10-Q 1 f10q0422_digeratitech.htm QUARTERLY REPORT

 

 

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 April 30, 2022

 

or

 

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

 

For the transition period from ____________ to ___________

 

Commission File Number 001-15687

 

DIGERATI TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada   74-2849995
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)

 

825 W. Bitters, Suite 104
San Antonio, Texas
  78216
(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:
139,988,039   Common Stock $0.001 par value   June 14, 2022

 

 

 

 

 

 

DIGERATI TECHNOLOGIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED APRIL 30, 2022

 

INDEX

 

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 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
Item 4. Controls and Procedures 40
     
PART II-- OTHER INFORMATION  
     
Item 1. Legal Proceedings 41
Item 1A. Risk Factors 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
Item 3. Defaults Upon Senior Securities 41
Item 4. Mine Safety Disclosures 41
Item 5. Other Information 41
Item 6. Exhibits 42
     
SIGNATURES   44

 

i

 

 

DIGERATI TECHNOLOGIES, INC. 

CONTENTS

 

PAGE 1   CONSOLIDATED BALANCE SHEETS AS OF APRIL 30, 2022, AND JULY 31, 2021 (UNAUDITED)
     
PAGE 2   CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2022, AND 2021 (UNAUDITED)
     
PAGE 3-4   CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2022, AND 2021 (UNAUDITED)
     
PAGE 5   CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED APRIL 30, 2022, AND 2021 (UNAUDITED)
     
PAGES 6-33   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

ii

 

 

PART 1. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, unaudited)

 

   April 30,   July 31, 
   2022   2021 
ASSETS        
CURRENT ASSETS:        
Cash and cash equivalents  $2,384   $1,489 
Accounts receivable, net   1,602    617 
Prepaid and other current assets   867    232 
Total current assets   4,853    2,338 
           
LONG-TERM ASSETS:          
Intangible assets, net   24,969    8,527 
Goodwill   8,878    3,931 
Property and equipment, net   1,742    529 
Other assets   398    76 
Investment in Itellum   185    185 
Right-of-use asset   1,966    934 
Total assets  $42,991   $16,520 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
CURRENT LIABILITIES:          
Accounts payable  $3,514   $1,653 
Accrued liabilities   8,164    2,570 
Equipment financing   14    37 
Convertible note payable, current, net $92 and $340, respectively   3,286    1,049 
Note payable, current, related party, net $0 and $0, respectively   1,024    998 
Note payable, current, net $0 and $714, respectively   1,050    2,963 
Acquisition payable   1,000    
-
 
Deferred income   2,140    20 
Derivative liability   8,922    16,773 
Operating lease liability, current   773    503 
Total current liabilities   29,887    26,566 
           
LONG-TERM LIABILITIES:          
Convertible note payable   750    - 
Notes payable, related party, net $0 and $0, respectively   100    136 
Note payable, net $0 and $4,641, respectively   33,568    6,241 
Operating lease liability   1,349    431 
Total long-term liabilities   35,767    6,808 
           
Total liabilities   65,654    33,374 
           
Commitments and contingencies   
 
    
 
 
           
STOCKHOLDERS’ DEFICIT:          
Preferred stock, $0.001, 50,000,000 shares authorized   
 
    
 
 
Convertible Series A Preferred stock, $0.001, 1,500,000 shares designated, 225,000 and 225,000 issued and outstanding, respectively   
-
    
-
 
Convertible Series B Preferred stock, $0.001, 1,000,000 shares designated, 425,442 and 425,442 issued and outstanding, respectively   
-
    
-
 
Convertible Series C Preferred stock, $0.001, 1,000,000 shares designated, 55,400 and 55,400 issued and outstanding, respectively   
-
    
-
 
Series F Super Voting Preferred stock, $0.001, 100 shares designated, 100 and 100 issued and outstanding, respectively   
-
    
-
 
Common stock, $0.001, 500,000,000 shares authorized, 139,988,039 and 138,538,039 issued and outstanding, respectively (28,000,000 reserved in Treasury)   139    139 
Additional paid in capital   89,309    89,100 
Accumulated deficit   (110,092)   (105,380)
Other comprehensive income   1    1 
Total Digerati’s stockholders’ deficit   (20,643)   (16,140)
Noncontrolling interest   (2,020)   (714)
Total stockholders’ deficit   (22,663)   (16,854)
Total liabilities and stockholders’ deficit  $42,991   $16,520 

 

See accompanying notes to consolidated unaudited financial statements

 

1

 

 

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

 

   Three months ended
April 30,
   Nine months ended
April 30,
 
   2022   2021   2022   2021 
OPERATING REVENUES:                
Cloud software and service revenue  $8,163   $3,751   $15,959   $8,629 
Total operating revenues   8,163    3,751    15,959    8,629 
                     
OPERATING EXPENSES:                    
Cost of services (exclusive of depreciation and amortization)   3,161    1,526    6,203    3,708 
Selling, general and administrative expense   4,296    1,993    8,211    4,969 
Legal and professional fees   756    204    2,505    717 
Bad debt expense   36    5    51    9 
Depreciation and amortization expense   1,540    611    2,514    1,204 
Total operating expenses   9,789    4,339    19,484    10,607 
                     
OPERATING LOSS   (1,626)   (588)   (3,525)   (1,978)
                     
OTHER INCOME (EXPENSE):                    
Gain (loss) on derivative instruments   6,827    (10,878)   7,835    (10,860)
Loss on extinguishment of debt   
-
    
-
    (5,480)   
-
 
Gain on settlement of debt   
-
    150    
-
    347 
Income tax benefit (expense)   (167)   (63)   (285)   (122)
Other income (expense)   2    
-
    
-
    
-
 
Interest expense   (1,676)   (1,577)   (4,563)   (3,079)
Total other income (expense)   4,986    (12,368)   (2,493)   (13,714)
                     
NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST   3,360    (12,956)   (6,018)   (15,692)
Less: Net loss attributable to the noncontrolling interests   546    158    1,306    223 
NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS   3,906    (12,798)   (4,712)   (15,469)
Deemed dividend on Series A Convertible preferred stock   (4)   (5)   (14)   (15)
NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS  $3,902   $(12,803)  $(4,726)  $(15,484)
                     
INCOME (LOSS) PER COMMON SHARE - BASIC  $0.03   $(0.09)  $(0.03)  $(0.12)
                     
LOSS PER COMMON SHARE - DILUTED  $(0.01)  $(0.09)  $(0.03)  $(0.12)
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC   139,751,107    136,719,871    139,285,833    126,524,312 
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED   254,167,793    136,719,871    139,285,833    126,524,312 

 

See accompanying notes to consolidated unaudited financial statements

 

2

 

 

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

For the Nine Months Ended April 30, 2021

(In thousands, except for share amounts, unaudited)

 

   Equity Digerati’s Shareholders             
   Preferred                               
   Convertible           Common   Additional      Other           
   Series A
Shares
   Par   Series B
Shares
   Par   Series C
Shares
   Par   Series F
Shares
   Par   Shares   Par   Paid-in
Capital
   Accumulated
Deficit
   Comprehensive
Income
   Stockholders’
Deficit
   Noncontrolling
Interest
   Totals 
BALANCE, July 31, 2020   225,000    -    407,477    -    -    -    100    -    101,323,590   $101   $86,364   $(88,697)  $1   $(2,231)  $(382)  $(2,613)
Amortization of employee stock options   -    -    -    -    -    -    -    -    -    -    20    -    -    20    -    20 
Common stock issued for services, to employees   -    -    -    -    -    -    -    -    7,858,820    8    257    -    -    265    -    265 
Common stock issued for services   -    -    -    -    -    -    -    -    2,000,000    2    56    -    -    58    -    58 
Common stock issued for debt conversion   -    -    -    -    -    -    -    -    10,000,000    10    147    -    -    157    -    157 
Common stock issued concurrent with convertible debt   -    -    -    -    -    -    -    -    1,000,000    1    44    -    -    45    -    45 
Beneficial conversion feature on convertible debt   -    -    -    -    -    -    -    -    -    -    111    -    -    111    -    111 
Derivative liability resolved to APIC due to note conversion   -    -    -    -    -    -    -    -    -    -    205    -    -    205    -    205 
Dividends declared   -    -    -    -    -    -    -    -    -    -    (5)   -    -    (5)   -    (5)
Net Ioss   -    -    -    -    -    -    -    -    -    -    -    (721)   -    (721)   (35)   (756)
BALANCE, October 31, 2020   225,000    -    407,477    -    -    -    100    -    122,182,410   $122   $87,199   $(89,418)  $1   $(2,096)  $(417)  $(2,513)
Amortization of employee stock options   -    -    -    -    -    -    -    -    -    -    33    -    -    33    -    33 
Common stock issued for settlement of accounts payable   -    -    -    -    -    -    -    -    1,000,000    1    59    -    -    60    -    60 
Common stock issued for debt conversion   -    -    -    -    -    -    -    -    10,676,765    11    243    -    -    254    -    254 
Common stock issued concurrent with convertible debt   -    -    -    -    -    -    -    -    500,000    -    24    -    -    24    -    24 
Beneficial conversion feature on convertible debt   -    -    -    -    -    -    -    -    -    -    30    -    -    30    -    30 
Derivative liability resolved to APIC due to note conversion   -    -    -    -    -    -    -    -    -    -    383    -    -    383    -    383 
Dividends declared   -    -    -    -    -    -    -    -    -    -    (5)   -    -    (5)   -    (5)
Net Ioss   -    -    -    -    -    -    -    -    -    -    -    (1,950)   -    (1,950)   (30)   (1,980)
BALANCE, January 31, 2021   225,000    -    407,477    -    -    -    100    -    134,359,175   $134   $87,966   $(91,368)  $1   $(3,267)  $(447)  $(3,714)
Amortization of employee stock options   -    -    -    -    -    -    -    -    -    -    57    -    -    57    -    57 
Preferred Stock Series B issued for debt settlement   -    -    17,965    -    -    -    -    -    -    -    18    -    -    18    -    18 
Preferred Stock Series C issued for debt settlement   -    -    -    -    55,400    -    -    -    -    -    554    -    -    554    -    554 
Common stock issued for debt conversion   -    -    -    -    -    -    -    -    598,825    1    17    -    -    18    -    18 
Common stock issued concurrent with convertible debt   -    -    -    -    -    -    -    -    600,000    1    77    -    -    78    -    78 
Common stock issued for services   -    -    -    -    -    -    -    -    2,000,000    2    123    -    -    125    -    125 
Common stock issued for exercise of warrants   -    -    -    -    -    -    -    -    300,000    -    30    -    -    30    -    30 
Beneficial conversion feature on convertible debt   -    -    -    -    -    -    -    -    -    -    413    -    -    413    -    413 
Dividends declared   -    -    -    -    -    -    -    -    -    -    (5)   -    -    (5)   -    (5)
Net Loss   -    -    -    -    -    -    -    -    -    -    -    (12,798)   -    (12,798)   (158)   (12,956)
BALANCE, April 30, 2021   225,000    -    425,442    -    55,400    -    100    -    137,858,000   $138   $89,250   $(104,166)  $1   $(14,777)  $(605)  $(15,382)

 

See accompanying notes to consolidated unaudited financial statements

 

3

 

 

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

For the Nine Months Ended April 30, 2022

(In thousands, except for share amounts, unaudited)

 

   Equity Digerati’s Shareholders             
   Preferred                               
   Convertible           Common   Additional      Other           
   Series A
Shares
   Par   Series B
Shares
   Par   Series C
Shares
   Par   Series F
Shares
   Par   Shares   Par   Paid-in
Capital
   Accumulated
Deficit
   Comprehensive
Income
   Stockholders’
Deficit
   Noncontrolling
Interest
   Totals 
BALANCE, July 31, 2021   225,000    -    425,442    -    55,400    -    100    -    138,538,039   $139   $89,100   $(105,380)  $1   $(16,140)  $(714)  $(16,854)
Amortization of employee stock options   -    -    -    -    -    -    -    -    -    -    24    -    -    24    -    24 
Common stock issued concurrent with convertible debt   -    -    -    -    -    -    -    -    600,000    -    38    -    -    38    -    38 
Dividends declared   -    -    -    -    -    -    -    -    -    -    (5)   -    -    (5)   -    (5)
Net Loss   -    -    -    -    -    -    -    -    -    -    -    2,424    -    2,424    (158)   2,266 
BALANCE, October 31, 2021   225,000    -    425,442    -    55,400    -    100    -    139,138,039   $139   $89,157   $(102,956)  $1   $(13,659)  $(872)  $(14,531)
Amortization of employee stock options   -    -    -    -    -    -    -    -    -    -    23    -    -    23    -    23 
Common stock issued concurrent with convertible debt   -    -    -    -    -    -    -    -    600,000    -    -    -    -    -    -    - 
Dividends declared   -    -    -    -    -    -    -    -    -    -    (5)   -    -    (5)   -    (5)
Net Ioss   -    -    -    -    -    -    -    -    -    -    -    (11,042)   -    (11,042)   (602)   (11,644)
BALANCE, January 31, 2022   225,000    -    425,442    -    55,400    -    100    -    139,738,039   $139   $89,175   $(113,998)  $1   $(24,683)  $(1,474)  $(26,157)
Amortization of employee stock options   -    -    -    -    -    -    -    -    -    -    28    -    -    28    -    28 
Common stock issued for debt extension   -    -    -    -    -    -    -    -    250,000    -    34    -    -    34    -    34 
Derivative liability resolved to APIC due to note payoff   -    -    -    -    -    -    -    -    -    -    76    -    -    76    -    76 
Dividends declared   -    -    -    -    -    -    -    -    -    -    (4)   -    -    (4)   -    (4)
Net income   -    -    -    -    -    -    -    -    -    -    -    3,906    -    3,906    (546)   3,360 
BALANCE, April 30, 2022   225,000    -    425,442    -    55,400    -    100    -    139,988,039   $139   $89,309   $(110,092)  $1   $(20,643)  $(2,020)  $(22,663)

 

See accompanying notes to consolidated unaudited financial statements

 

4

 

 

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

 

   Nine months ended
April 30,
 
   2022   2021 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(6,018)  $(15,692)
Adjustments to reconcile net loss to cash (used in)/provided by operating activities:          
Depreciation and amortization expense   2,514    1,204 
Stock compensation and warrant expense   75    558 
Bad debt expense   51    9 
Amortization of ROU Asset   214    95 
Amortization of debt discount   1,943    1,827 
(Gain) on derivative liabilities   (7,835)   10,860 
Loss on extinguishment of debt   5,480    
-
 
(Gain) on settlement of debt   
-
    (347)
Shares issued for debt extension charged to interest expense   34    
-
 
Debt extension fee charged to interest expense   155    
-
 
Changes in operating assets and liabilities:          
Accounts receivable   (433)   (96)
Inventory   10    26 
Prepaid expenses and other current assets   (96)   (141)
Other assets   23    
-
 
Right of use operating lease liability   (268)   (95)
Accounts payable   1,385    97 
Accrued expenses   1,003    1,397 
Deferred income   22    (105)
Net cash used in operating activities   (1,741)   (403)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Cash paid in acquisition of equipment   (193)   (228)
Proceeds from Nexogy   178    
-
 
Acquisition of VoIP assets, net of cash received   (12,790)   (10,108)
Net cash used in investing activities   (12,805)   (10,336)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Borrowings from convertible debt, net of original issuance cost and discounts   706    1,078 
Proceed from the exercise of warrants   
-
    30 
Borrowings from debt, net of original issuance cost and discounts   15,530    13,036 
Principal payments on debt, net   
-
    (1,330)
Principal payments on convertible notes, net   (175)   (266)
Principal payments on related party notes, net   (590)   (316)
Principal payment on equipment financing   (30)   (53)
Net cash provided by financing activities   15,441    12,179 
           
INCREASE IN CASH AND CASH EQUIVALENTS   895    1,440 
CASH AND CASH EQUIVALENTS, beginning of period   1,489    685 
CASH AND CASH EQUIVALENTS, end of period  $2,384   $2,125 
           
SUPPLEMENTAL DISCLOSURES:          
Cash paid for interest  $1,677   $753 
Income tax paid  $
-
   $
-
 
           
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES          
Accrued interest rolled into principal  $640   $328 
Incentive earnout adjustment on Active PBX acquisition  $120   $
-
 
Stock issued with convertible debt - debt discount  $38   $146 
Beneficial conversion feature on convertible debt  $
-
   $554 
Preferred Stock Series B issued for debt conversion  $
-
   $18 
Preferred Stock Series C issued for debt conversion  $
-
   $554 
Derivative liability resolved to APIC  $76   $588 
Debt discount from derivative liabilities  $60   $6,462 
Promissory note reclassed to convertible debt  $
-
   $15 
Capitalization of ROU assets and liabilities - operating  $
-
   $254 
Common Stock issued for debt conversion  $
-
   $429 
Common Stock issued for accounts payable  $
-
   $60 
Dividend declared  $14   $15 

 

See accompanying notes to consolidated unaudited financial statements

 

5

 

 

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

 

Earnings (Loss) Per Share

 

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

 

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

 

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

 

The Company excluded the following securities from the calculation of basic and diluted net loss per share as the effect would have been antidilutive    

 

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

55,437,949

    56,745,216    

55,437,949

 
Convertible Debt   12,633,333    

21,021,795

    12,633,333    

21,021,795

 
Total   69,378,549    

76,459,744

    69,378,549    

76,459,744

 

 

6

 

 

Treasury Shares

 

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

 

Customers and Suppliers

 

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

 

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

 

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

 

Sources of revenue:

 

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

 

Service Revenue

 

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

 

7

 

 

Disaggregation of Cloud software and service revenue

 

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

 

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

 

Contract Assets

 

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

 

Deferred Income

 

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

 

Customer deposits

 

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

 

Costs to Obtain a Customer Contract

 

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

 

Direct Costs - Cloud software and service

 

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

 

8

 

 

Contingencies

 

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

 

Derivative financial instruments.

 

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

 

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

 

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

 

Fair Value of Financial Instruments.

 

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

 

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

 

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

 

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

 

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

 

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

 

9

 

 

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

 

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

 

The fair market value of all derivatives during the year ended July 31, 2021 was determined using the Black-Scholes option pricing model which used the following assumptions:

 

Expected dividend yield   0.00%
Expected stock price volatility   125.60% - 283.01% 
Risk-free interest rate   0.05% - 1.65% 
Expected term   0.03 - 10.00 years 

 

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

 

Expected dividend yield   0.00%
Expected stock price volatility   63.32% - 250.19% 
Risk-free interest rate   0.03% - 2.89% 
Expected term   0.059.50 years 

 

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

 

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

 

Noncontrolling interest

 

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

 

10

 

 

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

 

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

 

Recently issued accounting pronouncements.

 

Recent accounting pronouncements, other than below, issued by the FASB (including its Emerging Issues Task Force), the AICPA and the SEC did not, or are not, believed by management to have a material effect on the Company’s present or future financial statements.

 

In August 2020, the FASB issued “ASU 2020-06, Debt with Conversion and Other Options (Subtopic 47020) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)” which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. The Company is currently evaluating the potential impact of this ASU on its financial statements.

 

NOTE 2 – GOING CONCERN

 

Financial Condition

 

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

 

Management Plans to Continue as a Going Concern

 

Management believes that available resources as of April 30, 2022 will not be sufficient to fund the Company’s operations and corporate expenses over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off its obligations, if and when they come due.

 

11

 

 

We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During fiscal 2022 certain members of our executive management team have taken a significant portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from our recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams; and we have also secured numerous agent agreements through our recent acquisitions that we anticipate will accelerate revenue growth. In addition, we will continue to focus on selling a greater number of comprehensive services to our existing customer base. Further, in an effort to increase our revenues, we will continue to evaluate the acquisition of various assets with emphasis in VoIP Services and Cloud Communication Services. As a result, during the due diligence process we anticipate incurring significant legal and professional fees.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

12

 

 

NOTE 3 – INTANGIBLE ASSETS

 

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

 

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