the conversion of $20,000 of the principal outstanding under the convertible debenture. On December 20, 2018, the Company issued 356,007 shares of common stock for the conversion of $20,000 of the principal outstanding under the convertible debenture.
During the years ended July 31, 2019, the Company amortized $80,000 of the debt discount as interest expense related to the convertible debenture. The total unamortized discount as of October 31, 2019 and July 31, 2019 was $0. The total principal outstanding balance as of October 31, 2019 and July 31, 2019 was $0.
14

Peak One - Second Debenture

The Company issued a second debenture (the “Debenture”) to Peak One on July 31, 2018 in the principal amount of $220,000 for a purchase price of $198,000 and 0% percent stated interest rate. The Company paid Peak One $5,000 for legal and compliance fees, these fees were deducted from the proceeds at time of issuance. The Company recorded these discounts and cost of $22,000 as a discount to the Debenture and amortized to interest expense.

The Company analyzed the Debenture for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. Therefore, the Company recognized derivative liability of $189,171. In connection with the execution of the Debenture, we issued 130,000 shares of our common stock to Peak One, the shares were recorded with a relative fair value of $3,627 and$192,798 was recorded as debt discount and amortized during the term of the note.

The following conversion were recognized by the Company:

On February 12, 2019, the Company issued 475,511 shares of common stock for the conversion of $20,000 of the principal outstanding under the convertible debenture.

On March 8, 2019, the Company issued 356,633 shares of common stock for the conversion of $25,000 of the principal outstanding under the convertible debenture.

On April 9, 2019, the Company issued 356,633 shares of common stock for the conversion of $25,000 of the principal outstanding under the convertible debenture.

On May 10, 2019, the Company issued 713,266 shares of common stock for the conversion of $50,000 of the principal outstanding under the convertible debenture.

On June 19, 2019, the Company issued 713,266 shares of common stock for the conversion of $50,000 of the principal outstanding under the convertible debenture.

On August 26, 2019, the Company issued 416,666 shares of common stock for the conversion of $25,000 of the principal outstanding under the convertible debenture.

On October 31, 2019, the Company issued 831,669 shares of common stock for the conversion of $25,000 of the principal outstanding under the convertible debenture.

During the ~~three~~nine months ended ~~October 31, 2019,~~April 30, 2020, the Company amortized $29,214 of the debt discount as interest expense. The total unamortized discount as ~~October 31, 2019~~April 30, 2020 and July 31, 2019, were $0 and $29,214. The total principal outstanding balance as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 were $0 and $50,000, respectively.

The convertible debentures dated January 17, 2018 and July 31, 2018 with Peak One provide the option to the holder to convert at any time on or after the 180th calendar day after the issue date, to convert all or any portion of the then outstanding and unpaid principal amount and interest under the Promissory notes into shares of Common Stock of the Company at a conversion price for each share of Common Stock equal to the lower of (i) $0.50 (the “Fixed Conversion Price”) , or (ii) 70% of the lowest closing bid price of the Company’s Common Stock during the twenty (20) Trading Days immediately preceding the date of the date of conversion of the Debentures (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 (“OTCP”) at the time of conversion, then seventy percent (70%) shall automatically adjust to sixty-five percent (65%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) Trading Days immediately preceding the date of conversion of the Debentures), subject in each case to equitable adjustments resulting from any stock splits, stock dividends, recapitalizations or similar events. (the “Alternate Conversion Price”)
1516

The Debentures called for redemption shall be redeemable by the Company, upon not more than two (2) days written notice, for an amount (the “Redemption Price”) equal to: (i) if the Redemption Date (as defined below) is ninety (90) days or less from the date of issuance of this Debenture, One Hundred Ten percent (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 one ninety-one (91) days from the date of issuance of this Debenture and less than or equal to one hundred twenty (120) days from the date of issuance of this Debenture, One Hundred Fifteen percent (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 one hundred twenty one (121) days from the date of issuance of this Debenture and less than or equal to one hundred fifty (150) days from the date of issuance of this Debenture, One Hundred Twenty percent (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 one hundred fifty one (151) days from the date of issuance of this Debenture and less than or equal to one hundred eighty (180) days from the date of issuance of this Debenture, One Hundred Thirty percent (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 one hundred eighty one (181) days from the date of issuance of this Debenture, One Hundred Forty percent (140%) of the sum of the Principal Amount so redeemed plus accrued interest, if any. The date upon which the Debentures are redeemed and paid shall be referred to as the “Redemption Date”.
In the Event of Default to the Holders of all Debentures then outstanding, and in each and every such case, unless such Event of Default shall have been waived in writing by a majority in interest of the Holders of the Debentures (which waiver shall not be deemed to be a waiver of any subsequent default), then at the option of a majority in interest of the Holders and in the discretion of a majority in interest of the Holders, take any or all of the following actions: (i) pursue remedies against the Company in accordance with any of the Holder’s rights, (ii) increase the interest rate applicable to the Debentures to the lesser of eighteen percent (18%) per annum and the maximum interest rate allowable under applicable law, (iii) in the case of an Event of Default under Section 10(e)(ii)(1) based on the Company’s failure to be DWAC Operational, increase the Principal Amount to an amount equal to one hundred ten percent (110%) of the then-outstanding Principal Amount, (iv) in the case of an Event of Default under Section 10(d)(i), increase the Principal Amount to an amount equal to one hundred twenty percent (120%) of the then-outstanding Principal Amount and an additional ten percent (10%) discount shall be factored into the Conversion Price until this Debenture is no longer outstanding, (v) in the case of an Event of Default under Section 10(d)(i) through (v), increase the Principal Amount of the relevant Holder’s Debenture by One Thousand Dollars and 00/100 ($500.00) for each day the related failure continues, (vi) in the case of an Event of Default under Section 10(d)(ii) through (v) arising from an untimely delivery to the Holder of Conversion Shares or shares of Common Stock in de-legended form, if the closing bid price of the Common Stock on the Trading Day immediately prior to the actual date of delivery of Conversion Shares or de-legended shares, as the case may be, is less than the closing bid price on the Trading Day immediately prior to the date when Conversion Shares or de-legended shares were required to be delivered, increase the Principal Amount of the relevant Holder’s Debenture by an amount per share equal to such difference, and (vii) following the expiration of the applicable grace period (if any), at the option and discretion of the Holder, accelerate the full indebtedness under this Debenture, in an amount equal to one hundred forty percent (140%) of the outstanding Principal Amount and accrued and unpaid interest (the “Acceleration Amount”), whereupon the Acceleration Amount shall be immediately due and payable, without presentment, demand, protest or notice of any kinds, all of which are hereby expressly waived, anything contained herein, in the Securities Purchase Agreement or in any other note or instruments to the contrary notwithstanding. In the case of an Event of Default under Section 10(d)(ii), the Holder may either (i) declare the Acceleration Amount to exclude the Conversion Amount that is the subject of the Event of Default, in which case the Acceleration Amount shall be based on the remaining Principal Amount and accrued interest (if any), in which case the Company shall continue to be obligated to issue the Conversion Shares, or (ii) declare the Acceleration Amount to include the Conversion Amount that is the subject of the Event of Default, in which case the Acceleration Amount shall be based on the full Principal Amount, including the Conversion Amount, and accrued interest (if any), whereupon the Notice of Conversion shall be deemed withdrawn.

Convertible Promissory Notes with four (4) investors - January 2019

On January 16, 2019, the Company entered into various Securities Purchase Agreements (the SPAs”) with four (4) different investors (each an “Investor”, and together the “Investors”) pursuant to which each Investor purchased a 10% unsecured convertible promissory note (each a “Note”, and together the “Notes”) from the Company. Three of the notes are in the aggregate principal amount of $140,000 each and a maturity date of October 16, 2019. One of the notes is in the aggregate principal amount of $57,750 and a maturity date of January 24, 2020. The purchase price of $140,000 of each of three Notes were paid in cash on January 16, 2019. After payment of transaction-related expenses of $51,000, net proceeds to the Company from the three Notes totaled $369,000. The purchase price of $57,750 Note was paid in cash on January 24, 2019. After payment of transaction-related expenses of $7,750, net proceeds to the Company from Note totaled $50,000. The Company recorded these discounts and cost of $58,750 as a discount to the Notes and fully amortized as interest expense during the period. In connection with the execution of the Notes, we issued 500,000 shares of our common stock to the Note holders, the shares were recorded with a relative fair value of $0 as the notes were fully discounted by derivative liability.
16

The Company analyzed the Notes for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized derivative liability for the four (4) new convertible notes of $655,345, of which $419,000 was recorded as debt discount and will be amortized during the term of the Notes, and $236,345 was recorded as day 1 derivative loss.

On July 12, 2019, the Company redeemed the full outstanding principal balance on two of the convertible notes for $280,000, at a redemption price of $382,726. The Company recognized the difference between the redemption price and principal balance paid as interest expense of $102,726.

On July 12, 2019, the Company redeemed $70,000 of the principal outstanding on one of the convertible notes, at a redemption price of $91,000. The Company recognized the difference between the redemption price and principal balance paid as interest expense of $21,000.

On July 19, 2019, the Company issued 156,202 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of the convertible notes.

On July 25, 2019, the Company issued 312,500 shares of common stock. The shares were issued in conjunction with a conversion of $20,000 of the principal outstanding under a convertible debenture.

On August 6, 2019, the Company entered into an Assignment Agreement whereby Jefferson Street Capital LLC (the “Assignor”) assigned a principal amount of $25,000, representing a portion of a Convertible Promissory Note dated January 24, 2019 to Armada Investment Fund LLC (the “Assignee”). The note is in the aggregate principal amount of $25,000 and a maturity date of January 24, 2020.

On August 26, 2019, the Company issued 250,000 shares of common stock for the conversion of $14,500 of the principal outstanding and $500 in fees under one of the convertible notes.

On August 27, 2019, the Company issued 277,291 shares of common stock for the conversion of $12,750 of the principal outstanding and $3,888 in fees under one of the convertible notes.

On September 23, 2019, the Company issued 342,466 shares of common stock for the conversion of $14,500 of the principal outstanding and $500 in fees under one of the convertible notes.

On October 29, 2019, the Company issued 465,736 shares of common stock for the conversion of $13,500 of the principal outstanding and $500 in fees under one of the convertible notes.

On November 19, 2019, the Company issued 537,635 shares of common stock for the conversion of $13,000 of the principal outstanding and $500 in fees under one of the convertible notes.
On January 8, 2020, the Company issued 785,760 shares of common stock for the conversion of $5,000 of the principal outstanding, $500 in fees and accrued interest of $8,408 under one of the convertible notes.
The total unamortized discount on the Notes as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 were $0 and $29,765, respectively. The total principal balance outstanding as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019, were ~~$18,000~~$0 and $98,250. The Company amortized $29,765 of debt discount as interest expense during the ~~three~~nine months ended ~~October 31, 2019.~~April 30, 2020.

Each Investor is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations Bureau OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with the terms of the Notes.
The Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the Notes. Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time, increases the Reserved Amount in accordance with the Company’s obligations under the Notes.
17

Pursuant to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note (the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock. The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion Shares.

Convertible Promissory Note - February 2019

On February 22, 2019, the Company entered into a Securities Purchase Agreement (the SPA”) with an investor (an “Investor”) the Investor purchased a 10% unsecured convertible promissory note (the “Note”) from the Company. The note is in the aggregate principal amount of $57,750 and a maturity date of February 22, 2020. After payment of transaction-related expenses of $7,750, net proceeds to the Company from the Note totaled $50,000. The Company recorded these discounts and cost of $7,750 as a discount to the Note and fully amortized as interest expense during the period.

The Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized derivative liability for the convertible note of $79,729, of which $50,000 was recorded as debt discount and will be amortized during the term of the Note, and $29,729 was recorded as day 1 derivative loss.

On October 27, 2019, the Company issued 332,667 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of the convertible notes.

On November 15, 2019, the Company issued 398,247 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of the convertible notes.
On December 16, 2019, the Company issued 520,833 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of the convertible notes.
On December 31, 2019, the Company issued 517,598 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of the convertible notes.
On January 16, 2020, the Company issued 705,128 shares of common stock for the conversion of $10,500 of the principal outstanding and $500 in fees under one of the convertible notes.
On January 28, 2020, the Company issued 956,226 shares of common stock for the conversion of $9,250 of the principal outstanding, $500 in fees and accrued interest of $3,962 under one of the convertible notes.
The total unamortized discount on the Notes as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 were ~~$13,924~~$0 and $29,166, respectively. The total principal balance outstanding as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019, were ~~$48,250~~$0 and $57,750. The Company amortized ~~$15,242~~$29,166 of debt discount as interest expense during the ~~three~~nine months ended ~~October 31, 2019.~~
The Investor is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations Bureau OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with the terms of the Note.
The Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the Note. Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time, increases the Reserved Amount in accordance with the Company’s obligations under the Note.
Pursuant to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note (the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock. The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion Shares.April 30, 2020.

Convertible Promissory Note - April 2019

On April 20, 2019, the Company entered into a Securities Purchase Agreement (the SPA”) with an investor (an “Investor”) the Investor purchased a 10% unsecured convertible promissory note (the “Note”) from the Company. The note is in the aggregate principal amount of $44,000 and a maturity date of January 19, 2020. After payment of transaction-related expenses of $4,000, net proceeds to the Company from the Note totaled $40,000. The Company recorded these discounts and cost of $4,000 as a discount to the Note and fully amortized as interest expense during the period. In connection with the execution of the Note, we issued 50,000 shares of our common stock to the Note holder, the shares were recorded with a relative fair value of $0 as the notes were fully discounted by derivative liability.
18

The Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized derivative liability for the convertible note of $55,592, of which $40,000 was recorded as debt discount and will be amortized during the term of the Note, and $15,592 was recorded as day 1 derivative loss.

On October 31, 2019, the Company issued 310,527 shares of common stock for the conversion of $6,500 of the principal outstanding and $2,834 in fees under one of the convertible notes.

On November 14, 2019, the Company issued 301,697 shares of common stock for the conversion of $7,500 of the principal outstanding, $500 in fees and accrued interest of $146 under one of the convertible notes.
On November 26, 2019, the Company issued 447,917 shares of common stock for the conversion of $8,000 of the principal outstanding, $500 in fees and accrued interest of $100 under one of the convertible notes.
18
On December 24, 2019, the Company issued 444,672 shares of common stock for the conversion of $8,000 of the principal outstanding, $500 in fees and accrued interest of $171 under one of the convertible notes.
On January 13, 2020, the Company issued 549,858 shares of common stock for the conversion of $8,000 of the principal outstanding, $500 in fees and accrued interest of $78 under one of the convertible notes.
On January 28, 2020, the Company issued 474,891 shares of common stock for the conversion of $6,000 of the principal outstanding, $500 in fees and accrued interest of $25 under one of the convertible notes.
The total unamortized discount on the Notes as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 were ~~$11,366~~$0 and $26,668, respectively. The total principal balance outstanding as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019, were ~~$37,500~~$0 and $44,000. The Company amortized ~~$15,302~~$26,668 of debt discount as interest expense during the ~~three~~nine months ended ~~October 31, 2019.~~
The Investor is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations Bureau OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with the terms of the Note.
The Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the Note. Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time, increases the Reserved Amount in accordance with the Company’s obligations under the Note.
Pursuant to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note (the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock. The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion Shares.April 30, 2020.

Convertible Promissory Notes with four (4) investors - July 2019

In July 2019, the Company entered into various Securities Purchase Agreements (the SPAs”) with four (4) different investors (each an “Investor”, and together the “Investors”) pursuant to which each Investor purchased unsecured convertible promissory note (each a “Note”, and together the “Notes”) from the Company. Three of the notes are in the aggregate principal amount of $146,625 each, 3% interest rate and a maturity date of April 11, 2020. The purchase price of $146,625 of each of three Notes were paid in cash on July 11, 2019. After payment of transaction-related expenses of $57,375, net proceeds to the Company from the three Notes totaled $382,500. One of the notes is in the aggregate principal amount of $140,000, interest rate of 10% and a maturity date of April 10, 2020. The purchase price of $140,000 Note was paid in cash on July 10, 2019. After payment of transaction-related expenses of $17,000, net proceeds to the Company from Note totaled $123,000. The Company recorded these discounts and cost of $74,375 as a discount to the Notes and fully amortized as interest expense during the period. In connection with the execution of the Notes, we issued 450,000 shares of our common stock to the Note holders, the shares were recorded with a relative fair value of $0 as the notes were fully discounted by derivative liability.
19

The Company analyzed the Notes for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized derivative liability for the four (4) new convertible notes of $959,180, of which $505,500 was recorded as debt discount and will be amortized during the term of the Notes, and $453,680 was recorded as day 1 derivative loss.

On January 9, 2020, the Company issued 200,000 shares of common stock for the conversion of $1,328 of the principal outstanding and accrued interest of $2,212 under one of the convertible notes.
On January 10, 2020, the Company assigned a convertible note with a $145,297 principal and accrued interest of $13,500. In addition, the Company assigned a second convertible note issued in October 2019 with a $35,750 principal and accrued interest of $15,453. The total assignment was for $210,000.
On January 22, 2020, the Company assigned two promissory notes with a $293,250 principal balance outstanding and accrued interest of $66,750. The total assignment was for $360,000.
The total unamortized discount on the Notes as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 were ~~$280,829~~$0 and $449,332, respectively. The total principal balance outstanding as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 ~~was $579,875.~~were $140,000 and $579,875, respectively. The Company amortized ~~$168,503~~$449,332 of debt discount as interest expense during the ~~three~~nine months ended ~~October 31, 2019.~~April 30, 2020.

Each of the Investors is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations Bureau OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with the terms of the Notes.
19

The Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the each of the Notes. Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time, increases the Reserved Amount in accordance with the Company’s obligations under each of the Notes.

Pursuant to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note (the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock. The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion Shares.

Convertible Promissory Note Assignment - August 6, 2019

On August 6, 2019, the Company entered into an Assignment Agreement whereby Jefferson Street Capital LLC (the “Assignor”) assigned a principal amount of $25,000, representing a portion of a Convertible Promissory Note dated January 24, 2019 to Armada Investment Fund LLC (the “Assignee”). The note is in the aggregate principal amount of $25,000 and a maturity date of January 24, 2020.

The Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of assignment, the Company transferred as derivative liability for the convertible note of $27,853, of which $10,823 was recorded as debt discount and was amortized during the term of the Note.

On August 12, 2019, the Company issued 114,123 shares of common stock for the conversion of $7,500 of the principal outstanding and $500 in administrative fees under the convertible note.

On August 20, 2019, the Company issued 191,116 shares of common stock for the conversion of $7,500 of the principal outstanding and $538 in accrued interest and administrative fees under the convertible note.

On September 4, 2019, the Company issued 250,620 shares of common stock for the conversion of $10,000 of the principal outstanding and $541 in fees under one of the convertible notes.

The total unamortized discount on the Note as of ~~October 31, 2019~~April 30, 2020 was $0. The total principal balance outstanding as of ~~October 31, 2019~~April 30, 2020 was $0. The Company amortized $10,823 of debt discount as interest expense during the ~~three~~nine months ended ~~October 31, 2019.~~April 30, 2020.
20

Convertible Promissory Note - August 30, 2019

On August 30, 2019, the Company entered into a Securities Purchase Agreement (the “SPA”) with an investor (an “Investor”) the Investor purchased a 10% unsecured convertible promissory note (the “Note”) from the Company. The note is in the aggregate principal amount of $93,500 and a maturity date of May 30, 2020. After payment of transaction-related expenses of $8,500, net proceeds to the Company from the Note totaled $85,000. The Company recorded these discounts and cost of $8,500 as a discount to the Note and fully amortized as interest expense during the period.

The Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized derivative liability for the convertible note of $100,978, of which $85,000 was recorded as debt discount and will be amortized during the term of the Note, and $15,978 was recorded as day 1 derivative loss.

20
The total unamortized discount on the Note as of ~~October 31, 2019~~April 30, 2020 was ~~$66,112.~~$9,448. The total principal balance outstanding as of ~~October 31, 2019~~April 30, 2020 was $93,500. The Company amortized ~~$18,888~~$75,552 of debt discount as interest expense during the ~~three~~nine months ended ~~October 31, 2019.~~April 30, 2020.

Other Terms to the Convertible Promissory Note and Note Assignment - August 2019

Notes shall bear interest at a rate of ten percent (10%) per annum (the “Interest Rate”), which interest shall be paid by the Company to each Investor in shares of Common Stock at any time an Investor sends a notice of conversion to the Company. Each of the Investors is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations Bureau OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with the terms of the Notes.

Each of the Notes may be prepaid until 180 days from the issuance date with the following penalties: (i) if a Note is prepaid within ninety (90) days of the issuance date, then the prepayment premium shall be 125% of the outstanding principal amount plus any accrued and unpaid interest; (ii) if a Note is prepaid during the period beginning on the date which is ninety-one (91) days following the issuance date, and ending on the date which is one hundred eighty (180) days following the issuance date, then the prepayment premium shall be 130% of the outstanding principal amount plus any accrued and unpaid interest. Such prepayment redemptions must be closed and funded within three days of giving notice of prepayment or the right to prepay shall be forfeited.

The Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the each of the Notes. Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time, increases the Reserved Amount in accordance with the Company’s obligations under each of the Notes.

Pursuant to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note (the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock. The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion Shares.
21

Convertible Promissory Notes - October 2019

In October 2019, the Company entered into two Securities Purchase Agreements (the “SPA”) with multiple investors (the “Investors”) the Investors purchased two 8% unsecured convertible promissory notes (the “Notes”) from the Company. The notes are in the aggregate principal amount of $71,500 and a maturity date of July 18, 2020. After payment of transaction-related expenses of $6,500, net proceeds to the Company from the Note totaled $65,000. The Company recorded these discounts and cost of $6,500 as a discount to the Note and fully amortized as interest expense during the period.

The Company analyzed the Notes for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized derivative liability for the convertible note of $82,462 of which $65,000 was recorded as debt discount and will be amortized during the term of the Note, and $17,462 was recorded as day 1 derivative loss.

On January 10, 2020, the Company assigned $35,750 of the principal outstanding on one of the convertible notes, along with the other note discussed in Convertible Promissory Notes with four (4) investors - July 2019 section, and accrued interest of $15,453. The total assignment for both notes was for $210,000.
21
The total unamortized discount on the ~~Note~~Notes as of ~~October 31, 2019~~April 30, 2020 was ~~$57,778.~~$7,223. The total principal balance outstanding as of ~~October 31, 2019~~April 30, 2020 was ~~$71,500.~~$35,750. The Company amortized ~~$7,222~~$64,277 of debt discount as interest expense during the ~~three~~nine months ended ~~October 31, 2019.~~April 30, 2020.

Other Terms to the Convertible Promissory Notes - October 2019

Notes shall bear interest at a rate of eight percent (8%) per annum (the “Interest Rate”), which interest shall be paid by the Company to each Investor in shares of Common Stock at any time an Investor sends a notice of conversion to the Company. Each of the Investors is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations Bureau OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with the terms of the Notes.

Each of the Notes may be prepaid until 180 days from the issuance date with the following penalties: (i) if a Note is prepaid within one hundred and twenty (120) days of the issuance date, then the prepayment premium shall be 125% of the outstanding principal amount plus any accrued and unpaid interest; (ii) if a Note is prepaid during the period beginning on the date which is one hundred and twenty-one (121) days following the issuance date, and ending on the date which is one hundred eighty (180) days following the issuance date, then the prepayment premium shall be 130% of the outstanding principal amount plus any accrued and unpaid interest. Such prepayment redemptions must be closed and funded within three days of giving notice of prepayment or the right to prepay shall be forfeited.

The Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the each of the Notes. Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time, increases the Reserved Amount in accordance with the Company’s obligations under each of the Notes.

Pursuant to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note (the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock. The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion Shares
Convertible Promissory Note Assignments – January 2020
On January 10, 2020, the Company entered into an Assignment Agreement whereby Armada Investment Fund LLC (the “Assignor”) assigned to Platinum Point Capital LLC (the “Assignee”) a principal amount of $145,297 and $35,750, representing the outstanding principal balance on the Convertible Promissory Notes dated July 11, 2019 and October 18, 2019, respectively, plus accrued interest of $28,953. The new notes are is in the aggregate principal amount of $210,000, annual interest rate of 3% and a maturity date of January 10, 2021.
On January 22, 2020, the Company entered into an Assignment Agreement whereby BHP Capital NY Inc. (the “Assignor”) assigned to Platinum Point Capital LLC (the “Assignee”) a principal amount of $146,625, representing the outstanding principal balance on the Convertible Promissory Note dated July 11, 2019, plus accrued interest of $33,375. The new note is in the aggregate principal amount of $180,000, annual interest rate of 3% and a maturity date of January 22, 2021.
On January 22, 2020, the Company entered into an Assignment Agreement whereby Jefferson Street Capital LLC (the “Assignor”) assigned to Platinum Point Capital LLC (the “Assignee”) a principal amount of $146,625, representing the outstanding principal balance on the Convertible Promissory Note dated July 11, 2019, plus accrued interest of $33,375. The new note is in the aggregate principal amount of $180,000, annual interest rate of 3% and a maturity date of January 22, 2021.
22

The Company analyzed the Notes for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of the assignment, the Company recognized derivative liability for the new convertible notes of $784,565, of which $570,000 was recorded as debt discount and will be amortized during the term of the Notes, and $214,565 was recorded as day 1 derivative loss.
On January 22, 2020, the Company issued 1,698,717 shares of common stock for the conversion of $25,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On February 4, 2020, the Company issued 2,054,263 shares of common stock for the conversion of $25,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On February 27, 2020, the Company issued 2,500,000 shares of common stock for the conversion of $15,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On April 2, 2020, the Company issued 3,208,955 shares of common stock for the conversion of $20,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On April 24, 2020, the Company issued 3,208,955 shares of common stock for the conversion of $20,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
The total unamortized discount on the Notes as of April 30, 2020 was $324,417, and the total principal balance outstanding as of April 30, 2020 was $467,500. The Company amortized $248,083 of debt discount as interest expense during the nine months ended April 30, 2020.
Other Terms to the Convertible Promissory Notes and Note Assignments – January 2020
Notes shall bear interest at a rate of three (3%) per annum (the “Interest Rate”), which interest shall be paid by the Company to each Investor in shares of Common Stock at any time an Investor sends a notice of conversion to the Company. Each of the Investors is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations Bureau OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with the terms of the Notes.
Each of the Notes may be prepaid until 180 days from the issuance date with the following penalties: (i) if a Note is prepaid within ninety (90) days of the issuance date, then the prepayment premium shall be 125% of the outstanding principal amount plus any accrued and unpaid interest; (ii) if a Note is prepaid during the period beginning on the date which is ninety-one (91) days following the issuance date, and ending on the date which is one hundred eighty (180) days following the issuance date, then the prepayment premium shall be 130% of the outstanding principal amount plus any accrued and unpaid interest. Such prepayment redemptions must be closed and funded within three days of giving notice of prepayment or the right to prepay shall be forfeited.
The Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the each of the Notes. Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time, increases the Reserved Amount in accordance with the Company’s obligations under each of the Notes.
23
Pursuant to the terms of the Notes, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note (the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock. The Company is also subject to certain customary negative covenants under the Notes, including but not limited to the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion Shares.
Convertible Promissory Notes – February 2020 & April 2020
On February 13, 2020, the Company entered into a convertible promissory note (the “Note”). The note is in the aggregate principal amount of $33,500, annual interest rate of 10% and a maturity date of February 13, 2021. After payment of transaction-related expenses of $3,500, net proceeds to the Company from the Note totaled $30,000. The Company recorded these discounts and cost of $3,500 as a discount to the Note and fully amortized as interest expense during the period.
The Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized derivative liability for the convertible note of $42,976, of which $30,000 was recorded as debt discount and will be amortized during the term of the Note, and $12,976 was recorded as day 1 derivative loss.
The total unamortized discount on the Note as of April 30, 2020 was $22,500. The total principal balance outstanding as of April 30, 2020 was $33,500. The Company amortized $7,500 of debt discount as interest expense during the nine months ended April 30, 2020.
On April 28, 2020, the Company entered into a convertible promissory note (the “Note”). The note is in the principal amount of $15,000, annual interest rate of 10% and a maturity date of April 28, 2021.
The Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized derivative liability for the convertible note of $26,629, of which $15,000 was recorded as debt discount and will be amortized during the term of the Note, and $11,629 was recorded as day 1 derivative loss.
The total unamortized discount on the Note as of April 30, 2020 was $15,000. The total principal balance outstanding as of April 30, 2020 was $15,000. The Company amortized $0 of debt discount as interest expense during the nine months ended April 30, 2020.
Other Terms to the Convertible Promissory Notes – February 2020 & April 2020
Notes shall bear interest at a rate of ten percent (10%) per annum (the “Interest Rate”), which interest shall be paid by the Company to each Investor in shares of Common Stock at any time an Investor sends a notice of conversion to the Company. Each of the Investors is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations Bureau OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with the terms of the Notes.
Each of the Notes may be prepaid until 180 days from the issuance date with the following penalties: (i) if a Note is prepaid within ninety (90) days of the issuance date, then the prepayment premium shall be 125% of the outstanding principal amount plus any accrued and unpaid interest; (ii) if a Note is prepaid during the period beginning on the date which is ninety-one (91) days following the issuance date, and ending on the date which is one hundred eighty (180) days following the issuance date, then the prepayment premium shall be 130% of the outstanding principal amount plus any accrued and unpaid interest. Such prepayment redemptions must be closed and funded within three days of giving notice of prepayment or the right to prepay shall be forfeited.
24
The Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the each of the Notes. Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time, increases the Reserved Amount in accordance with the Company’s obligations under each of the Notes.
Pursuant to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note (the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock. The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion Shares.

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

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

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

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

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

Our derivative liabilities as of ~~October 31, 2019~~April 30, 2020 and July 31, 2019 ~~and 2018~~ of ~~$1,301,967~~$1,098,917 and $927,171, 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: Fair value measurements at reporting date using:
Quoted prices in Significant Quoted prices in Significant
active markets other Significant active markets other Significant
for identical Observable unobservable for identical observable unobservable
liabilities inputs inputs liabilities inputs inputs
Description Fair Value (Level 1) (Level 2) (Level 3) Fair Value (Level 1) (Level 2) (Level 3)

Convertible promissory notes derivative liability at July 31, 2019 $ 927,171 - - $ 927,171 $ 927,171         -             - $ 927,171
Convertible promissory notes derivative liability at October 31, 2019 $ 1,301,967 - - $ 1,301,967
Convertible promissory notes derivative liability at April 30, 2020 $ 1,098,917 - - $ 1,098,917
25

The fair market value of all derivatives during the ~~three~~nine months ended ~~October 31, 2019~~April 30, 2020 was determined using the Black-Scholes option pricing model which used the following assumptions:

Expected dividend yield 0.00 %
Expected stock price volatility 83.28% - 268.02 %
Risk-free interest rate ~~1.52% -2.67%~~0.16% -2.67 %
Expected term 0.01 - 3.00 years

Level 3 inputs.

The following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value on a recurring basis using significant unobservable inputs:

Balance at July 31, 2018 $ 632,268
Derivative from new convertible promissory notes recorded as debt discount 1,043,834
Derivative liability resolved to additional paid in capital due to debt conversion (822,922 )
Derivative loss 73,991
Balance at July 31, 2019 $ 927,171 $ 927,171
Derivative from new convertible promissory notes recorded as debt discount 150,000 765,000
Derivative liability resolved to additional paid in capital due to debt conversion (240,250 ) (524,850 )
Derivative loss 465,046
Balance at October 31, 2019 $ 1,301,967
Derivative gain (68,404 )
Balance at April 30, 2020 $ 1,098,917
NOTE 7 – EQUITY

During the ~~three~~nine months ended ~~October 31, 2019,~~April 30, 2020, the Company issued the following shares of common stock:

On August 12, 2019, the Company issued 114,123 shares of common stock for the conversion of $7,500 of the principal outstanding and $500 in administrative fees under the convertible note.

On August 20, 2019, the Company issued 191,116 shares of common stock for the conversion of $7,500 of the principal outstanding and $538 in accrued interest and administrative fees under the convertible note.

On August 26, 2019, the Company issued 250,000 shares of common stock for the conversion of $14,500 of the principal outstanding and $500 in administrative fees under a convertible note.

On August 26, 2019, the Company issued 416,666 shares of common stock for the conversion of $25,000 of the principal outstanding under a convertible note.

On September 4, 2019, the Company issued 250,620 shares of common stock for the conversion of $10,000 of the principal outstanding and $541 in administrative fees under a convertible note.

On September 10, 2019, the Company issued 277,291 shares of common stock for the conversion of $12,750 of the principal outstanding and $3,888 in accrued interest and administrative fees under a convertible note.

On September 26, 2019, the Company issued 342,466 shares of common stock for the conversion of $14,500 of the principal outstanding and $500 in administrative fees under a convertible note.

On October 7, 2019, the Company issue 400,000 shares of common stock, as part of an amendment to various promissory notes. The shares were recorded as debt discount and amortized over the remaining term of the notes.

On October 27, 2019, the Company issued 332,667 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in administrative fees under a convertible note.

On October 29, 2019, the Company issued 465,736 shares of common stock for the conversion of $13,500 of the principal outstanding and $500 in administrative fees under a convertible note.

On October 31, 2019, the Company issued 310,527 shares of common stock for the conversion of $6,500 of the principal outstanding and $2,834 in accrued interest and administrative fees under a convertible note.

On October 31, 2019, the Company issued 831,669 shares of common stock for the conversion of $25,000 of the principal outstanding under a convertible note.

26
On November 14, 2019, the Company issued 301,697 shares of common stock for the conversion of $7,500 of the principal outstanding, $500 in fees and accrued interest of $146 under one of the convertible notes.
On November 15, 2019, the Company issued 398,247 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of the convertible notes.
On November 19, 2019, the Company issued 537,635 shares of common stock for the conversion of $13,000 of the principal outstanding and $500 in fees under one of the convertible notes.
On November 26, 2019, the Company issued 447,917 shares of common stock for the conversion of $8,000 of the principal outstanding, $500 in fees and accrued interest of $100 under one of the convertible notes.
In November 2019, in conjunction of various note extension agreements, the Company issued 80,000 shares of common stock with a fair market value $3,200.
In November 2019, the Company issued 282,885 shares of common stock for payment of $14,382 in accrued interest.
In November 2019, the Company issued 86,667 shares of common stock in conjunction to the conversion of 25,000 shares of the Series A Convertible Preferred stock and $1,189 in accrued dividends.
On December 10, 2019, the Company issued 400,000 shares of common stock with a fair market value of $15,240 for compensation on an agreement for professional services.
On December 16, 2019, the Company issued 520,833 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of the convertible notes.
On December 24, 2019, the Company issued 444,672 shares of common stock for the conversion of $8,000 of the principal outstanding, $500 in fees and accrued interest of $171 under one of the convertible notes.
On December 31, 2019, the Company issued 517,598 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of the convertible notes.
On January 8, 2020, the Company issued 785,760 shares of common stock for the conversion of $5,000 of the principal outstanding, $500 in fees and accrued interest of $8,408 under one of the convertible notes.
On January 9, 2020, the Company issued 200,000 shares of common stock for the conversion of $1,328 of the principal outstanding and accrued interest of $2,212 under one of the convertible notes.
On January 13, 2020, the Company issued 549,858 shares of common stock for the conversion of $8,000 of the principal outstanding, $500 in fees and accrued interest of $78 under one of the convertible notes.
On January 16, 2020, the Company issued 705,128 shares of common stock for the conversion of $10,500 of the principal outstanding and $500 in fees under one of the convertible notes.
On January 22, 2020, the Company issued 1,698,717 shares of common stock for the conversion of $25,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On January 28, 2020, the Company issued 474,891 shares of common stock for the conversion of $6,000 of the principal outstanding, $500 in fees and accrued interest of $25 under one of the convertible notes.
On January 28, 2020, the Company issued 956,226 shares of common stock for the conversion of $9,250 of the principal outstanding, $500 in fees and accrued interest of $3,962 under one of the convertible notes.
27
On February 4, 2020, the Company issued 2,054,263 shares of common stock for the conversion of $25,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On February 15, 2020, the Company issued 200,000 shares of common stock as a principal payment on a note for $10,000. At issuance, the Company recognized a benefit to non-cash expense of $4,600, this benefit was recognized as a result of the difference between the fair market value of the shares of common stock issued and debt settled.
On February 19, 2020, the Company issued 110,027 shares of common stock for payment of accrued interest and a fair market value of $4,290.
On February 19, 2020, in conjunction with various note extension agreements, the Company issued 260,000 shares of common stock with a fair market value of $6,890.
On February 20, 2020, in conjunction with a note extension agreement, the Company issued 40,000 shares of common stock with a fair market value of $800.
On February 24, 2020, the Company issued 11,509,022 common shares to various employees as part of the Company’s Non-Standardized profit-sharing plan contribution. The Company recognized stock-based compensation expense of approximately $233,633 equivalent to the value of the shares calculated based on the share’s closing price at the grant date.
On February 27, 2020, the Company issued 2,500,000 shares of common stock for the conversion of $15,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On April 2, 2020, the Company issued 3,208,955 shares of common stock for the conversion of $20,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On April 24, 2020, the Company issued 3,208,955 shares of common stock for the conversion of $20,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On April 30, 2020, the Company issued 14,138,826 shares of common stock for the settlement of debt of $386,000 and $38,164 in accrued interest. At the time of issuance, the Company recognized a gain in settlement of debt $134,319.
During the ~~three~~nine months ended ~~October 31, 2018,~~April 30, 2019, the Company issued the following shares of common stock:

On August 1, 2018, the Company secured $40,000 from an investor under a private placement and issued 80,000 shares of its common stock at a price of $0.50 per share and warrants to purchase an additional 15,000 shares of its common stock at an exercise price of $0.50 per share. We determined that the warrants issued in connection with the private placement were equity instruments and did not represent derivative instruments. The Company adopted a sequencing policy and determined that the warrants with fixed exercise price were excluded from derivative consideration.
24

On September 28, 2018, the Company issued an aggregate of 21,672 shares of common stock with a market value at time of issuance of $5,794. The shares were issued to settle accounts payables of $5,287 to a professional, the Company recognized a loss of $507 upon issuance of the shares.

On October 12, 2018, the Company issued a promissory note for $25,000, bearing interest at a rate of 8% per annum, with maturity date of November 12, 2018. In conjunction with the Note, the Company issued 140,000 common shares, the shares vested at time of issuance, these shares replace previously issued warrants with an exercise price of $0.15, therefore the exercise price of $21,000 was recognized as a discount on the promissory note. The Company will amortize the fair market value as interest expense over the term of the note.

On October 18, 2018, the Company issued a promissory note for $25,000, bearing interest at a rate of 8% per annum, with maturity date of November 18, 2018. In conjunction with the Note, the Company issued 100,000 common shares, the shares vested at time of issuance, these shares replace previously issued warrants with an exercise price of $0.15, therefore the exercise price of $15,000 was recognized as a discount on the promissory note. The Company will amortize the fair market value as interest expense over the term of the note.
28
On November 1, 2018 the Company issued an aggregate of 200,000 shares of common stock with a market value at time of issuance of $69,600 and recognized the total fair market value as stock-based compensation expense at the time of issuance. The shares were issued for consulting services.
On November 5, 2018, the Company issued an aggregate of 16,883 shares of common stock with a market value at time of issuance of $5,875. The shares were issued to settle accounts payables of $5,287 to a professional, the Company recognized a loss of $587 upon issuance of the shares. This loss is immaterial, thus presented in stock-based compensation expense on the statement of cash flows.
On November 14, 2018, the Company secured $75,000 from an investor under a Securities Purchase Agreement and issued 258,621 shares of its common stock at a price of $0.29.
On November 29, 2018, the Company issued an aggregate of 39,444 shares of common stock with a market value at time of issuance of $11,833. The shares were issued to settle accounts payables of $10,545 to a professional, the Company recognized a loss of $1,288 upon issuance of the shares. This loss is immaterial, thus presented in stock-based compensation expense on the statement of cash flows.
On February 1, 2019, the Company issued an aggregate of 325,000 shares of common stock with a market value at time of issuance of $78,000 and recognized the total fair market value as stock-based compensation expense at the time of issuance. The shares were issued for consulting services.
On February 5, 2019, the Company issued an aggregate of 60,715 shares of common stock with a market value at time of issuance of $13,357. The shares were issued to settle accounts payables of $10,382 to a professional, the Company recognized a loss of $2,975 upon issuance of the shares.
On February 8, 2019, the Company secured $150,000 from an accredited investor under a Securities Purchase Agreement and issued 600,000 shares of its common stock at a price of $0.25.
On February 8, 2019, the Company issued an aggregate of 400,000 shares of common stock with a market value at time of issuance of $100,000 and recognized the total fair market value as stock-based compensation expense at the time of issuance. The shares were issued for consulting services.

NOTE 8 - LEASES

Effective August 1, 2019, the Company adopted ASC 842, “Leases” (“ASC 842”) on a modified retrospective basis. Accordingly, information presented for periods prior to FY2019 have not been recast. In addition, the Company elected the optional practical expedient permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment for existing lease upon adoption. No impact was recorded to the income statement or beginning retained earnings for Topic 842.

The leased properties have a remaining lease term of eleven to forty-six months as of August 1, 2019. At the option of the Company it can elect to extend the term of the leases.

Beginning August 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments, including annual rent increases, over the lease term at commencement date. Operating leases in effect prior to August 1, 2019 were recognized at the present value of the remaining payments on the remaining lease term as of August 1, 2019. Because neither of our leases included an implicit rate of return, we used our incremental secured borrowing rate based on lease term information available as of the adoption date or lease commencement date in determining the present value of lease payments. The incremental borrowing rate on the leases is 8.0%.

The Company has not entered into any sale and leaseback transactions during the ~~three-month~~nine-month period ended ~~October 31, 2019.~~April 30, 2020.
29

The impact of ASU No. 2016-02 (“Leases (Topic 842)” on our consolidated balance sheet beginning August 1, 2019 was through the recognition of ROU assets and lease liabilities for operating leases. Amounts recognized aton August 1, 2019 and ~~October 31, 2019~~April 30, 2020 for operating leases are as follows:

ROU Asset August 1, 2019 $ 372,651 August 1, 2019 $ 372,651
Amortization $ (89,949 ) $ (159,403 )
ROU Asset October 31, 2019 $ 282,702 April 30, 2020 $ 213,248

Lease Liability August 1, 2019 $ 372,651 August 1, 2019 $ 372,651
Amortization $ (89,949 ) $ (159,403 )
Lease Liability October 31, 2019 $ 282,702 April 30, 2020 $ 213,248

Lease Liability Short term $ 138,481 Short term $ 114,387
Lease Liability Long term $ 144,221 Long term $ 98,861
Lease Liability Total: $ 282,702 Total: $ 213,248
For the ~~three-months~~nine-months ended ~~October 31, 2019~~April 30, 2020 amortization of assets was ~~$89,949.~~$159,403.

For the ~~three-months~~nine-months ended ~~October 31, 2019,~~April 30, 2020 amortization of liabilities was ~~$89,949.~~$159,403.

The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease liabilities recorded on the Consolidated Balance Sheet as of ~~October 31, 2019:~~April 30, 2020:

Operating Operating
Amounts due within 12 months of October 31, Lease
Amounts due within 12 months of April 30, Lease

2020 $ 161,602 $ 134,638
2021 81,831 56,872
2022 50,425 37,161
2023 17,808 -
2024 - -
Total minimum lease payments $ 311,667 $ 228,671
Less: effect of discounting (28,965 ) (15,423 )
Present Value of future minimum lease payments $ 282,702 $ 213,248
Less: current obligation under leases (138,481 ) (114,387 )
Long-term lease obligation $ 282,702 $ 98,861
NOTE 9 – 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 Preferred Stock. The Series B Preferred Stock is only issuable to the Company’s debt holders as of March 25, 2020 (“Existing Debt Holders”) who may purchase shares of Series B Preferred Stock at the Stated Value by converting all or part of the debt owed to them by the Corporation as of March 25, 2020. Each share of Series B Preferred Stock has a par value of $0.001 per share and a stated value equal to one dollar ($1.00) (the “Stated Value”). In April 2020, the Company issued a total of 424,165 shares of Series B Preferred Stock for settlement of debt of $386,000 on various promissory notes and $38,165 in accrued interest. No dividends are payable on the Series B Preferred Stock.
30
The terms of our Series B Preferred Stock allow for:
Voting Rights. Except as otherwise provided by the Nevada Revised Statutes, other applicable law or as provided in this Certificate of Designation, the Series B Preferred Stock shall have no voting rights. However, as long as any shares of Series B Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares of the Series B Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series B Preferred Stock or alter or amend this Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (c) increase the number of authorized shares of Series B Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
Mandatory Conversion. Upon (i) an up-listing of the Corporation’s Common Stock to Nasdaq or a US national securities exchange, (ii)an underwriting involving the sale of $5,000,000 or more of the Corporation’s Common Stock or Common Stock Equivalents (a “Material Underwriting”), (iii) the Corporation ceases to be a public corporation as the result of a going private transaction, (iv) the Corporation, directly or indirectly, effects any sale, lease, exclusive license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions (including a transaction involving the Corporation’s spin-off of its operating subsidiary, T3 Communications, Inc.), (v) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Corporation or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (vi) the Corporation, directly or indirectly, in one or more related transactions, effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (vii) the Corporation, directly or indirectly, in one or more related transactions, consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person, other than an officer or director of the Company, whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) , all shares of Series B Preferred Stock shall be automatically converted, without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, into the number of fully paid and nonassessable shares of Common Stock in an amount equal, following conversion ,to 18% of the Corporation’s issued and outstanding shares of Common Stock . Each of (i)-(vii) above shall be hereafter referred to as a “Conversion Event” and the date of a Conversion Event shall be hereafter referred to as a “Conversion Date”. Upon any such mandatory conversion and the issuance of Conversion Shares further thereto, the shares of Series B Preferred Stock shall be deemed cancelled and of no further force or effect. A mandatory conversion is the only means by which Series B Preferred Stock is convertible as the shares of Series B Preferred Stock are not convertible at the option of the Holder. For purposes of the foregoing Conversion Events, conversion will be deemed to have taken place immediately prior to the Conversion Event. By way of example, if the Corporation engages in a Material Underwriting, the Series B Preferred Stock will be treated as having been converted immediately prior to the issuance of the securities in the Material Underwriting.
Redemption. At any time on or after the second anniversary of the date of issuance of shares of Series B Preferred Stock to the Holder, the Corporation, in its sole discretion ,may elect, by delivering written notice to the Holder no less than 10 days or more than 20 prior to the redemption date set forth in such notice (the “Redemption Date”), to redeem all or any portion of the Series B Preferred Stock held by such Holder at a price per share (the “Redemption Price”) equal to 120% of the Stated Value per share being redeemed . The Corporation shall, unless otherwise prevented by law, redeem from such holder on the Redemption Date the number of shares of Series B Preferred Stock identified in such notice of redemption. During the period ended April 30, 2020, the Company evaluated Series B Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during the period and determined that the convertible shares were classified as equity instruments. The Company will evaluate the convertible shares at each reporting balance sheet date and determine if a re-classification is required.
31

NOTE 910 – SUBSEQUENT EVENTS

Promissory Note
On ~~November 6, 2019,~~May 4, 2020, the Company, entered into an unsecured promissory note (the “Note”) for $213,100 made to the Company under the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The loans to the Company was made through The Bank of San Antonio (the “Lender”).
The Note provides for an interest rate of 1.00% per year and matures two years after the issuance date. Beginning on the seventh month following the date of the Note, the Company is required to make 18 monthly payments of principal and interest in the amount of $11,933. The Note may be used for payroll costs, costs related to certain group health care benefits and insurance premiums, rent payments, utility payments, mortgage interest payments and interest payments on any other debt obligation that were incurred before February 15, 2020. The Note contains events of default and other conditions customary for a Note of this type.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. The terms of any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt. While the Company currently believes that its use of the Note proceeds will meet the conditions for forgiveness under the PPP, no assurance is provided that the Company will obtain forgiveness of the Note in whole or in part.
Equity issuance
On May 29, 2020, the Company issued ~~110,830 shares of common stock for the payment of accrued interest on a promissory note, with a market value of $7,758, the Company recognized a loss of $258 upon issuance of the shares.~~
~~On November 14, 2019, the Company issued 301,697~~3,500,000 shares of common stock for the conversion of ~~$7,500~~$30,000 of the principal outstanding and ~~$646 in administrative fees~~accrued interest of $1,500 under aone of the convertible ~~note.~~notes.

~~On November 15, 2019, the Company issued 398,247 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in administrative fees under a convertible note.~~
~~On November 19, 2019, the Company issued 537,635 shares of common stock for the conversion of $13,000 of the principal outstanding and $500 in administrative fees under a convertible note.~~
On November 25, 2019, the Company issue 20,000 shares of common stock, as part of an amendment to a promissory note. The shares were recorded as debt discount and amortized over the remaining term of the note.
On November 25, 2019, the Company issue 40,000 shares of common stock, as part of an amendment to a promissory note. The shares were recorded as debt discount and amortized over the remaining term of the note.
~~On November 25, 2019, the Company issued 114,630 shares of common stock for the payment of accrued interest on a promissory note, with a market value at issuance of $4,665.~~
~~On November 26, 2019, the Company issued 447,917 shares of common stock for the conversion of $8,000 of the principal outstanding and $600 in administrative fees under a convertible note.~~
~~On December 10, 2019, the Company issued 400,000 shares of common stock with a market value at time of issuance of $15,200. The shares were issued for consulting services with a professional.~~
2632

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, 2019 filed with the Securities and Exchange Commission on October 28, 2019.

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 ~~October 31, 2019~~April 30, 2020 and ~~2018.~~2019. 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, 2019 filed with the Securities and Exchange Commission on October 28, 2019. For purposes of the following discussion, fiscal 2020 or 2020 refers to the year ended July 31, 2020 and fiscal 2019 or 2019 refers to the year ended July 31, 2019.

Overview

Digerati Technologies, Inc., a Nevada corporation (including our subsidiaries, “we,” “us,” “Company” or “Digerati”), through its operating subsidiaries in Texas and Florida, Shift8 Networks, Inc., dba, T3 Communications (“T3”) and T3 Communications, Inc. (“T3”), respectively, provides cloud services specializing in Unified Communications as a Service (“UCaaS”) solutions for the business market. Our product line includes a portfolio of Internet-based telephony products and services delivered through our cloud application platform and session-based communication network and network services including Internet broadband, fiber, mobile broadband and cloud WAN solutions (SD WAN). Our services are designed to provide enterprise-class, carrier-grade services to the small-to-medium-sized business (“SMB”) at cost-effective monthly rates. Our UCaaS or cloud communication services include fully hosted IP/PBX, mobile applications, Voice over Internet Protocol (“VoIP”) transport, SIP trunking, and customized VoIP services all deliveredOnly in the Cloud™.
33

As a provider of cloud communications solutions to the SMB, we are seeking to capitalize on the migration by businesses from the legacy telephone network to the Internet Protocol (“IP”) telecommunication network and the migration from hardware-based on-premise telephone systems to software-based communication systems in the cloud. Most SMBs are lagging in technical capabilities and advancement and seldom reach the economies of scale that their larger counterparts enjoy, due to their achievement of a critical mass and ability to deploy a single solution to a large number of workers. SMBs are typically unable to afford comprehensive enterprise solutions and, therefore, need to integrate a combination of business solutions to meet their needs. Cloud computing has revolutionized the industry and opened the door for businesses of all sizes to gain access to enterprise applications with affordable pricing. This especially holds true for cloud telephony applications, but SMBs are still a higher-touch sale that requires customer support for system integration, network installation, cabling, and troubleshooting. We have placed a significant emphasis on that “local” touch when selling, delivering, and supporting our services which we believe will differentiate us from the national providers that are experiencing high attrition rates due to a poor customer support.

The adoption of cloud communication services is being driven by the convergence of several market trends, including the increasing costs of maintaining installed legacy communications systems, the fragmentation resulting from use of multiple on-premise systems, and the proliferation of personal smartphones used in the workplace. Today, businesses are increasingly looking for an affordable path to modernizing their communications system to improve productivity, business performance and customer experience.

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.
27

Recent Activity

In September 2019, wethe Companyentered into a definitive agreement to acquire Nexogy, Inc. (“Nexogy”), a leading provider in South Florida of UCaaS and managed services, offering a portfolio of cloud-based solutions to the high-growth SMB market. ~~We are~~In February 2020, after meeting the required public notice period pursuant to section 214 of the Communications Act of 1934, the Company secured FCC approval for the acquisition of Nexogy. In addition, in February 2020 the Company entered into a Letter of Intent (LOI) for another acquisition. The Company is expecting to simultaneously close both of the transactionsduring ~~our second~~the fourth quarter of FY 2020 ~~(prior to January~~(on or before July 31, 2020), subject to ~~FCC regulatory approval and~~ finalizing debt financing for the ~~transaction~~transactions that ~~has~~were previously ~~been~~ committed ~~to be provided to the Company~~ by an established and traditional lending source.

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.

34
Results of Operations

Three Months ended ~~October~~~~31, 2019~~ April 30, 2020 Compared to Three Months ended ~~October 31, 2018~~April 30, 2019

Cloud Software and Service Revenue. Cloud software and service revenue increased by ~~$67,000,~~$81,000, or 4%5% from the three months ended ~~October 31, 2018~~April 30, 2019 to the three months ended ~~October 31, 2019.~~April 30, 2020. The increase in revenue between periods is primarily attributed to the increase in total customers between periods. Our total number of customers increased from ~~664~~688 for the three months ended ~~October 31, 2018~~April 30, 2019 to ~~708~~731 customers for the three months ended ~~October 31, 2019.~~April 30, 2020. Additionally, our average monthly revenue per customer decreased from ~~$764~~$723 for the three months ended ~~October 31, 2018~~April 30, 2019 to ~~$754~~$715 for the three months ended ~~October 31, 2019.~~April 30, 2020.

Cost of Services (exclusive of depreciation and amortization). The cost of services ~~increased~~decreased by ~~$46,000,~~$6,000, or 6%1%, from the three months ended ~~October 31, 2018~~April 30, 2019 to the three months ended ~~October 31, 2019.~~April 30, 2020. The ~~increase~~decrease in cost of services between periods is primarily attributed to the ~~additional costs arising from~~reduction of one of our colocation sites, whereby we consolidated multiple servers and consolidated to a nationwide provider. As a result of the ~~increase in revenue between periods. Although our consolidated~~ cost ~~of services increased between periods,~~reductions, our consolidated gross margin ~~increased~~improved by ~~$21,000~~$87,000 from the quarter ended ~~October 31, 2018~~April 30, 2019 to the quarter ended October 31, 2019. The increase in gross margin between periods is attributed to a higher concentration of enterprise customers revenue, which generate a slightly higher margin than services provided via resellers.April 30, 2020.

Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional ~~fees)~~fees and stock compensation expense).SG&A expenses ~~increased~~decreased by ~~$4,000,~~$141,000, or 1%16%, from the three months ended ~~October 31, 2018~~April 30, 2019 to the three months ended ~~October 31, 2019.~~April 30, 2020. The decrease in SG&A is attributed to reduction of a few sales partners, customer care and technical support partners.

Stock Compensation expense.Stock compensation expense ~~increased~~decreased by ~~$367,000,~~$32,000 from the three months ended ~~October 31, 2018~~April 30, 2019 to the three months ended ~~October 31, 2019.~~April 30, 2020. The ~~increase~~decrease between periods is attributed to the recognition of stock option expense of ~~$142,000~~$62,979 recognized during the three months ended ~~October 31, 2019~~April 30, 2020 associated with the stock options with multiple vesting periods that were awarded to various employees during FY2018, FY2019 and FY2020. The Company also recognized ~~$370,259~~$233,633 in stock compensation expense associated with the funding of the 401(K)-profit sharing plan for ~~stock issued in lieu of cash payments to~~ the ~~Management team during the period~~three months ended ~~October 31, 2019.~~April 30, 2020.
28

Legal and professional fees. Legal and professional fees ~~decreased~~increased by ~~$22,000, or 18%,~~$3,000, from three months ended ~~October 31, 2018~~April 30, 2019 to the three months ended ~~October 31, 2019.~~April 30, 2020. The ~~decrease~~increase between periods is attributed to the recognition during FY ~~2019~~2020 of ~~$20,000~~$18,750 in professional expenses incurred related to investor relations ~~services.~~services, the recognition of $10,500 in professional fees related to the due-diligence on target acquisitions, the recognition of $26,000 in professional fees related to accounting and financial quarterly reviews and the recognition of $10,650 in professional fees related to mediation with two former employees.

Bad debt. Bad debt ~~declined by $3,000 between periods. During~~was a benefit of $19,000 for the three months ended ~~October 31, 2018 the Company~~April 30, 2020; this was recognized ~~a recovery of bad debt of $3,000~~ for accounts that were previously deemed uncollectable.

Depreciation and amortization. Depreciation and amortization decreased by ~~$7,000,~~$19,000, from the three months ended ~~October 31, 2018~~April 30, 2019 to the three months ended ~~October 31, 2019,~~April 30, 2020, mainly due to the decrease in depreciation expense related to assets that reached their expected useful life.

Operating loss. The Company reported an operating loss of ~~$671,000~~$472,000 for the three months ended ~~October 31, 2019~~April 30, 2020 compared to an operating loss of ~~$413,000~~$767,000 for the three months ended ~~October 31, 2018.~~April 30, 2019. The ~~increase~~improvement in operating loss between periods is primarily due to the ~~increase~~decrease of ~~$301,000~~$141,000 in SG&A, the decrease of $19,000 in depreciation expense, the improvement of $87,000 in gross margin, decrease in stock compensation ~~expense. The increase was slightly offset by the increase~~expense of ~~$21,000 in gross margin~~$32,000 and the ~~decrease~~improvement of ~~$22,000~~$19,000 in ~~legal and professional fees.~~bad debt recovery.

Gain (loss) on derivative instruments. Gain (loss) on derivative instruments increased by ~~$326,000~~$1,152,000 from three months ended ~~October 31, 2018~~April 30, 2019 to the three months ended ~~October 31, 2019.~~April 30, 2020. We are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re- measurement of all derivative instruments we recognized ~~a loss~~an increase between periods.

Gain on settlement of debt. Gain on settlement of debt improved by $134,000 from three months ended April 30, 2019 to the three months ended April 30, 2020. During the three months ended April 30, 2020 the Company issued 14,138,826 shares of common stock for the conversion of $386,000 on the outstanding principal balance on various promissory notes and $38,164 in accrued interest. At the time of issuance, the Company recognized $134,000 as a gain in settlement of debt.
35
Income tax benefit (expense).During the three months ended ~~October 31, 2019,~~April 30, 2020, the Company recognized an income tax expense ~~benefit~~ of ~~$39,000. The primary reason for~~$10,000, this was comparable to the ~~income tax benefit is due to a refund of previously paid taxes.~~three months ended April 30, 2019.

Interest expense. Interest income (expense) increased by ~~$48,000~~$135,000 from the three months ended ~~October 31, 2018~~April 30, 2019 to the three months ended ~~October 31, 2019.~~April 30, 2020. The ~~primary reason for the increase in interest expenses is attributed to the recognition of~~Company recognized non-cash interest / accretion expense of ~~$324,000~~$363,000 related to the adjustment to the present value of various convertible notes and debentures. Additionally, the Company recognized ~~$66,000~~$121,000 in interest expense for cash interest payments on various promissory notes, accrual of ~~$35,000~~$16,000 for interest expense for various promissory notes, interest paid in shares of common stock for $8,000 and interest income of ~~$4,700.~~$3,400.

Net income (loss) including noncontrolling interest.Net loss including noncontrolling interest for the three months ended ~~October 31, 2019~~April 30, 2020 was ~~$1,521,000~~$1,108,000 compared to a net loss for the three months ended ~~October 31, 2018~~April 30, 2019 of ~~$941,000.~~$250,000. The increase in net loss including noncontrolling interest between periods is primarily due to the increase of ~~$367,000~~$81,000 in stock compensation ~~expense. The increase of $326,000 in loss on derivative instruments. The increases was slightly offset by~~expense, the increase of ~~$21,000 in gross margin, the decrease of $22,000~~$3,000 in legal and professional fees, the increase of $1,152,000 in loss on derivative instruments, and the increase of $135,000 in interest expense. The increases were slightly offset by the improvement of $87,000 in gross margin between periods, the decline of $141,000 in SG&A, the decline of $32,000 in stock compensation expense and the improvement of ~~$52,000~~$134,000 in ~~income tax.~~gain on settlement of debt.

Net income attributable to the noncontrolling interest.During the three months ended ~~October 31, 2019,~~April 30, 2020, the consolidated entity recognized net income in noncontrolling interest of ~~$13,000.~~$1,000. 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 common shareholders.Net loss for the three months ended ~~October 31, 2019~~April 30, 2020 was ~~$1,508,000~~$1,107,000 compared to a net loss for the three months ended ~~October 31, 2018~~April 30, 2019 of ~~$914,000.~~$221,000.
Nine Months ended April 30, 2020 Compared to Nine Months ended April 30, 2019
Cloud Software and Service Revenue. Cloud software and service revenue increased by $219,000, or 5% from the nine months ended April 30, 2019 to the nine months ended April 30, 2020. The increase in revenue between periods is primarily attributed to the increase in total customers between periods. Our total number of customers increased from 688 for the nine months ended April 30, 2019 to 731 customers for the nine months ended April 30, 2020. Additionally, our average monthly revenue per customer decreased from $738 for the nine months ended April 30, 2019 to $730 for the nine months ended April 30, 2020.
Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $21,000, or 1%, from the nine months ended April 30, 2019 to the nine months ended April 30, 2020. The increase in cost of services between periods is primarily attributed to the additional costs arising from the acquired customers. Although our consolidated cost of services increased between periods, our consolidated gross margin improved by $198,000 between periods. The improvement in gross margin between periods is attributed to a higher concentration of enterprise customers revenue, which generate a higher margin than services provided via resellers.
Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense).SG&A expenses decreased by $99,000 or 4%, from the nine months ended April 30, 2019 to the nine months ended April 30, 2020. The decrease in SG&A is attributed to reduction of a few sales partners, customer care and technical support partners.
Stock Compensation expense.Stock compensation expense increased by $416,000, from the nine months ended April 30, 2019 to the nine months ended April 30, 2020. The increase between periods is attributed to the recognition of stock option expense of $315,000 recognized during the nine months ended April 30, 2020 associated with the stock options with multiple vesting periods that were awarded to various employees during FY2018, FY2019 and FY2020. The Company also recognized $568,000 in stock compensation for stock issued in lieu of cash payments to the Management team during the nine months ended April 30, 2020. The Company also recognized $233,633 in stock compensation expense associated with the funding of the 401(K)-profit sharing plan for the nine months ended April 30, 2020.
36
Legal and professional fees. Legal and professional fees increased by $103,000, from nine months ended April 30, 2019 to the nine months ended April 30, 2020. The increase between periods is attributed to the recognition during FY 2020 of $48,750 in professional expenses incurred related to investor relations services, the recognition of $60,500 in professional fees related to the due-diligence on target acquisitions and the recognition of $102,650 on professional fees related to mediation with two former employees.
Bad debt. Bad debt was a benefit of $16,000 for the nine months ended April 30, 2020; this was recognized for accounts that were previously deemed uncollectable.
Depreciation and amortization. Depreciation and amortization decreased by $40,000, from the nine months ended April 30, 2019 to the nine months ended April 30, 2020, mainly due to decrease in depreciation expense related to assets that reached their expected useful life.
Operating loss. The Company reported an operating loss of $1,842,000 for the nine months ended April 30, 2020 compared to an operating loss of $1,676,000 for the nine months ended April 30, 2019. The increase in operating loss between periods is primarily due to the increase of $416,000 in stock compensation expense and the increase of $103,000 in legal and professional fees. The increases were slightly offset by the improvement of $198,000 in gross margin, improvement of $40,000 in depreciation and amortization expense and the improvement of $99,000 in SG&A.
Gain (loss) on derivative instruments. Gain (loss) on derivative instruments improved by $663,000 from the nine months ended April 30, 2019 to the nine months ended April 30, 2020. We are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re- measurement of all derivative instruments we recognized an improvement between periods.
Gain on settlement of debt. Gain on settlement of debt improved by $134,000 from nine months ended April 30, 2019 to the nine months ended April 30, 2020. During the three months ended April 30, 2020 the Company issued 14,138,826 shares of common stock for the conversion of $386,000 on the outstanding principal balance on various promissory notes and $38,164 in accrued interest. At the time of issuance, the Company recognized $134,000 as a gain in settlement of debt.
Income tax benefit (expense).During the nine months ended April 30, 2020, the Company recognized an income tax benefit of $22,000. During the nine months ended April 30, 2019, the Company recognized an income tax expense of $37,000.
Interest expense. Interest income (expense) increased by $99,000 from the nine months ended April 30, 2019 to the nine months ended April 30, 2020. The Company recognized non-cash interest / accretion expense of $1,086,000 related to the adjustment to the present value of various convertible notes and debentures. Additionally, the Company recognized $218,500 in interest expense for cash interest payments on various promissory notes, $35,000 of interest paid in stock for various promissory notes, accrual of $67,000 for interest expense for various promissory notes and interest income of $11,000.
Net income (loss) including noncontrolling interest.Net loss including noncontrolling interest for the nine months ended April 30, 2020 was $3,130,000 compared to a net loss for the nine months ended April 30, 2019 of $3,721,000. The increase in net loss including noncontrolling interest between periods is primarily due to the increase of $416,000 in stock compensation expense, the increase of $103,000 in legal and professional fees, the increase of $99,000 in interest expense and the increase of $21,000 in cost of services. The increases were slightly offset by the improvement of $198,000 in gross margin between periods and the improvement of $757,000 in other income and expense, the improvement of $99,000 in SG&A, and the improvement of $40,000 in depreciation expense.
Net income attributable to the noncontrolling interest.During the nine months ended April 30, 2020, the consolidated entity recognized net income in noncontrolling interest of $58,000. 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 common shareholders.Net loss for the nine months ended April 30, 2020 was $3,072,000 compared to a net loss for the nine months ended April 30, 2019 of $3,636,000.
37

Liquidity and Capital Resources

Cash Position: We had a consolidated cash balance of ~~$469,000~~$445,000 as of ~~October 31, 2019.~~April 30, 2020. Net cash provided by operating activities during the ~~three~~nine months ended ~~October 31, 2019~~April 30, 2020 was approximately ~~$26,000,~~$36,000, primarily as a result of operating expenses, that included ~~$511,000~~$1,132,000 in stock compensation and warrant expense, amortization of debt discount of ~~$324,000, loss~~$1,046,000, gain on derivative liability of ~~$465,000~~$69,000, depreciation and amortization expense of ~~$146,000.~~$465,000. Additionally, we had an increase of ~~$42,000~~$277,000 in accounts payable, increase in accrued expenses of ~~$80,000,~~$532,000, increase in deferred income of $33,000, decrease in accounts receivables of ~~$15,000, decrease in deferred income of $42,000,~~$116,000, a decrease in prepaid expenses and other current assets of ~~$21,000.~~$18,000 and a gain on settlement of debt of $134,000.
29

Cash used in investing activities during the ~~three~~nine months ended ~~October 31, 2019~~April 30, 2020 was ~~$24,000~~$159,000 , which included $57,000 for the purchase of ~~equipment.~~equipment and the cash paid of $102,000 for escrow deposits related to an acquisition.

Cash provided by financing activities during the ~~three~~nine months ended ~~October 31, 2019~~April 30, 2020 was ~~$101,000.~~$162,000. The Company secured ~~$150,000~~$195,000 from convertible notes, net of issuance costs and discounts. The Company also secured $70,000 from borrowing from a related party, and $322,000 from borrowings from 3^rd party promissory notes. The Company made principal payments of ~~$33,000~~$376,000 on related party notes and ~~$16,000~~$49,000 in principal payments on equipment financing. Overall, our net operating, investing, and financing activities during the ~~three~~nine months ended ~~October 31, 2019~~April 30, 2020 provided approximately ~~$63,000 of~~$39,000 to our available cash.

We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During fiscal 2020 we anticipate reducing fixed costs 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.

Management believes that current available resources will not be sufficient to fund the Company’s operations over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, among other things, raising additional capital, 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 $95,000 per month, including wages, rent, utilities and corporate professional fees. As described elsewhere herein, we are not generating sufficient cash from operations to pay for our ongoing operating expenses, or to pay our current liabilities. As of ~~October 31, 2019,~~April 30, 2020, our total liabilities were approximately ~~$7,722,000,~~$7,238,000, which included ~~$1,302,000~~$1,099,000 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 $500,000 of additional working capital to fund our ongoing operations during Fiscal 2020. We used proceeds secured from convertible promissory notes to pay for operating expenses and we anticipate raising additional debt financing to meet our working capital needs.

38
Digerati’s consolidated financial statements for the ~~three~~nine months ending ~~October 31, 2019~~April 30, 2020 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Since the Company’s inception in 1993, Digerati has incurred net losses and accumulated a deficit of approximately ~~$86,828,000~~$88,392,000 and a working capital deficit of approximately ~~$6,379,000~~$5,285,000 which raises doubt about Digerati’s ability to continue as a going concern.

Item 3. Quantitative and Qualitative Disclosures About Market Risks.

Not Applicable.
30

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this quarterly report on Form 10-Q for the quarter ended ~~October 31, 2019,~~April 30, 2020, our Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”) evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our PEO and PFO concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b) Changes in Internal Controls over Financial Reporting

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

39
PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

Not Applicable

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

On August 12, 2019, the Company issued 114,123 shares of common stock for the conversion of $7,500 of the principal outstanding and $500 in administrative fees under the convertible note.

On August 20, 2019, the Company issued 191,116 shares of common stock for the conversion of $7,500 of the principal outstanding and $538 in accrued interest and administrative fees under the convertible note.

On August 26, 2019, the Company issued 250,000 shares of common stock for the conversion of $14,500 of the principal outstanding and $500 in administrative fees under a convertible note.

On August 26, 2019, the Company issued 416,666 shares of common stock for the conversion of $25,000 of the principal outstanding under a convertible note.

40
On September 4, 2019, the Company issued 250,620 shares of common stock for the conversion of $10,000 of the principal outstanding and $541 in administrative fees under a convertible note.

On September 10, 2019, the Company issued 277,291 shares of common stock for the conversion of $12,750 of the principal outstanding and $3,888 in accrued interest and administrative fees under a convertible note.
32

On September 26, 2019, the Company issued 342,466 shares of common stock for the conversion of $14,500 of the principal outstanding and $500 in administrative fees under a convertible note.

On October 7, 2019, the Company issue 400,000 shares of common stock, as part of an amendment to various promissory notes. The shares were recorded as debt discount and amortized over the remaining term of the notes.

On October 27, 2019, the Company issued 332,667 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in administrative fees under a convertible note.

On October 29, 2019, the Company issued 465,736 shares of common stock for the conversion of $13,500 of the principal outstanding and $500 in administrative fees under a convertible note.

On October 31, 2019, the Company issued 310,527 shares of common stock for the conversion of $6,500 of the principal outstanding and $2,834 in accrued interest and administrative fees under a convertible note.

On October 31, 2019, the Company issued 831,669 shares of common stock for the conversion of $25,000 of the principal outstanding under a convertible note.

On November 6, 2019, the Company issued 110,830 shares of common stock for the payment of accrued interest on a promissory note, with a market value of $7,758, the Company recognized a loss of $258 upon issuance of the shares.
~~On November~~ 14, 2019, the Company issued 301,697 shares of common stock for the conversion of $7,500 of the principal outstanding, $500 in fees and ~~$646 in administrative fees~~accrued interest of $146 under aone of the convertible ~~note.~~notes.

On November 15, 2019, the Company issued 398,247 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in ~~administrative~~ fees under aone of the convertible ~~note.~~notes.

On November 19, 2019, the Company issued 537,635 shares of common stock for the conversion of $13,000 of the principal outstanding and $500 in ~~administrative~~ fees under ~~a convertible note.~~
~~On November 25, 2019, the Company issue 20,000 shares of common stock, as part of an amendment to a promissory note. The shares were recorded as debt discount and amortized over the remaining term~~one of the ~~note.~~
On November 25, 2019, the Company issue 40,000 shares of common stock, as part of an amendment to a promissory note. The shares were recorded as debt discount and amortized over the remaining term of the note.
~~On November 25, 2019, the Company issued 114,630 shares of common stock for the payment of accrued interest on a promissory note, with a market value at issuance of $4,665.~~convertible notes.

On November 26, 2019, the Company issued 447,917 shares of common stock for the conversion of $8,000 of the principal outstanding, $500 in fees and ~~$600~~accrued interest of $100 under one of the convertible notes.
In November 2019, in ~~administrative fees under~~conjunction of various note extension agreements, the Company issued 80,000 shares of common stock with a ~~convertible note.~~fair market value $3,200.
In November 2019, the Company issued 282,885 shares of common stock for payment of $14,382 in accrued interest.
In November 2019, the Company issued 86,667 shares of common stock in conjunction to the conversion of 25,000 shares of the Series A Convertible Preferred stock and $1,189 in accrued dividends.

On December 10, 2019, the Company issued 400,000 shares of common stock with a fair market value of $15,240 for compensation on an agreement for professional services.
On December 16, 2019, the Company issued 520,833 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of the convertible notes.
On December 24, 2019, the Company issued 444,672 shares of common stock for the conversion of $8,000 of the principal outstanding, $500 in fees and accrued interest of $171 under one of the convertible notes.
41
On December 31, 2019, the Company issued 517,598 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in fees under one of the convertible notes.
On January 8, 2020, the Company issued 785,760 shares of common stock for the conversion of $5,000 of the principal outstanding, $500 in fees and accrued interest of $8,408 under one of the convertible notes.
On January 9, 2020, the Company issued 200,000 shares of common stock for the conversion of $1,328 of the principal outstanding and accrued interest of $2,212 under one of the convertible notes.
On January 13, 2020, the Company issued 549,858 shares of common stock for the conversion of $8,000 of the principal outstanding, $500 in fees and accrued interest of $78 under one of the convertible notes.
On January 16, 2020, the Company issued 705,128 shares of common stock for the conversion of $10,500 of the principal outstanding and $500 in fees under one of the convertible notes.
On January 22, 2020, the Company issued 1,698,717 shares of common stock for the conversion of $25,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On January 28, 2020, the Company issued 474,891 shares of common stock for the conversion of $6,000 of the principal outstanding, $500 in fees and accrued interest of $25 under one of the convertible notes.
On January 28, 2020, the Company issued 956,226 shares of common stock for the conversion of $9,250 of the principal outstanding, $500 in fees and accrued interest of $3,962 under one of the convertible notes.
On February 4, 2020, the Company issued 2,054,263 shares of common stock for the conversion of $25,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On February 15, 2020, the Company issued 200,000 shares of common stock as a principal payment on a note for $10,000. At issuance, the Company recognized a benefit to non-cash expense of $4,600, this benefit was recognized as a result of the difference between the fair market value of the shares of common stock issued and debt settled.
On February 19, 2020, the Company issued 110,027 shares of common stock for payment of accrued interest and a fair market value of $4,401.
On February 19, 2020, in conjunction with various note extension agreements, the Company issued 260,000 shares of common stock with a fair market value of $6,890.
On February 20, 2020, in conjunction with a note extension agreement, the Company issued 40,000 shares of common stock with a fair market value of $800.
On February 24, 2020, the Company issued 11,509,022 common shares to various employees as part of the Company’s Non-Standardized profit-sharing plan contribution. The Company recognized stock-based compensation expense of approximately $233,633 equivalent to the value of the shares calculated based on the share’s closing price at the grant date.
On February 27, 2020, the Company issued 2,500,000 shares of common stock for the conversion of $15,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On April 2, 2020, the Company issued 3,208,955 shares of common stock for the conversion of $20,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
On April 24, 2020, the Company issued 3,208,955 shares of common stock for the conversion of $20,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.
42
On April 30, 2020, the Company issued 14,138,826 shares of common stock for the settlement of debt of $386,000 and $38,164 in accrued interest. At the time of issuance, the Company recognized a gain in settlement of ~~$15,200. The~~debt $134,319.
On April 30, 2020, the Company issued a total of 424,165 shares ~~were~~of Series B Preferred Stock for payment of $386,000 of the outstanding principal balance on various promissory notes and $38,165 in accrued interest.
On May 29, 2020, the Company issued 3,500,000 shares of common stock for ~~consulting services with a professional.~~the conversion of $30,000 of the principal outstanding and accrued interest of $1,500 under one of the convertible notes.

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,~~Quarterly Report on Form 10-Q, none of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved.
33

Item 3. Defaults Upon Senior Securities.

None
Item 4. Mine Safety Disclosures.
Not Applicable

Item 5. Other Information.

Item 1.01 Entry into a Material Definitive Agreement.
~~None~~
Convertible Promissory Note
On February 13, 2020, the Company entered into securities purchase agreement (the “February SPA”) and related convertible promissory note (the “February Convertible Note”). The February Convertible Note is in the aggregate principal amount of $33,500, annual interest rate of 10% and a maturity date of February 13, 2021. After payment of transaction-related expenses of $3,500, net proceeds to the Company from the February Convertible Note totaled $30,000. The Company recorded these discounts and cost of $3,500 as a discount to the Note and fully amortized as interest expense during the period.
Item 1.01 under Part II, Item 5 of this Quarterly Report on Form 10-Q contains only a brief description of the material terms of the February SPA and February Convertible Note and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such description is qualified in its entirety by reference to the full text of the February SPA and the February Convertible Note, filed as Exhibits 10.1 and 4.1 to this Form 10-Q for the quarter ended April 30, 2020.
Non-Convertible Promissory Notes and Related Party Loan
On February 26, 2020, the Company entered into a non-convertible promissory note for $30,000 with an effective annual interest rate of 12% and a maturity date of May 1, 2020 (the “February Non-Convertible Note Number 1”). Subsequently, the note holder agreed to extend the maturity date until August 31, 2020.
On February 27, 2020, the Company entered into a non-convertible promissory note for $70,000 with an effective annual interest rate of 12% and a maturity date of May 1, 2020 (the “February Non-Convertible Note Number 2”). Subsequently, the note holder agreed to extend the maturity date until August 31, 2020. The note holder also serves as President, CEO and Board Member of T3 Communications, Inc., the Florida entity that is one of our operating subsidiaries.
43
Item 1.01 under Part II, Item 5 of this Quarterly Report on Form 10-Q contains only a brief description of the material terms of the February Non-Convertible Notes Number 1 and Number 2 and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such description is qualified in its entirety by reference to the full text of the February Non-Convertible Notes Number 1 and Number 2 , filed as Exhibits 4.2 and 4.3 to this Form 10-Q for the quarter ended April 30, 2020.
Paycheck Protection Program (the “PPP”) Loans
On April 22, 2020, the Company, entered into two unsecured promissory notes (the “April Notes”) for $62,500 and $86,500 made to the Company under the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The loans to the Company was made through The Bank of San Antonio (the “Lender”).
The April Notes provide for an interest rate of 1.00% per year and matures two years after the issuance date. Beginning on the seventh month following the date of the April Notes, the Company is required to make 18 monthly payments of principal and interest in the amount of $8,316. The April Notes may be used for payroll costs, costs related to certain group health care benefits and insurance premiums, rent payments, utility payments, mortgage interest payments and interest payments on any other debt obligation that were incurred before February 15, 2020. The April Notes contain events of default and other conditions customary for a Note of this type.
On May 4, 2020, the Company, entered into an unsecured promissory note (the “May Note”) for $213,100 made to the Company under the PPP. The loan to the Company was made through the Lender. The May Note provides for an interest rate of 1.00% per year and matures two years after the issuance date. Beginning on the seventh month following the date of the May Note, the Company is required to make 18 monthly payments of principal and interest in the amount of $11,933. The May Note may be used for payroll costs, costs related to certain group health care benefits and insurance premiums, rent payments, utility payments, mortgage interest payments and interest payments on any other debt obligation that were incurred before February 15, 2020. The May Note contains events of default and other conditions customary for a Note of this type.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. The terms of any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt. While the Company currently believes that its use of the April Notes and May Note proceeds will meet the conditions for forgiveness under the PPP, no assurance is provided that the Company will obtain forgiveness of the April Notes and May Note in whole or in part.
Item 1.01 under Part II, Item 5 of this Quarterly Report on Form 10-Q contains only a brief description of the material terms of the April Notes and May Note and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such description is qualified in its entirety by reference to the full text of the April Notes and May Note, filed as Exhibit 4.4, Exhibit 4.5 and Exhibit 4.6 to this Form 10-Q for the quarter ended April 30, 2020.
Item 2.03 Creation of Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
The discussion of the February Note, April Notes, and May Note set forth in Item 1.01 under Part II, Item 5 of this Quarterly Report on Form 10-Q is incorporated in this Item 2.03 by reference.
Item 3.02 Unregistered Sales of Equity Securities.
The disclosure set forth in Item 1.01 under Part II, Item 5 of this Quarterly Report on Form 10-Q with regard to the shares issuable pursuant to the February Convertible Note an issued pursuant to the Debt Conversion Agreement is incorporated in this Item 3.02 by reference. The issuance of the securities set forth herein was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering. The Company’s reliance upon Section 4(a)(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there were only four recipients; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual entities and the Company; and (f) the recipients of the securities are accredited investors.
44

Item 6. Exhibits

~~Exhibit~~
Exhibit Number Exhibit Title

4.1
Convertible Promissory Note for ~~$93,500~~$33,500 with Platinum Point Capital LLC dated ~~August 30, 2019~~February 13, 2020.
(filed as Exhibit ~~4.13~~4.9 to Form ~~10-K~~10-Q filed with the SEC on ~~October 28, 2019)~~March 6, 2020).

4.2
~~Convertible~~ Promissory Note for ~~$35,750~~$30,000 with ~~Jefferson Street Capital LLC~~3BRT Investments, LP dated ~~October 18, 2019~~February 26, 2020.
(filed as Exhibit ~~4.15~~4.10 to Form ~~10-K~~10-Q filed with the SEC on ~~October 28, 2019)~~March 6, 2020).

4.3
~~Convertible~~ Promissory Note for ~~$35,750~~$70,000 with ~~Armada Investment Fund~~NexGen Integrated Communications, LLC dated ~~October 18, 2019~~February 27, 2020.
(filed as Exhibit ~~4.16~~4.11 to Form ~~10-K~~10-Q filed with the SEC on ~~October 28, 2019)~~March 6, 2020).

~~10.1~~4.4* PPP Note for $62,500 dated April 22, 2020.
4.5* PPP Note for $86,000 dated April 22, 2020.
4.6* PPP Note for $213,100 dated May 4, 2020.
4.7* Convertible Promissory Note for $15,000 with Platinum Point Capital LLC dated April 28, 2020.
10.1*
Securities Purchase Agreement for ~~$93,500~~$15,500 with Platinum Point Capital LLC dated ~~August 30,~~April 28, 2019.
(filed as Exhibit 10.15 to Form 10-K filed with the SEC on October 28, 2019).

~~10.2~~10.2*
~~Securities Purchase~~Form of Debt Conversion Agreement ~~for $35,750 with Armada Investment Fund LLC~~ dated ~~October 18, 2019~~.
~~(filed as Exhibit 10.16 to Form 10-K filed with the SEC on October 28, 2019).~~April 30, 2020.
~~10.3~~
~~Securities Purchase Agreement for $35,750 with Jefferson Street Capital LLC dated October 18, 2019~~.
~~(filed as Exhibit 10.17 to Form 10-K filed with the SEC on October 28, 2019).~~

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.

31.2* 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.

32.1+ 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.

32.2+ 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* XBRL Instance Document

101.SCH* XBRL Taxonomy Extension Schema Document

101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF* XBRL Taxonomy Extension Definition Linkbase Document

101.LAB* XBRL Taxonomy Extension Label Linkbase Document

101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

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

45
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)~~

Date: ~~December 13, 2019~~June 9, 2020 By: /s/ Arthur L. Smith
Name: Arthur L. Smith
Title: President and
Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)

Date: ~~December 13, 2019~~June 9, 2020 By: ~~/s/~~/s/ Antonio Estrada Jr.
Name: Antonio Estrada Jr.
Title: Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)

35
46

PART I-- FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2733
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3039
Item 4.	~~Control~~Controls and Procedures	3139

PART II-- OTHER INFORMATION

Item 1.	Legal Proceedings	3240
Item 1A.	Risk Factors	3240
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3240
Item 3.	Defaults Upon Senior Securities	3443
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	3443
Item 6.	Exhibits	3445

SIGNATURES		3546

	Gross Carrying		Accumulated			Net Carrying		Gross
October 31, 2019	Value		Amortization			Amount
								Carrying		Accumulated			Net Carrying
April 30, 2020								Value		Amortization			Amount

NetSapiens - license, 10 years	$	150,000	$	(150,000	)	$	-	$	150,000	$	(150,000	)	$	-
Customer relationships, 5 years		40,000		(14,672	)		25,328		40,000		(18,672	)		21,328
Customer relationships, 7 years		1,480,000		(328,934	)		1,151,066		1,480,000		(434,648	)		1,045,352
Marketing & Non-compete, 5 years		800,000		(240,000	)		560,000		800,000		(320,000	)		480,000
Total Define-lived Assets		2,470,000		(733,606	)		1,736,394		2,470,000		(923,320	)		1,546,680
Goodwill, Indefinite		810,353		-			810,353		810,353		-			810,353
Balance, October 31, 2019	$	3,280,353	$	(733,606	)	$	2,546,748
Balance, April 30, 2020								$	3,280,353	$	(923,320	)	$	2,357,033

Expected dividend yield	0.00	%
Expected stock price volatility	317.52	%
Risk-free interest rate	1.47	%
Expected term	3.0 year

					��	Weighted-average						Weighted average
			Weighted-average			remaining contractual				Weighted average		remaining contractual
	Options		exercise price			term (years)		Options		exercise price		term (years)

Outstanding at July 31, 2019		4,940,000	$	0.27			3.65		4,940,000	$	0.27		3.65
Granted		60,000	$	0.12			4.82		60,000	$	0.12		4.57
Exercised		-		-			-		-		-		-
Forfeited and cancelled		-		-			-		-		-		-
Outstanding at October 31, 2019		5,000,000	$	0.27			3.41
Exercisable at October 31, 2019		4,018,038	$	0.27			3.22
Outstanding at April 30, 2020									5,000,000	$	0.27		2.92
Exercisable at April 30, 2020									4,681,507	$	0.26		2.86

			Fair value measurements at reporting date using:								Fair value measurements at reporting date using:
			Quoted prices in		Significant						Quoted prices in		Significant
			active markets		other		Significant				active markets		other		Significant
			for identical		Observable		unobservable				for identical		observable		unobservable
			liabilities		inputs		inputs				liabilities		inputs		inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)

Convertible promissory notes derivative liability at July 31, 2019	$	927,171		-		-	$	927,171	$	927,171		-		-	$	927,171
Convertible promissory notes derivative liability at October 31, 2019	$	1,301,967		-		-	$	1,301,967
Convertible promissory notes derivative liability at April 30, 2020									$	1,098,917		-		-	$	1,098,917

Balance at July 31, 2018	$	632,268
Derivative from new convertible promissory notes recorded as debt discount		1,043,834
Derivative liability resolved to additional paid in capital due to debt conversion		(822,922	)
Derivative loss		73,991
Balance at July 31, 2019	$	927,171		$	927,171
Derivative from new convertible promissory notes recorded as debt discount		150,000			765,000
Derivative liability resolved to additional paid in capital due to debt conversion		(240,250	)		(524,850	)
Derivative loss		465,046
Balance at October 31, 2019	$	1,301,967
Derivative gain					(68,404	)
Balance at April 30, 2020				$	1,098,917

ROU Asset	August 1, 2019	$	372,651		August 1, 2019	$	372,651
Amortization		$	(89,949	)		$	(159,403	)
ROU Asset	October 31, 2019	$	282,702		April 30, 2020	$	213,248

Lease Liability	August 1, 2019	$	372,651		August 1, 2019	$	372,651
Amortization		$	(89,949	)		$	(159,403	)
Lease Liability	October 31, 2019	$	282,702		April 30, 2020	$	213,248

Lease Liability	Short term	$	138,481		Short term	$	114,387
Lease Liability	Long term	$	144,221		Long term	$	98,861
Lease Liability	Total:	$	282,702		Total:	$	213,248

	Operating			Operating
Amounts due within 12 months of October 31,	Lease
Amounts due within 12 months of April 30,				Lease

2020	$	161,602		$	134,638
2021		81,831			56,872
2022		50,425			37,161
2023		17,808			-
2024		-			-
Total minimum lease payments	$	311,667		$	228,671
Less: effect of discounting		(28,965	)		(15,423	)
Present Value of future minimum lease payments	$	282,702		$	213,248
Less: current obligation under leases		(138,481	)		(114,387	)
Long-term lease obligation	$	282,702		$	98,861

Exhibit Number		Exhibit Title

4.1		Convertible Promissory Note for ~~$93,500~~$33,500 with Platinum Point Capital LLC dated ~~August 30, 2019~~February 13, 2020. (filed as Exhibit ~~4.13~~4.9 to Form ~~10-K~~10-Q filed with the SEC on ~~October 28, 2019)~~March 6, 2020).

4.2		~~Convertible~~ Promissory Note for ~~$35,750~~$30,000 with ~~Jefferson Street Capital LLC~~3BRT Investments, LP dated ~~October 18, 2019~~February 26, 2020. (filed as Exhibit ~~4.15~~4.10 to Form ~~10-K~~10-Q filed with the SEC on ~~October 28, 2019)~~March 6, 2020).

4.3		~~Convertible~~ Promissory Note for ~~$35,750~~$70,000 with ~~Armada Investment Fund~~NexGen Integrated Communications, LLC dated ~~October 18, 2019~~February 27, 2020. (filed as Exhibit ~~4.16~~4.11 to Form ~~10-K~~10-Q filed with the SEC on ~~October 28, 2019)~~March 6, 2020).

~~10.1~~4.4*		PPP Note for $62,500 dated April 22, 2020.

4.5*		PPP Note for $86,000 dated April 22, 2020.

4.6*		PPP Note for $213,100 dated May 4, 2020.

4.7*		Convertible Promissory Note for $15,000 with Platinum Point Capital LLC dated April 28, 2020.

10.1*		Securities Purchase Agreement for ~~$93,500~~$15,500 with Platinum Point Capital LLC dated ~~August 30,~~April 28, 2019. (filed as Exhibit 10.15 to Form 10-K filed with the SEC on October 28, 2019).

~~10.2~~10.2*		~~Securities Purchase~~Form of Debt Conversion Agreement ~~for $35,750 with Armada Investment Fund LLC~~ dated ~~October 18, 2019~~. ~~(filed as Exhibit 10.16 to Form 10-K filed with the SEC on October 28, 2019).~~April 30, 2020.

~~10.3~~		~~Securities Purchase Agreement for $35,750 with Jefferson Street Capital LLC dated October 18, 2019~~. ~~(filed as Exhibit 10.17 to Form 10-K filed with the SEC on October 28, 2019).~~

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.

31.2*		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.

32.1+		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.

32.2+		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*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

	DIGERATI TECHNOLOGIES, INC.
	~~(Registrant)~~

Date: ~~December 13, 2019~~June 9, 2020	By:	/s/ Arthur L. Smith
	Name:	Arthur L. Smith
	Title:	President and
		Chief Executive Officer
		(Duly Authorized Officer and Principal Executive Officer)

Date: ~~December 13, 2019~~June 9, 2020	By:	~~/s/~~/s/ Antonio Estrada Jr.
	Name:	Antonio Estrada Jr.
	Title:	Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)