| DEBT | NOTE
6 - DEBT Non-convertible
- debt On
December 1, 2017, Shift8 and Synergy Telecom, Inc., a Delaware corporation (“Synergy”), closed a transaction to acquire
all the assets, assumed all customers, and critical vendor arrangements from Synergy. In conjunction with the transaction, Shift8
entered into a promissory note for $125,000 with an effective annual interest rate of 6% with 5 quarterly payments and a maturity
date of February 28, 2019. The note holder agreed to extend three of the quarterly payment until March 31, 2019. The outstanding balance as of January 31, 2019 was $75,000. Subsequently, on February 11, 2019 the Company paid $25,000
of the principal outstanding and paid another $25,000 of the principal outstanding on February 26, 2019. On
April 30, 2018, Shift8 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, Shift8 entered into a Security Agreement, whereby Shift8 Agreed to pledge
one third of the outstanding shares of T3, 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 he principal balance
is paid in full. The lender agreed to extend the maturity date until March 31, 2019, we are currently paying a $3,000 per week
late fee. As of January 31, 2019, the outstanding principal balance was $650,000. On
April 30, 2018, Shift8 Networks, Inc. (“Shift8”), a subsidiary of Digerati Technologies, Inc. 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 Shift8 and 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 nonusurious rate
of interest per annum permitted by whichever of applicable United States federal law or Louisiana law permits the higher interest
rate. Shift8 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, Shift8 agreed to pay a monitoring fee of 0.33% of the
credit facility, payable in arrears monthly. Shift8 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. Shift8 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. As of January 31, 2019, the outstanding principal balance was
$500,000. On
October 12, 2018, the Company issued an unsecured promissory note for $25,000, bearing interest at a rate of 8% per annum, with
maturity date of November 12, 2018, subsequently the maturity date was extended to December 10, 2018. In conjunction with the
promissory note, the Company issued 140,000 common shares, the shares vested at time of issuance, these shares replaced 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 amortized the fair market value as interest expense over the term of the note. During the six months ended January
31, 2018, the Company amortized $21,000 of the debt discount as interest expense related to the note. On December 10, 2018, the
Company paid in full the principal amount of $25,000 and accrued interest of $323. On
October 18, 2018, the Company issued an unsecured 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 promissory note, the Company issued 100,000 common shares, the shares
vested at time of issuance, these shares replace previously issued warrants with an exercise price of $0.15, therefore the exercise
price of $15,000 was recognized as a discount on the promissory note. On November 16, 2018, the Company paid in full the principal
amount of $25,000 and accrued interest of $159. During the six months ended January 31, 2019, the Company amortized $15,000 of
the debt discount as interest expense related to the note. On
October 22, 2018, the Company issued a secured promissory note for $50,000, bearing interest at a rate of 8% per annum, with maturity
date of December 31, 2018. The 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 March 2019, the maturity date was extended to May 31, 2019. As of
January 31, 2019, the outstanding principal balance was $50,000. Notes
payable, related party On
April 30, 2018, Shift8 Technologies, Inc. (“Shift8”) 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 On
May 1, 2018, Shift8 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 Shift8 in T3, 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 $27,000 and was recognized as a discount on the promissory note, the
company amortized $4,065 as interest expense during the six months ended January 31, 2019. During the six months ended January
31, 2019, the Company paid $26,000 of the principal balance. The total principal outstanding and unamortized discount as of January
31, 2019 were $237,000 and $20,360, respectively. The note holder also serves as Board Member of T3 Communications, Inc., one
of our operating subsidiaries. On
December 7, 2018, Digerati entered into an unsecured promissory note for $28,000 with an effective annual interest rate of 0%,
and a maturity date of January 21, 2019. In conjunction with the note, the Company issued 28,000 shares of Common Stock, the shares
vested at time of issuance. Subsequently, the maturity date was extended to March 31, 2019. Under a Black-Scholes valuation the
relative fair market value of the shares of Common Stock at time of issuance was approximately $3,000 and was recognized as a
discount on the promissory note. The total principal outstanding and unamortized discount as of January 31, 2019 were $28,000
and $3,000, respectively. The note holder also serves as Board Member of T3 Communications, Inc., one of our operating subsidiaries. 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 interes t on September 15, 2018. T “ Variable
Conversion Price Shares “ Fixed Conversion Price “Fixed Conversion Price” 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 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 $119,000
and was recognized as a discount on the promissory notes. The company amortized $76,382 as interest expense during the six months
ended January 31, 2019. The total principal outstanding and unamortized discount as of January 31, 2019 were $272,000 and $32,810,
respectively. Convertible
debt - derivative 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 deference 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.
In addition, during the six months ended January 31, 2019, the Company amortized $80,000 of the debt discount as interest expense
related to the convertible debenture. The total principal outstanding and unamortized discount as of January 31, 2019 were $0
and $0, respectively. During
the six months ended January 31, 2019, the Company amortized $32,132 of the debt discount as interest expense related to the convertible
debenture dated July 31, 2018 with Peak One Opportunity Fund L.P. The total principal outstanding and unamortized discount as
of January 31, 2019 were $220,000 and $160,666, respectively. During
the six months ended January 31, 2019, the Company amortized $272,500 of the debt discount as interest expense related to the
convertible note, dated May 30, 2018 with Firstfire Global Opportunities Fund, LLC. On November 21, 2018 the Company issued 85,000
shares of common stock for a debt amendment and recorded the fair market of the shares of $23,800 as interest expense. On January
3, 2019, the Company issued 218,101 shares of common stock for the conversion of $15,000 of the principal outstanding under the
convertible debenture. On January 11, 2019, the Company issued 427,972 shares of common stock for the conversion of $30,000 of
the principal outstanding under the convertible debenture. On January 18, 2019, the Company redeemed the full outstanding principal
balance on the convertible debenture of $260,556, at a redemption price of $370,000. The Company recognized the difference between
the redemption price and principal balance paid as interest expense of $109,444. The total principal outstanding and unamortized
discount as of January 31, 2019 were $0 and $0, respectively. 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. Each
Note 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 four 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. 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. 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. Therefore, as of the six months ending January 31, 2019, the
company recognized derivative liability for the four 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. The total principal
balance outstanding and unamortized discount on the Notes as of January 31, 2019 were $477,750 and $398,500, respectively. The
company amortized $20,499 discount from derivative liabilities as interest expense during the six months ended January 31, 2019.
I n 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. Fair
Value of Financial Instruments. Level
1 Level
2 Level
3 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 January 31, 2019 and July 31, 2018 were $2,406,805 and $632,268, respectively. The
fair market value of all derivatives during the six months ended July 31, 2019 was determined using the Black-Scholes option pricing
model which used the following assumptions:
Expected dividend yield 0.00 %
Expected stock price volatility 165.84%
- 190.31 %
Risk-free interest rate 2.21%
- 2.93 %
Expected term 0.58 - 2.75 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 419,000
Derivative liability resolved to additional paid in capital due to debt conversion (141,768 )
Derivative loss 1,497,305
Balance at January 31, 2019 $ 2,406,805 |
