10-Q 1 ea0207545-10q_digerati.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, 2024.

 

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.)
     
8023 Vantage Dr, Suite    
660 San Antonio, Texas   78230
(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 Exchange 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:
179,734,434     Common Stock $0.001 par value   June 14, 2024

 

 

 

 

 

 

DIGERATI TECHNOLOGIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED APRIL 30, 2024

 

INDEX

 

PART I — FINANCIAL INFORMATION  
     
Item 1. Financial Statements 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 44
Item 4. Controls and Procedures 44
     
PART II — OTHER INFORMATION  
     
Item 1. Legal Proceedings 45
Item 1A. Risk Factors 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
Item 3. Defaults Upon Senior Securities 45
Item 4. Mine Safety Disclosures 45
Item 5. Other Information 45
Item 6. Exhibits 46
     
SIGNATURES 47

 

i

 

 

DIGERATI TECHNOLOGIES, INC. 

CONTENTS

 

PAGE 1   CONSOLIDATED BALANCE SHEETS AS OF APRIL 30, 2024 AND JULY 31, 2023 (UNAUDITED)
     
PAGE 2   CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2024 AND 2023 (UNAUDITED)
     
PAGE 3-4   CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2024 AND 2023 (UNAUDITED)
     
PAGE 5   CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED APRIL 30, 2024 AND 2023 (UNAUDITED)
     
PAGES 6-33   NOTES TO THE 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,  
    2024     2023  
ASSETS            
CURRENT ASSETS:            
Cash and cash equivalents   $ 969     $ 924  
Accounts receivable, net     1,268       749  
Prepaid and other current assets     896       650  
Total current assets     3,133       2,323  
                 
LONG-TERM ASSETS:                
Intangible assets, net     10,608       12,211  
Goodwill     19,380       19,380  
Property and equipment, net     1,093       1,346  
Other assets     534       437  
Investment in Itellum     185       185  
Right-of-Use assets - financing     1,366       578  
Right-of-Use assets - operating     944       1,912  
Total assets   $ 37,243     $ 38,372  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
CURRENT LIABILITIES:                
Accounts payable   $ 4,240     $ 5,373  
Accrued liabilities     10,746       9,877  
Equipment financing     595       228  
Convertible note payable, current, net of discount of $317 and $960, respectively     7,784       8,216  
Note payable, current, related party, current, net of discount of $1 and $0, respectively     514       500  
Note payable, current, net of discount of $1,317 and $60, respectively     46,135       36,497  
Revolving credit facility     2,000      
-
 
Acquisition payable, net of discount of $2 and $0, respectively     1,028       1,000  
Deferred income     1,070       1,124  
Derivative liability     5,173       4,125  
Operating lease liability, current     518       662  
Total current liabilities     79,803       67,602  
                 
LONG-TERM LIABILITIES:                
Equipment financing     769       354  
Operating lease liability, net of current portion     465       1,320  
Total long-term liabilities     1,234       1,674  
                 
Total liabilities     81,037       69,276  
                 
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, 0 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, 179,734,434 and 160,931,685 issued and outstanding (122,000,000 and 109,000,000, respectively, reserved in Treasury)     180       161  
Additional paid in capital     94,845       93,911  
Accumulated deficit     (133,854 )     (121,684 )
Other comprehensive income     1       1  
Total Digerati’s stockholders’ deficit     (38,828 )     (27,611 )
Noncontrolling interest     (4,966 )     (3,293 )
Total stockholders’ deficit     (43,794 )     (30,904 )
Total liabilities and stockholders’ deficit   $ 37,243     $ 38,372  

 

See accompanying notes to unaudited consolidated 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,
 
   2024   2023   2024   2023 
OPERATING REVENUES:                
Cloud software and service revenue  $7,430   $7,837   $22,649   $23,908 
                     
Total operating revenues   7,430    7,837    22,649    23,908 
                     
OPERATING EXPENSES:                    
Cost of services (exclusive of depreciation and amortization)   2,912    2,879    8,123    8,698 
Selling, general and administrative expense   4,067    4,322    12,431    12,921 
Legal and professional fees   621    681    2,784    2,311 
Bad debt expense   93    37    208    106 
Depreciation and amortization expense   908    993    2,720    2,912 
Total operating expenses   8,601    8,912    26,266    26,948 
                     
OPERATING LOSS   (1,171)   (1,075)   (3,617)   (3,040)
                     
OTHER INCOME (EXPENSE):                    
Gain (loss) on derivative instruments   (467)   2,120    (1,048)   2,893 
Gain (loss) on extinguishment of debt   (816)   55    (915)   55 
Other income (expense)   88    (1)   37    455 
Interest expense   (2,920)   (3,701)   (8,184)   (8,137)
Income tax expense   (46)   (51)   (109)   (128)
Total other income (expense)   (4,161)   (1,578)   (10,219)   (4,862)
                     
NET LOSS   (5,332)   (2,653)   (13,836)   (7,902)
                     
Less: Net loss attributable to the noncontrolling interests   803    409    1,666    898 
NET LOSS ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS   (4,529)   (2,244)   (12,170)   (7,004)
                     
Deemed dividend on Series A Convertible preferred stock   
-
    -    
-
    (8)
NET LOSS ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS  $(4,529)  $(2,244)  $(12,170)  $(7,012)
                     
LOSS PER COMMON SHARE – BASIC & DILUTED
  $(0.03)  $(0.01)  $(0.07)  $(0.05)
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC & DILUTED
   176,182,237    153,785,787    167,357,959    148,462,169 

 

See accompanying notes to unaudited consolidated financial statements

 

2

 

 

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED APRIL 30, 2024

(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
Equity
   Noncontrolling
Interest
   Totals 
BALANCE, July 31, 2023   -    
-
    425,442    
-
    55,400    
-
    100    
-
    160,931,685   $161   $93,911   $(121,684)  $1   $(27,611)  $(3,293)  $(30,904)
Stock option expense   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    12    
-
    
-
    12    
-
    12 
Common stock issued for debt extension   -    
-
    -    
-
    -    
-
    -    
-
    990,000    1    41    
-
    
      -
    42    
-
    42 
Reversal of conversion feature   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    (56)   
-
    
-
    (56)   (7)   (63)
Net loss   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    
-
    (4,085)   
-
    (4,085)   (395)   (4,480)
BALANCE, October 31, 2023         -    
      -
    425,442    
      -
    55,400    
      -
    100    
      -
    161,921,685   $162   $93,908   $(125,769)  $1   $(31,698)  $(3,695)  $(35,393)
Stock option expense   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    4    
-
    
-
    4    
-
    4 
Common stock issued for debt conversion and settlement   -    
-
    -    
-
    -    
-
          -    
-
    4,813,667          5    284    
-
    
-
    289    
-
    289 
Common stock issued for warrant conversion   -    
-
    -    
-
    -    
-
    -    
-
    8,161,944    8    322    
-
    
-
    330    
-
    330 
Beneficial conversion feature on convertible debt - debt discount   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    141    
-
    
-
    141    
-
    141 
Net loss   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    
-
    (3,556)   
-
    (3,556)   (468)   (4,024)
BALANCE, January 31, 2024   -    
-
    425,442    
-
    55,400    
-
    100    
-
    174,897,296   $175   $94,659   $(129,325)  $1   $(34,490)  $(4,163)  $(38,653)
Common stock issued for debt conversion and settlement   -    
-
    -    
-
    -    
-
    -    
-
    2,947,404    3    145    
-
    
-
    148    
-
    148 
Common stock issued for warrant conversion   -    
-
    -    
-
    -    
-
    -    
-
    1,889,734    2    41    
-
    
-
    43    
-
    43 
Net loss   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    
-
    (4,529)   
-
    (4,529)   (803)   (5,332)
BALANCE, April 30, 2024   -    
-
    425,442    
-
    55,400    
-
    100    
-
    179,734,434   $180   $94,845   $(133,854)  $1   $(38,828)  $(4,966)  $(43,794)

 

See accompanying notes to unaudited consolidated financial statements

 

3

 

 

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED APRIL 30, 2023

(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
Equity
   Noncontrolling
Interest
   Totals 
BALANCE, July 31, 2022   225,000    
-
    425,442    
-
    55,400    
-
    100    
-
    142,088,039   $142   $89,487   $(113,393)  $      1   $(23,763)  $(2,055)  $(25,818)
Amortization of employee stock options   -    
-
    -    
-
    -    
-
          -    
-
    -    
      -
    23    
-
    
-
    23    
-
    23 
Common stock issued for conversion of Convertible Series A Preferred stock   (25,000)   
-
    -    
-
    -    
-
    -    
-
    105,723    
-
    7    
-
    
-
    7    
-
    7 
Common stock issued for exercise of warrants   -    
-
    -    
-
    -    
-
    -    
-
    160,628    
-
    21    
-
    
-
    21    
-
    21 
Common stock issued for debt extension   -    
-
    -    
-
    -    
-
    -    
-
    2,060,000    2    247    
-
    
-
    249    
-
    249 
Common stock issued concurrent with convertible debt   -    
-
    -    
-
    -    
-
    -    
-
    650,000    1    94    
-
    
-
    95    
-
    95 
Dividends accrued   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    (4)   
-
    
-
    (4)   
-
    (4)
Net Loss   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    
-
    (4,984)   
-
    (4,984)   (161)   (5,145)
BALANCE, October 31, 2022   200,000    
-
    425,442    
-
    55,400    
-
    100    
-
    145,064,390    145   $89,875   $(118,377)  $1   $(28,356)  $(2,216)  $(30,572)
Amortization of employee stock options   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    23    
-
    
-
    23    
-
    23 
Common stock issued for conversion of Convertible Series A Preferred stock   (175,000)   
-
    -    
-
    -    
-
    -    
-
    749,327    1    49    
-
    
-
    50    
-
    50 
Common stock issued for exercise of warrants   -    
-
    -    
-
    -    
-
    -    
-
    9,677    
            -
    1    
-
    
-
    1    
-
    1 
Common stock issued for debt extension   -    
-
    -    
-
    -    
-
    -    
-
    1,000,000    1    90    
-
    
-
    91    
-
    91 
Common stock issued for debt conversion and settlement   -    
-
    -    
-
    -    
-
    -    
-
    1,500,000    1    74    
-
    
-
    75    
-
    75 
Common stock issued concurrent with convertible debt   -    
-
    -    
-
    -    
-
    -    
-
    4,164,907    4    256    
-
    
-
    260    
-
    260 
Dividends accrued   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    (4)   
-
    
-
    (4)   
-
    (4)
Warrant issued with debt - debt discount   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    667    
-
    
-
    667    
-
    667 
Beneficial conversion feature on convertible debt - debt discount   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    1,275    
-
    
-
    1,275    
-
    1,275 
Net Loss   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    
-
    224    
-
    224    (328)   (104)
BALANCE, January 31, 2023   25,000    
-
    425,442    
-
    55,400    
-
    100    
-
    152,488,301   $152   $92,306   $(118,153)  $1   $(25,694)  $(2,544)  $(28,238)
Amortization of employee stock options   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    35    
-
    
-
    35    
-
    35 
Common stock issued to employees   -    
-
    -    
-
    -    
-
    -    
-
    1,370,551    1    (1)   
-
    
-
    
-
    
-
    
-
 
Common stock issued for exercise of warrants   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Common stock issued for debt extension   -    
-
    -    
-
    -    
-
    -    
-
    2,180,000    2    163    
-
    
-
    165    
-
    165 
Common stock issued for debt conversion and settlement   -    
-
    -    
-
    -    
-
    -    
-
    1,500,000    2    74    
-
    
-
    76    
-
    76 
Common stock issued concurrent with convertible debt   -    
-
    -    
-
    -    
-
    -    
-
    899,500    1    74    
-
    
-
    75    
-
    75 
Warrant issued with debt - debt discount   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    170    
-
    
-
    170    
-
    170 
Beneficial conversion feature on convertible debt - debt discount   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    126    
-
    
-
    126    
-
    126 
Net loss   -    
-
    -    
-
    -    
-
    -    
-
    -    
-
    
-
    (2,244)   
-
    (2,244)   (409)   (2,653)
BALANCE, April 30, 2023   25,000    
-
    425,442    
-
    55,400    
-
    100    
-
    158,438,352   $158   $92,947   $(120,397)  $1   $(27,291)  $(2,953)  $(30,244)

 

See accompanying notes to unaudited consolidated financial statements

 

4

 

 

DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

 

   Nine Months Ended
April 30,
 
   2024   2023 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(13,836)  $(7,902)
Adjustments to reconcile net loss to cash used in operating activities:          
Depreciation and amortization expense   2,720    2,912 
Stock compensation expenses   16    81 
Bad debt expense   208    106 
Amortization of Right-of-use assets   406    624 
Amortization of debt discount   1,756    2,104 
(Gain) loss on derivative liabilities   1,048    (2,893)
(Gain) loss on extinguishment of debt   771    (55)
(Gain) on settlement of conversion premium on Notes   
-
    (466)
Loss on conversion of warrants   144    
-
 
Debt extension fee charged to interest expense   
-
    689 
Common stock issued for debt extension charged to interest expense   42    505 
Changes in operating assets and liabilities:          
Accounts receivable   (727)   (390)
Prepaid expenses and other current assets   (246)   (213)
Inventory   
-
    18 
Other assets   (97)   (281)
Right of use operating lease liability   (437)   (574)
Accounts payable   807    883 
Accrued expenses   6,171    1,406 
Deferred income   (54)   346 
Net cash used in operating activities   (1,308)   (3,100)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Cash paid for acquisition of equipment   (225)   (467)
Net cash used in investing activities   (225)   (467)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Borrowings from convertible debt, net of original issuance cost and discounts   
-
    4,491 
Borrowings from debt, net of original issuance cost and discounts   2,000    
-
 
Proceeds from the exercise of warrants   
-
    22 
Borrowings from related party notes, net of original issuance cost and discounts   
-
    250 
Principal payments on debt, net   
-
    (548)
Principal payments on convertible debt, net   
-
    (520)
Principal payments on related party notes, net   
-
    (568)
Principal payment on equipment financing   (422)   (72)
Net cash provided by financing activities   1,578    3,055 
           
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   45    (512)
CASH AND CASH EQUIVALENTS, beginning of period   924    1,509 
           
CASH AND CASH EQUIVALENTS, end of period  $969   $997 
           
SUPPLEMENTAL DISCLOSURES:          
Cash paid for interest  $145   $2,995 
           
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES          
Common stock issued for accounts payable settlement  $120   $
-
 
Conversion of convertible notes  $317   $
-
 
Beneficial conversion feature on debt extinguishment  $141   $
-
 
Beneficial conversion feature on convertible note  $
-
   $1,401 
Accounts payable reclassed to debt principal  $9,384   $
-
 
Accrued interest rolled into principal  $
-
   $1,503 
Reduction of Right-of-use liability due to termination of operating leases  $562   $
-
 
Debt discount from debt extinguishment  $2,231   $
-
 
Day 1 (one) recognition of Right-of-use assets for financing leases  $1,205   $524 
Debt discount from derivative liabilities  $
-
   $64 
Debt discount from warrant issuances  $
-
   $837 
Common stock issued for debt conversion and settlement  $
-
   $151 
Common Stock issued for the conversion of Preferred Stock Series A  $
-
   $57 
Dividends accrued  $
-
   $8 
Debt discount from common stock issued with debt  $
-
   $430 

 

See accompanying notes to unaudited consolidated financial statements

 

5

 

 

DIGERATI TECHNOLOGIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

Description of Business

 

Unless otherwise indicated or the context otherwise requires, references in this subsection to “we,” “us,” “our,” “the Company,” and other similar terms refer to Digerati and its subsidiaries.

 

Digerati Technologies, Inc., a Nevada corporation, through its operating subsidiaries, (i) Verve Cloud, Inc. (formerly known as T3 communications, Inc.), a Nevada corporation (“Verve Cloud Nevada”), (ii) Verve Cloud, Inc. (formerly known as Shift8 Networks, Inc.), a Texas corporation (“Verve Cloud Texas”), (iii) T3 Communications, Inc., a Florida corporation (“T3 Communications”), (iv) Nexogy, Inc., a Florida corporation (“Nexogy”) and (v) NextLevel Internet, Inc., a California corporation (“Next Level” and, together with Verve Cloud Nevada, Verve Cloud Texas, T3 Communications and Nexogy, the “Operating Subsidiaries”), which, as of June 1, 2023, operate as a single business unit under the Verve Cloud name and have locations in Texas, Florida and California, provides cloud services specializing in Unified Communications as a Service (“UCaaS”) and broadband connectivity 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 Wide Area Network (“WAN”) or Software-defined Wide Area Network (“SD WAN”) solutions.

 

Digerati provides enterprise-class, carrier-grade services to the small-to-medium-sized business (“SMB”) at cost-effective monthly rates. Digerati’s UCaaS or cloud communication services include fully hosted Internet Protocol (“IP”)/private branch exchange (“PBX”), video conferencing, mobile applications, Voice over Internet Protocol (“VoIP”) transport, Session Initiation Protocol (“SIP”) trunking, and customized VoIP services all delivered Only in the Cloud™.

 

Basis of presentation and consolidation

 

The accompanying unaudited interim consolidated financial statements of Digerati 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, 2023, contained in the Company’s Annual Report on Form 10-K filed on November 24, 2023, have been omitted.

 

Reclassification

 

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations or net assets of the Company.

 

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.

 

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,
 
   2024   2023   2024   2023 
Stock options to purchase common stock   13,805,000    
-
    13,805,000    
-
 
Warrants to purchase common stock   107,701,179    
-
    107,701,179    
-
 
Convertible Preferred Shares   71,893,774    63,458,674    71,893,774    63,458,674 
Convertible Debt   115,207,831    85,183,490    115,207,831    85,183,490 
Total   308,607,784    148,642,164    308,607,784    148,642,164 

 

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 122,000,000 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, 2024, 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, 2024 and 2023, the Company did not derive revenues of 10% or more from any single customer.

 

As of April 30, 2024 and July 31, 2023, the Company did not have outstanding accounts receivable comprising 10% or more of our total outstanding accounts receivable from any single customer. 

 

Sources of revenue:

 

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, 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: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) 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 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 data.

 

7

 

 

Disaggregation of Cloud-based hosted revenues.

 

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

 

   For the Three Months Ended
April 30,
   For the Nine Months Ended
April 30,
 
   2024   2023   2024   2023 
Cloud software and service revenue  $7,404   $7,777   $22,564   $23,694 
Product revenue   26    60    85    214 
Total operating revenues  $7,430   $7,837   $22,649   $23,908 

 

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, 2024 and July 31, 2023 was $283,781 and $281,294, 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 place, 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, 2024 and July 31, 2023, Digerati’s customer deposits balance was $785,863 and $842,956, respectively. The customer deposit balance is included as part of deferred income on the consolidated balance sheets.

 

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, 2024, the Company has $1,041,027 in deferred commissions/contract costs, of which the current portion of $505,818 is included in prepaid and other current assets and the long-term portion of $533,862 in other assets in the consolidated balance sheets. Sales commissions expenses for the nine months ended April 30, 2024 and 2023 were $2,619,764 and $2,050,008, respectively. The costs to obtain customer contract balances are included as part of prepaid expenses and other assets on the consolidated balance sheets.

 

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.

 

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. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is probable within the next 12 months from the balance sheet date.

 

8

 

 

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, 2024 and July 31, 2023 were $5,173,310 and $4,125,429, 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.
 
       Quoted
prices
in active
markets
for identical
liabilities
   Significant
other
observable
inputs
   Significant
unobservable
inputs
 
Description  Fair Value   (Level 1)   (Level 2)   (Level 3) 
Derivative liability at July 31, 2023  $4,125,429    
          -
    
          -
   $4,125,429 
                     
Derivative liability at April 30, 2024  $5,173,310    
-
    
-
   $5,173,310 

 

9

 

 

The fair market value of all derivatives during the year ended July 31, 2023 was determined using the Black-Scholes option pricing model which used the following assumptions:

 

Expected dividend yield   0.00% 
Expected stock price volatility   169.54% - 178.58% 
Risk-free interest rate   3.97% - 5.55% 
Expected term   0.25 - 7.30 years 

 

The fair market value of all derivatives during the three months ended April 30, 2024 was determined using the Black-Scholes option pricing model which used the following assumptions:

 

Expected dividend yield   0.00% 
Expected stock price volatility   162.47% - 189.47% 
Risk-free interest rate   4.69% - 5.25% 
Expected term   0.676.55 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, 2023  $4,125,429 
Derivative loss   1,047,881 
Balance at April 30, 2024  $5,173,310 

 

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.

 

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 470-20) 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, 2023, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of this ASU on its financial statements. 

 

10

 

 

NOTE 2 – GOING CONCERN

 

Financial Condition

 

The Company’s consolidated financial statements 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 $133,854,000 and a working capital deficit of approximately $76,670,000 which raises substantial doubt about Digerati’s ability to continue as a going concern. The Company’s consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.  

 

Management Plans to Continue as a Going Concern

 

Management believes that available resources as of April 30, 2024, will not be sufficient to fund the Company’s operations and corporate expenses over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, among other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such 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.

 

We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During Fiscal Year 2024, certain members of our executive management team have continued to defer compensation 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. 

 

We require cash to meet our interest payments to Post Road (as defined below), capital expenditure needs, and operational cash flow needs. The Company anticipates issuing additional equity or entering into additional Convertible Notes to secure the funding required to meet these cash needs. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, the Company may not be able to meet its interest payments, capital expenditures, and operational needs. As a result, the Company will be required to negotiate with its lender the terms of the current financing agreements, in addition to postponing the timing of deployment of its capital expenditures and extending the timing of the operational cash needs.

 

The Operating Subsidiaries are parties to the Credit Agreement, dated as of November 17, 2020 (as amended from time to time, the “Credit Agreement”), among the Operating Subsidiaries, Post Road Special Opportunity Fund II LLP (“PRSOF”), as a lender, the other lenders party thereto and Post Road Administrative LLC (“PR Administrative” and, together with its affiliate PRSOF, “Post Road”), as administrative agent for the lenders. The Company is also a party to certain sections of the Credit Agreement. Next Level Internet, Inc. became an Operating Subsidiary and a party to the Credit Agreement in February 2022.

 

11

 

 

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

  

Below are key financial covenant requirements, (measured quarterly) for the fiscal quarter ended April 30, 2024:

 

Minimum–Allowed - Liquidity of $750,000

 

Minimum–Allowed – Fixed Charge Coverage Ratio of 1.25 to 1.00

 

Maximum Allowed - Churn of 3.00% at any time

 

As of April 30, 2024, the Company was in compliance with the financial covenants under the Credit Agreement, which were based on the amended financial covenants as set forth in the Third Forbearance Agreement and Amendment to Loan Documents (the “Third Forbearance Agreement”) effective February 2, 2024. While Digerati, the parent company of Verve Cloud Nevada, is not subject to these financial covenants, they have had and will continue to have a material impact on Verve Cloud Nevada’s expenditures and ability to raise funds.

 

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

 

During the period beginning on November 1, 2021, and ending on April 30, 2024, the Company and Post Road entered into several amendments and other modifications to the Credit Agreement. Specifically:

 

On December 15, 2022, Post Road agreed to forbear from exercising its remedies in connection with the Company’s failure to comply with the financial covenants in the Credit Agreement as of the last day of the fiscal quarter ended October 31, 2022, as well as certain other specified defaults, until December 23, 2022.

 

On February 3, 2023, Digerati, the Operating Subsidiaries and Post Road entered into a Consent, Limited Waiver and Fourth Amendment to Credit Agreement and Amendment to Notes (the “Fourth Amendment”). Among other things, the Fourth Amendment (a) conditionally revised each of the six financial covenants set forth in the Credit Agreement (related to maximum leverage, minimum liquidity, minimum EBITDA, maximum capital expenditures, minimum interest coverage (a provision that replaced the minimum fixed charge coverage ratio provision), and maximum churn), (b) conditionally waived all then-existing events of default under the Credit Agreement and (c) modified the interest rates payable under the Credit Agreement. In addition, the Fourth Amendment provided that none of the revised financial covenants (other than minimum liquidity of $1,000,000, which was tested and met as of January 31, 2023) would be tested as of the last day of the fiscal quarter ended January 31, 2023 so long as no additional events of default occurred prior to such date. The conditional revisions to the financial covenants and the conditional waivers of existing events of default in the Fourth Amendment were contingent on the consummation of the Merger with Minority Equality Opportunities Acquisition, Inc., a Delaware corporation (“MEOA”) by February 28, 2023 (the “Merger Outside Closing Date”). If the Merger was not consummated by the Merger Outside Closing Date, the terms of the financial covenants would revert to the terms in effect immediately prior to the Fourth Amendment and the existing events of default would continue unwaived. The Merger Outside Closing Date was, as described below, extended several times, but the termination of the Business Combination Agreement with MEOA has effectively nullified the revisions to the financial covenants and conditional waivers set forth in the Fourth Amendment.

 

On March 13, 2023, Digerati, the Operating Subsidiaries, and Post Road entered into the Fifth Amendment to Credit Agreement, which specifically extended the Merger Outside Closing Date from February 28, 2023, to April 28, 2023.

 

On April 3, 2023, Digerati, the Operating Subsidiaries, and Post Road entered into a Sixth Amendment to its Credit Agreement (the “Sixth Amendment”), which (a) deferred the cash interest otherwise due and payable on April 1, 2023, to May 1, 2023, and (b) increased the net principal amount of additional convertible notes the Company was permitted by the Credit Agreement to have outstanding from $3,000,000 to $3,500,000.

 

On May 1, 2023, Digerati, the Operating Subsidiaries, and Post Road entered into a Seventh Amendment to Credit Agreement (the “Seventh Amendment”), pursuant to which the Merger Outside Closing Date was extended from April 28, 2023, to May 31, 2023, or such later date as agreed to in writing by Post Road in its sole discretion.

 

On August 16, 2023, Digerati, the Operating Subsidiaries and Post Road entered into a letter agreement, pursuant to which Post Road agreed that all accrued interest that was originally due and payable in cash by the Operating Subsidiaries on April 3, 2023, May 1, 2023, June 1, 2023, July 3, 2023 and August 1, 2023 would, instead, be added to the outstanding principal balances of Term Loan A and Term Loan C, as applicable, under the Credit Agreement on the effective date of the letter agreement, and due on the maturity dates of such loans, along with all other principal and interest amounts thereunder.

 

12

 

 

On November 22, 2023 (with effect from November 2, 2023), Digerati, the Operating Subsidiaries, and Post Road entered into a Second Forbearance Agreement, Amendment to Loan Documents and Limited Consent (the “Second Forbearance Agreement”), which (a) extended the maturity date of our Term Loan C Note with Post Road from November 2, 2023, to December 31, 2023, (b) provided that Post Road and the other lenders under the Credit Agreement shall forbear through December 31, 2023 from exercising their rights and remedies under the loan documents and applicable law with respect to (i) certain existing events of default under the loan documents and (ii) certain events of default that are expected to arise before December 31, 2023, and (c) amended certain provisions of the Credit Agreement and the other loan documents to allow the company to incur up to an additional $2,000,000 of working capital financing

 

On February 2, 2024 Digerati, the Operating Subsidiaries, and Post Road entered into a Third Forbearance Agreement which (a) extends the maturity date of our Term Loan C Note with Post Road from December 31, 2023, to November 17, 2024 (which is also the maturity date of the other loans outstanding under the Credit Agreement), (b) provides that Post Road and the other lenders under the Credit Agreement shall forbear through November 17, 2024 from exercising their rights and remedies under the loan documents and applicable law with respect to the Specified Defaults and (c) amends certain other provisions of the Credit Agreement. The Third Forbearance Agreement replaces the Second Forbearance Agreement, which expired in accordance with its terms on December 31, 2023.

 

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.

 

NOTE 3 – INTANGIBLE ASSETS

 

Below are summarized changes in intangible assets at April 30 2024 and July 31, 2023:

 

   Gross
Carrying
   Accumulated   Net
Carrying
 
April 30, 2024  Value   Amortization   Amount 
NetSapiens - license, 10 years  $150,000   $(150,000)  $
-
 
Customer relationships, 5 years   40,000    (40,000)   
-
 
Customer relationships, 7 years   10,947,262    (4,777,816)   6,169,446 
Trademarks, 7 & 10 years   7,148,000    (2,784,907)   4,363,093 
Non-compete, 2 & 3 years   931,000    (855,583)   75,417 
Marketing & Non-compete, 5 years   800,263    (800,263)   
-
 
Total Definite-lived Intangible Assets   20,016,525    (9,408,569)   10,607,956 
Goodwill   19,380,080    
-
    19,380,080 
Balance, April 30, 2024  $39,396,605   $(9,408,569)  $29,988,036 

 

   Gross
Carrying
   Accumulated   Net
Carrying
 
July 31, 2023  Value   Amortization   Amount 
NetSapiens - license, 10 years  $150,000   $(150,000)  $
-
 
Customer relationships, 5 years   40,000    (40,000)   
-
 
Customer relationships, 7 & 10 years   10,947,262    (3,989,768)   6,957,494 
Trademarks, 7 & 10 years   7,148,000    (1,980,728)   5,167,272 
Non-compete, 2 & 3 years   931,000    (844,583)   86,417 
Marketing & Non-compete, 5 years   800,263    (800,263)   
-
 
Total Definite-lived Intangible Assets   20,016,525    (7,805,342)   12,211,183 
Goodwill   19,380,080    
-
    19,380,080 
Balance, July 31, 2023  $39,396,605   $(7,805,342)  $31,591,263 

 

Total amortization expense for the nine months ended April 30, 2024 and 2023 was $1,603,227 and $2,263,546, respectively.

 

13

 

 

The Company expects to record amortization expense of intangibles assets over the next five years and thereafter as follows:

 

Period Ending July 31,  Amortization 
2024 *  $556,576 
2025   2,108,167 
2026   1,856,869 
2027   1,838,645 
2028   1,560,074 
2029 and thereafter   2,687,625 
Total:  $10,607,956 

 

* Three months remaining

 

NOTE 4 – STOCK-BASED COMPENSATION

 

In November 2015, the Company adopted the Digerati Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”). On May 25, 2023, the Company amended the Plan which now authorizes the grant of up to 15 million (previously 7.5 million) stock options, restricted common shares, non-restricted common shares and other awards to employees, directors, and certain other persons. The Plan is intended to permit the Company to retain and attract qualified individuals who will contribute to the overall success of the Company. The Company’s Board of Directors determines the terms of any grants under the Plan. Exercise prices of all stock options and other awards vary based on the market price of the shares of common stock 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 nine months ended April 30, 2024 and 2023, the Company did not issue any new stock options.

  

The Company recognized $16,018 and $80,122 in stock-based compensation expense for stock options to employees for the nine months ended April 30, 2024 and 2023, respectively. Unamortized compensation stock option cost totaled $0 and $17,850 as of April 30, 2024 and 2023, respectively.

 

A summary of the stock options outstanding as of April 30, 2024 and July 31, 2023, and the changes during the nine months ended April 30, 2024 are presented below:

 

       Weighted
average
exercise
   Weighted
average
remaining
contractual
 
   Options   price   term (years) 
Outstanding at July 31, 2023   13,805,000   $0.05    3.68 
Granted   
-
    
-
    
-
 
Exercised   
-
    
-
    
-
 
Forfeited and cancelled   
-
    
-
    
-
 
Outstanding on April 30, 2024   13,805,000   $0.05    2.93 
Exercisable on April 30, 2024   13,805,000   $0.05    2.93 

 

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 13,805,000 and 13,805,000 stock options outstanding as of April 30, 2024 and July 31, 2023, was $72,034 and $28,065, respectively.

 

The aggregate intrinsic value of 13,805,000 and 13,519,606 stock options exercisable on April 30, 2024 and July 31, 2023 was $72,034 and $28,065, respectively.  

 

14

 

 

NOTE 5 – WARRANTS

 

During the nine months ended April 30, 2024, the Company did not issue any warrants.

 

During the nine months ended April 30, 2023, the Company issued 17,241,721 warrants under promissory notes in which the warrants vested at the time of issuance. The warrants have an expiration term of five (5) years with an exercise price of $0.1195. Under the Black-Scholes valuation method, the relative fair market value of the warrants at time of issuance was approximately $837,000 and was recognized as a discount on the promissory notes. The Company will amortize the debt discount as interest expense over 12 months.

 

A summary of the warrants outstanding as of April 30, 2024 and July 31, 2023, and the changes during the nine months April 30, 2024, are presented below:

 

   Warrants   Weighted
average
exercise
price
   Weighted
average
remaining
contractual
term (years)
 
Outstanding at July 31, 2023   124,942,900   $0.03    6.89 
Granted   
-
    
-
    - 
Exercised   (17,241,721)  $0.58    - 
Forfeited and cancelled   
-
   $
-
    - 
Outstanding on April 30, 2024   107,701,179   $0.01    6.55 
Exercisable on April 30, 2024   80,775,885   $0.01    6.55 

 

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 107,701,179 and 124,942,900 warrants outstanding as of April 30, 2024 and July 31, 2023, was $3,198,725 and $2,692,529, respectively.

 

The aggregate intrinsic value of 80,775,885 and 98,017,606 warrants exercisable on April 30, 2024 and July 31, 2023, was $2,399,044 and $2,019,397, respectively.

 

NOTE 6 – NOTES PAYABLE NON-CONVERTIBLE

 

On October 22, 2018, the Company issued a secured promissory note for $50,000, bearing interest at a rate of 8% per annum, with maturity date of December 31, 2018. The maturity date was extended multiple times and most recently, subsequent to April 30, 2024, the lender agreed to extend the maturity until July 31, 2024. The promissory note is secured by a Pledge and Escrow Agreement, whereby the Company agreed to pledge rights to collateral due under a certain agreement. The principal outstanding balance as of April 30, 2024 and July 31, 2023 was $50,000.

 

15

 

 

Credit Agreement and Notes

 

Pursuant to the Credit Agreement, Post Road provided Verve Cloud with a secured loan of up to $20,000,000 (the “Loan”), with initial loans of $10,500,000 pursuant to the issuance of a Term Loan A Note and $3,500,000 pursuant to the issuance of a Term Loan B Note, each funded on November 17, 2020, and an additional $6,000,000 in loans, in increments of $1,000,000, as requested by Verve Cloud before the 18 month anniversary of the initial funding date to be lent pursuant to the issuance of a Delayed Draw Term Note. After payment of transaction-related expenses and closing fees of $964,000, net proceeds to the Company from Term Loan A Note and Term Loan B Note totaled $13,036,000. The Company recorded these discounts and cost of $964,000 as a discount to the Notes, which discount was amortized as interest expense over the term of the notes.

 

During the year ended July 31, 2023, the total debt discount for the Term Loan A Note and the Term Loan B Note was fully amortized.

 

The loans under the original Term Loan A Note had a maturity date of November 17, 2024, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%). The loans were non-amortized (interest only payments) through the maturity date and contained an option for the Company to pay interest in kind (“PIK”) for up to five percent (5%) of the interest rate in year one, four percent (4%) in year two and three percent (3%) in year three. The original Term Loan A Note was amended and restated and replaced by the Amended and Restated Term Loan A Note (the “A&R Term Loan A Note”) issued by the Operating Subsidiaries in favor of Post Road on December 20, 2021 as indicated below. 

 

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

 

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

 

Pursuant to the First Amendment, the additional proceeds of $6,000,000 were used to fund the acquisition of the assets of Skynet Telecom LLC (“Skynet”) 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 First Amendment. The Company evaluated the amendment and the recapitalization of the notes and accounted for these changes as an extinguishment of debt and recognized a loss on extinguishment of debt of $5,479,865, the loss is composed of the full amortization debt discount of $4,061,121, and the amendment fees of $1,418,744.

 

On February 2, 2024, Digerati, the Operating Subsidiaries, and Post Road entered into a Third Forbearance Agreement and Amendment to Loan Documents which (a) extends the maturity date of our Term Loan C Note with Post Road from December 31, 2023, to November 17, 2024 (which is also the maturity date of the other loans outstanding under the Credit Agreement), (b) provides that Post Road and the other lenders under the Credit Agreement shall forbear through November 17, 2024 from exercising their rights and remedies under the loan documents and applicable law with respect to the Specified Defaults and (c) amends certain other provisions of the Credit Agreement. The Third Forbearance Agreement replaces the Second Forbearance Agreement, which expired in accordance with its terms on December 31, 2023.

 

The A&R Term Loan A Note has a maturity date of November 17, 2024, and an interest rate of Term SOFR (with a minimum rate of 3.5%) plus twelve percent (12%). The principal balance and accrued PIK interest outstanding on the A&R Term Loan was $29,544,420 and $23,879,060 as of April 30, 2024 and July 31, 2023, respectively, and had accrued PIK interest outstanding of $7,375,904 and $1,710,545, respectively. The A&R Term Loan A principal balance at April 30, 2024 included an amendment fee of $824,346 which was added to the principal balance. In addition, as a result of the Third Forbearance Agreement and Amendment mentioned in a section above, the extinguishment accounting resulted in a debt discount of $1,084,448 and a gain on debt extinguishment of $260,102. As of April 30, 2024, the debt discount balance on Term Loan A was $759,113, which included amortization of $325,335 of debt discount to interest expense during the nine months ended April 30, 2024.

 

On February 4, 2022, Verve Cloud and Post Road entered into a Joinder and Second Amendment to Credit Agreement (the “Joinder and Second Amendment”) in connection with which Verve Cloud issued a Term Loan C Note. Pursuant to the Joinder and Second Amendment, Post Road provided Verve Cloud with a secured loan of $10,000,000. The proceeds of $10,000,000 were used to fund the acquisition of Next Level Internet, Inc. (“Next Level” or “NLI”) 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 Joinder and Second Amendment. At issuance the Company recognized $250,000 in original issue discount and $220,000 in debt issuance. The total unamortized debt discount was $0 and $0 as of April 30, 2024 and July 31, 2023, respectively. The principal balance on the Term Loan C Note was $15,018,555 and $11,128,264, respectively, as of April 30, 2024 and July 31, 2023 and had accrued PIK interest outstanding of $5,018,556 and $1,128,264, respectively. Term Loan C Note had a maturity date of August 4, 2023, which was subsequently amended to mature on November 2, 2023, again amended to mature on December 31, 2023, and again amended to mature on November 17, 2024   at an interest rate of Term SOFR (with a minimum rate of 3.5%) plus twelve percent (12%). As a result of the Third Forbearance Agreement and Amendment mentioned in a section above, the extinguishment accounting resulted in a debt discount of $551,520 and a loss on debt extinguishment of $1,031,109. As of April 30, 2024, the debt discount balance on Term Loan C was $386,064, which included amortization of $165,456 of debt discount to interest expense during the nine months ended April 30, 2024.

 

For further details regarding the Credit Agreement, please see Note 2, “Management Plans to Continue as a Going Concern” to the consolidated financial statements.

 

16

 

 

Promissory Notes – Next Level Internet Acquisition

 

On February 4, 2022, as per the acquisition of Next Level, the Company entered into two unsecured promissory notes (the “Unsecured Adjustable Promissory Notes”) for $1,800,000 and $200,000, respectively. The Unsecured Adjustable Promissory Notes are payable in eight equal quarterly installments in the aggregate amount of $250,000 each commencing on June 4, 2022, through and including March 7, 2024, with a base annual interest rate of 0% and a default annual interest rate of 18%. The amount owed is subject to change based on certain revenue milestones required to be achieved by Next Level. At issuance, the Company fair valued the Unsecured Adjustable Promissory Notes and recognized a debt discount of $241,000 which is amortized over the term of the Unsecured Adjustable Promissory Notes. The Company amortized $60,250 to interest expense during the nine months ended April 30, 2024. Total unamortized debt discount on the Unsecured Adjustable Promissory Notes as of April 30, 2024 and July 31, 2023 was $0 and $60,250, respectively. The total principal balance outstanding as of April 30, 2024 and July 31, 2023 on the Unsecured Adjustable Promissory Notes was $1,719,585 and $1,500,000, respectively.

 

On January 3, 2023, the Company amended its forbearance agreement with the holders and agreed to pay the deferred payment, together with interest at the rate of 18% per annum (based upon the number of days elapsed between the date the deferred payment is scheduled for payment under the Unsecured Adjustable Promissory Notes and the date the deferred payment is actually paid and a year of 360 days) and extension fees of $7,500 on or before February 28, 2023 (the period from the effective date through February 28, 2023). This deferral of payment resulted in an additional principal added to the balance of $26,125, which consisted of the extension fee of $7,500 and interest expense of $18,625.

 

On February 28, 2023, the holders extended the payment date for the September 4, 2022 installment to be due by April 30, 2023 in exchange for a $15,000 amendment fee to be added to the outstanding principal balance. This deferral of payment resulted in an additional principal added to the balance of $39,000, which consisted of the extension fee of $15,000 and interest expense of $24,000. The $39,000 balance was paid on March 15, 2023.

 

On March 7, 2023, the holders extended the payment date for the March 7, 2023 installment to be due by April 30, 2023 in exchange for a $7,500 amendment fee to be added to the outstanding principal balance. This deferral of payment resulted in an additional principal added to the balance of $8,500, which consisted of the extension fee of $7,500 and interest expense of $1,000. The $8,500 balance was paid on March 15, 2023.

 

On May 1, 2023, the holders extended the payment date for the September 4, 2022 installment to be due by May 31, 2023 in exchange for payment of accrued interest between March 15, 2023 and April 30, 2023 of $5,750.00 which was paid on May 10, 2023.

 

On May 1, 2023, the holders extended the payment date for the March 7, 2023 installment to be due by May 31, 2023 in exchange for payment of accrued interest between March 15, 2023 and April 30, 2023 of $5,750.00 which was paid on May 10, 2023.

 

On June 1, 2023, the Company and the holders agreed to extend the due date for the principal payment along with accrued interest due on May 31, 2023 to June 30, 2023.

 

In November 2023, the maturity date and principal payments on the Note were extended to December 31, 2023.

 

17

 

 

On February 4, 2022, as part the acquisition of NLI, the Company entered into two unsecured convertible promissory notes (the “Unsecured Convertible Promissory Notes”) for $1,800,000 and $200,000, respectively. The Unsecured Convertible Promissory Notes are payable in eight equal quarterly installments in the aggregate amount of $250,000 with the first payment commencing on April 30, 2022, through and including January 31, 2024. The Unsecured Convertible Promissory Notes have a base annual interest rate of 10% and a default annual interest rate of 18%. The holders had a one-time right to convert all or a portion of the Unsecured Convertible Promissory Notes commencing on the six-month anniversary of the Unsecured Convertible Promissory Notes being issued and ending 30 days after such six-month anniversary. At inception of the Unsecured Convertible Promissory Notes, the Company recognized the fair market value of the conversion on the notes of $2,382,736, and recognized $117,264 in debt discount, which was amortized over the conversion period. During the year ended July 31, 2023, the conversion option on the Unsecured Convertible Promissory Notes ended, and the Company recognized $466,086 as other income for the settlement of the conversion option. During the year ended July 31, 2023, the Company made principal payments totaling $791,375. On multiple occasions, the holders agreed to forbear the principal payment of $250,000 and extend the maturity date on the Unsecured Convertible Promissory Notes.

 

During the quarter ended January 31, 2024, the Company transferred the principal balance for the Unsecured Convertible Promissory Notes of $1,119,996 to the balance of the Unsecured Adjustable Promissory Notes which resulted from the conversion feature ending during the last fiscal year ended July 31, 2023.

 

On January 6, 2024, the Company and holders entered into an Extension and Forbearance Agreement for the Unsecured Adjustable Promissory Notes and the Unsecured Convertible Promissory Notes where the holders agreed to (1) forbear from exercising any rights and remedies it may have under the Notes and applicable law arising from the existing events of default until December 31, 2024 (the “Forbearance Period”) and (2) extend the due date of all payments that are either currently due and payable or will become due and payable during the Forbearance Period to the Forbearance Termination Date (the “Maturity Extension”). As consideration for this agreement, the Noteholder received a fee in an amount equal to 3.0% of the principal amount of the Notes outstanding as of December 31, 2023, which was added to the principal balance on the Note. The Company accrued $339,581 of default interest expense during the nine months ended April 30, 2024, which was added to the principal balance of the Note. The Extension and Forbearance Agreement mentioned above was accounted as a debt extinguishment, resulting in   a debt discount of $258,144 and a gain on debt extinguishment of $175,437 which is included as part of the loss on debt extinguishment. As of April 30, 2024, the debt discount balance on Unsecured Adjustable Promissory Notes and the Unsecured Convertible Promissory Notes was $172,096, which included amortization of $86,048   of debt discount to interest expense during the nine months ended April 30, 2024.

 

NOTE 7 – REVOLVING CREDIT FACILITY

 

Thermo Communications Funding, LLC

 

On February 2, 2024, the Operating Subsidiaries entered into a loan and security agreement (the “Revolving Credit Agreement”) among the Operating Subsidiaries, Thermo Communications Funding, LLC, as agent for the lenders parties thereto (in such capacity, the “Revolving Agent”), and the lenders named therein (the “Revolving Lenders”), which provides for a revolving credit facility in an aggregate amount not to exceed the lesser of (a) a borrowing base calculated based on the Operating Subsidiaries’ eligible accounts receivable balance and (b) $2,000,000 (the “Revolving Facility”) evidenced by a promissory note (the “Revolving Note”).

 

Pursuant to the Revolving Credit Agreement, amounts borrowed under the Revolving Credit Facility are secured by liens on the same assets that serve as collateral for the obligations under the Credit Agreement, consisting of substantially all of the assets of the Operating Subsidiaries, subject to an intercreditor agreement, dated as of February 2, 2024, among Post Road, the Revolving Agent and the Revolving Lenders (the “Intercreditor Agreement”).

 

Amounts outstanding under the Revolving Note bear interest at a floating rate per annum equal to the greater of (a) the Wall Street Journal prime rate (currently 8.50%) plus 2.75% and (b) 10.50%. In addition, the Operating Subsidiaries are required to pay a monthly monitoring fee of $10,000 to the Revolving Agent. The Revolving Credit Agreement contains customary representations and warranties, events of default and covenants in favor of the Revolving Agent and Revolving Lenders. This includes a financial covenant to maintain a minimum cash flow to debt service ratio of not less than 1.10 to 1.00 as of the end of each fiscal quarter beginning with the quarter ended March 31, 2024. As of April 30, 2024, the Company determined that it was in compliance with such financial covenant. 

 

The Revolving Facility may be terminated in whole, but not in part, by paying outstanding amounts thereunder plus a premium equal to (a) within six months of the effectiveness of the Revolving Credit Agreement, 1% of the maximum amount of the Revolving Note, multiplied by the number of months remaining until maturity, divided by 12 and (b) thereafter, 0.5% of the maximum amount of the Revolving Note, multiplied by the number of months remaining until maturity, divided by 12. No premium is payable if the Revolving Facility is terminated within 30 days of its stated maturity date. The Revolving Facility matures on February 2, 2025. The outstanding balance as of April 30, 2024 was $2,000,000. The Company paid $67,273 in interest expense during the nine months ended April 30, 2024.

 

18

 

 

NOTE 8 – RELATED PARTY TRANSACTIONS 

  

On December 31, 2021, as a result of the of the acquisition of Skynet’s assets, the two sellers became related parties as they continued to be involved as consultants for 12 months to manage the customer relationship. The Company will pay $100,000 to each of the consultants on an annual basis. As of April 30, 2024 and July 31, 2023, there were no outstanding balances owed to the consultants. Part of the Purchase Price of $600,000 (the “Earn-out Amount”) was retained by the Company and will be paid to sellers in six equal quarterly payments. An additional $100,000 (the “Holdback Amount”) was retained by the Company and will be paid to sellers in accordance with the Skynet asset purchase agreement (the “Asset Purchase Agreement”). The total balance outstanding on the Holdback amount as of April 30, 2024 and July 31, 2023 was $103,000 and $100,000, respectively. The Company amortized $450 and $29,764 of debt discount as interest expense during the nine months ended April 30, 2024 and 2023, respectively. The total debt discount outstanding as of April 30, 2024 and July 31, 2023, was $900 and $0, respectively. The total balance outstanding on the Earn-out Amounts as of April 30, 2024 and July 31, 2023 was $412,000 and $400,000, respectively. On January 13, 2024, the maturity date on the Note was extended to December 31, 2024. As consideration for this extension agreement, the Noteholder received a fee in an amount equal to 3.0% of the principal amount of the Notes outstanding as of December 31, 2023, which was added to the principal balance on the Note.

 

Acquisition Payable – Skynet

 

As part of the acquisition of Skynet’s assets, the Company will pay the seller a $1,000,000 (the “Share Payment”) by issuance of restricted shares of the Company’s common stock to the owners. On September 1, 2022, the Company and the sellers amended the Asset Purchase Agreement. In accordance with the amended agreement, the Share Payment will be made via the issuance of shares on the earlier of (i) the effective date of that certain Registration Statement on Form S-1 filed by the Company with the Securities and Exchange Commission on August 11, 2021 (in which case the stock will be valued at the price set forth in the prospectus that is a part of such Registration Statement, without underwriter discounts) and (ii) April 30, 2023 (in which case the stock will be valued at the average of the last transaction price on the OTCQB for each of the 10 trading days immediately preceding such issuance date). On December 5, 2022 and March 9, 2023, the Asset Purchase Agreement was amended. The payments due were originally extended until the closing of the merger with MEOA which was expected to close during the second quarter of calendar year 2023. On June 15, 2023, Digerati terminated the Business Combination Agreement with MEOA. On November 22, 2023, the maturity date on the Note was extended to December 31, 2023. On January 13, 2024, the maturity date was extended to December 31, 2024. As a condition of the extension of the maturity date, a 3% fee was added to the principal balance of the Note. The total principal balance outstanding on the acquisitions payable as of April 30, 2024 and July 31, 2023 was $1,030,000 and $1,000,000, respectively. The Company amortized $900 and $0 of debt discount as interest expense during the nine months ended April 30, 2024 and 2023, respectively. The total debt discount outstanding as of April 30, 2024 and July 31, 2023, was $1,799 and $0, respectively.

 

19

 

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE

 

As of April 30, 2024 and July 31, 2023, convertible notes payable consisted of the following:

 

   April 30,   July 31, 
CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE  2024   2023 
         
On October 13, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $330,000, an annual interest rate of 8%, and an original maturity date of October 13, 2021.  In connection with the execution of the Note, the Company issued 1,000,000 shares of our common stock to the Noteholder, and recognized $211,426 of debt discount related to the original issue discount, relative fair market value of shares, and the intrinsic value of the conversion feature of the Note, which was amortized over the term of the Note. The maturity date was extended multiple times and during the last fiscal year, the lender agreed to extend the maturity until July 31, 2023. On January 29, 2024, the maturity date on the Note was extended to December 31, 2024. (See below variable conversion terms No.1). (1) (2) (3)  $178,448   $173,250 
           
On January 27, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, an annual interest rate of 8%, and a maturity date of January 27, 2022. In connection with the execution of the Note, the Company issued 500,000 shares of our common stock to the Noteholder, and at the time of issuance, the Company recognized the relative fair market value of the shares of $24,368 as debt discount and $44,368 as debt discount for the intrinsic value of the conversion feature, which both were amortized to interest expense during the term of the Note. The Noteholder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into common stock at any time after 180 days of funding the Note. The conversion price shall be the greater of $0.05 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Noteholder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing. The maturity date was extended multiple times. On February 1, 2023, the lender agreed to extend the maturity until July 30, 2023. As consideration for the extension on the Note, the Company agreed to add $50,000 to the principal amount outstanding and issued 300,000 shares of common stock with a market value of $26,460, both of which, were charged to interest expense. The Company analyzed the Note and determined that it does not require to be accounted as a derivative instrument. During the nine months ended April 30, 2024, the Noteholder converted $250,000 of the principal amount to 5,000,000 shares of common stock. On January 11, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (2) (3) (5)   136,250    375,000 
           
On April 14, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, an annual interest rate of 8%, and a maturity date of April 14, 2022. In connection with the execution of the Note, the Company issued 500,000 shares of our common stock to the Noteholder, at the time of issuance, the Company recognized the relative fair market value of the shares of $63,433 as debt discount, and it will be amortized to interest expense during the term of the Note. Additionally, the Company recognized $96,766 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the Note. The Noteholder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into common stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The maturity date has been extended multiple times. On April 14, 2023, the lender agreed to extend the maturity until October 14, 2023. As consideration for the extension on the Note, the Company agreed to add $50,000 to the principal amount outstanding and issued 300,000 shares of common stock with a market value of $23,670, both of which, were charged to interest expense. On January 11, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (2) (3) (5)   386,250    375,000 
           
On August 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, an annual interest rate of 8% (and a default interest rate of 20%), and a maturity date of August 31, 2022. In connection with the execution of the Note, the Company issued 150,000 shares of our common stock to the Noteholder, and at the time of issuance, the Company recognized the relative fair market value of the shares of $13,635 as debt discount, which will be amortized to interest expense during the term of the promissory note. The Noteholder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into common stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Noteholder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The maturity date has been extended multiple times. On February 28, 2023, the lender agreed to extend the maturity until August 31, 2023. As consideration for the extension on the Note, the Company agreed to add $18,000 to the principal amount outstanding and issued 100,000 shares of common stock with a market value of $8,200, both of which, were charged to interest expense. On January 11, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (2) (3) (5)   111,240    108,000 

 

20

 

 

On September 29, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, an annual interest rate of 8%, a default interest rate of 20%, and a maturity date of September 29, 2022. In connection with the execution of the Note, the Company issued 150,000 shares of our common stock to the Noteholder, at the time of issuance, the Company recognized the relative fair market value of the shares of $10,788 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Noteholder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into common stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Noteholder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The maturity date has been extended multiple times. On March 29, 2023, the lender agreed to extend the maturity until September 29, 2023. As consideration for the extension on the Note, the Company agreed to add $18,000 to the principal amount outstanding and issued 100,000 shares of common stock with a market value of $7,970, both of which, were charged to interest expense. On January 11, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (2) (3) (5)   111,240    108,000 
           
On October 22, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $150,000, an annual interest rate of 8% (and a default interest rate of 20%), and a maturity date of October 22, 2022. In connection with the execution of the Note, the Company issued 300,000 shares of our common stock to the note holder, and at the time of issuance, the Company recognized the relative fair market value of the shares of $13,965 as debt discount, which will be amortized to interest expense during the term of the promissory note. The Noteholder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into common stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Noteholder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The maturity date has been extended multiple times. On April 29, 2023, the lender agreed to extend the maturity until October 29, 2023. As consideration for the extension on the Note, the Company agreed to add $30,000 to the principal amount outstanding and issued 180,000 shares of common stock with a market value of $12,582, both of which, were charged to interest expense. On January 11, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (2) (3) (5)   216,300    210,000 
           
On February 4, 2022, as part the acquisition of NLI, the Company entered into two unsecured convertible promissory notes (the “Unsecured Convertible Promissory Notes”) for $1,800,000 and $200,000, respectively. The Notes are payable in eight equal quarterly installments in the aggregate amount of $250,000 with the first payment commencing on April 30, 2022, through and including April 30, 2024. The Notes have a base annual interest rate of 10% and a default annual interest rate of 18%. The Sellers have a one-time right to convert all or a portion of the Convertible Notes commencing on the six-month anniversary of the notes being issued and ending 30 days after such six-month anniversary. The conversion price means an amount equal to the volume weighted average price per share of Stock on the Nasdaq Stock Market for the ten (10) consecutive trading days on which the conversion notice is received by the Company. However, if the stock is not then listed for trading on the Nasdaq Stock Market, the Conversion Price shall be the volume weighted average transaction price per share reported by the OTC Reporting Facility for the ten (10) consecutive trading days immediately preceding the date on which such Conversion Notice is received by the Company. At inception of the Notes, the Company recognized the fair market value of the conversion on the notes of $2,382,736, and recognized $117,264 in debt discount, which was amortized over the conversion period. During the year ended July 31, 2023, the conversion option on the Notes ended, and the Company recognized $466,086 as other income for the settlement of the conversion option. During the year ended July 31, 2023, the Company made principal payments totaling $791,375. On May 1, 2023, lenders agreed to forbear the principal payment of $250,000 originally due on April 30, 2023 to May 31, 2023. On June 1, 2023, the Company and the Noteholders agreed to extend the due date for the principal payment along with accrued interest due on May 31, 2023 to June 30, 2023. During the nine months ended April 30, 2024 an additional $119,996 was added to the principal balance for default interest for missing principal payments on the Notes. On January 6, 2024, the maturity date on the Note was extended to December 31, 2024. During the quarter ended January 31, 2024, the Company transferred the principal balance $1,119,996 to the Unsecured Adjustable Promissory Notes as result of the convertible feature which ended during the last fiscal year ended July 31, 2023.  See Note 6 for additional detail. (3)   
-
    1,000,000 

 

21

 

 

On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, an annual interest rate of 8%, and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the Note. In connection with the execution of the Note, the Company issued 300,000 shares of our common stock to the Noteholder and recorded $30,446 as debt discount and amortized over the term of the Note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of common stock. The Note Conversion Price shall equal the greater of $0.15 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the Note. Upon the occurrence of an Event of Default, the outstanding balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The maturity date has been extended multiple times. On January 30, 2023, the lender agreed to extend the maturity until May 30, 2023. In connection with the extension of the maturity date on the Note, the Company agreed to increase the principal balance by $30,000 and issued 300,000 shares of common stock with a fair market value of $26,910, both of which, were charged to interest expense.  On May 30, 2023, the Company and the Noteholders agreed to extend the due date for the principal payment due on May 30, 2023 to September 30, 2023. In exchange for the extension of the due date, $30,000 was added to the principal and the Company issued 300,000 shares of common stock with a fair market value of $26,700. On January 23, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (2) (3) (5)   329,600    320,000 
           
On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, an annual interest rate of 8%, and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the Note. In connection with the execution of the Note, the Company issued 300,000 shares of our common stock to the Not holder and recorded $30,446 as debt discount and amortized over the term of the Note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of common stock. The Note Conversion Price shall equal the greater of $0.15 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the Note. Upon the occurrence of an Event of Default, the outstanding balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The maturity date has been extended multiple times. On January 30, 2023, the lender agreed to extend the maturity until May 30, 2023. In connection with the extension of the maturity date on the Note, the Company agreed to increase the principal balance by $30,000 and issued 300,000 shares of common stock with a fair market value of $26,910, both of which, were charged to interest expense.  On May 30, 2023, the Company and the Noteholders agreed to extend the due date for the principal payment due on May 30, 2023 to September 30, 2023. In exchange for the extension of the due date, $30,000 was added to the principal and the Company issued 300,000 shares of common stock with a fair market value of $26,700. On January 23, 2024, the maturity date of the Note was extended to December 31, 2024. (1) (2) (3) (5)   329,600    320,000 

 

On July 27, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $165,000, an annual interest rate of 8%, and a maturity date of April 27, 2023. After payment of transaction-related expenses and closing fees of $19,500, net proceeds to the Company from the Note totaled $145,500. Additionally, the Company issued 300,000 shares of our common stock to the Noteholder. The Company recorded the $19,500 and the relative fair market value of the shares of $22,093 as debt discount and amortized to interest expense over the term of the Note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the note holder shall be entitled to convert any portion of the outstanding and unpaid conversion amount into fully paid and nonassessable shares of common stock. The Note conversion price shall equal the greater of $0.10 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the Note. The maturity date has been extended multiple times. On April 25, 2023, the lender agreed to extend the maturity until July 31, 2023. In connection with the extension of the maturity date on the Note, the Company agreed to increase the principal balance by $30,000 and issued 300,000 shares of common stock with a fair market value of $21,000, both of which, were charged to interest expense. On January 23, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (2) (3) (5)   200,850    195,000 

 

22

 

 

On September 12, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, an annual interest rate of 8%, and a maturity date of September 12, 2023. In connection with the execution of the Note, the Company issued 150,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $15,880 as debt discount, and it will be amortized to interest expense during the term of the promissory Note. The Noteholder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into common stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Noteholder may elect to convert up to 100% of the principal plus accrued interest into shares of common stock into a qualified uplist financing at a 25% discount. On January 11, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (3) (5)   77,250    75,000 
           
On October 3, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $165,000, an annual interest rate of 8%, and a maturity date of July 3, 2023. After payment of transaction-related expenses and closing fees of $19,500, net proceeds to the Company from the Note totaled $145,500. Additionally, the Company issued 300,000 shares of our common stock to the Noteholder. The Company recorded the $19,500 and the relative fair market value of the shares of $32,143 as debt discount and amortized to interest expense over the term of the Note. The Company recognized $117,857 debt discount related to beneficial conversion feature and will be amortized to interest expense over the term of Note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid conversion amount into fully paid and nonassessable shares of common stock. The Note conversion price shall equal the greater of $0.10 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the Note. On January 23, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (3) (5)   169,950    165,000 

 

On October 27, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $38,500, an annual interest rate of 8%, and a maturity date of July 26, 2023. After payment of transaction-related expenses and closing fees of $3,500, net proceeds to the Company from the Note totaled $25,000. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid conversion amount into fully paid and nonassessable shares of common stock. The Note conversion price shall equal the greater of $0.10 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the Note.  On January 23, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (3) (5)     39,655       38,500  
                 
On October 27, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $71,500, an annual interest rate of 8%, and a maturity date of July 26, 2023. After payment of transaction-related expenses and closing fees of $6,500, net proceeds to the Company from the Note totaled $65,000. Additionally, the Company issued 200,000 shares of our common stock to the Noteholder. The Company recorded the $6,500 and the relative fair market value of the shares of $38,768 as debt discount and amortized to interest expense over the term of the Note. The Company recognized $40,888 debt discount related to beneficial conversion feature and will be amortized to interest expense over the term of Note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid conversion amount into fully paid and nonassessable shares of common stock. The Note conversion price shall equal the greater of $0.10 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the Note. On January 23, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (3) (5)     73,645       71,500  

 

23

 

 

On October 31, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $350,000, an annual interest rate of 14%, and a maturity date of February 28, 2023. Net proceeds to the Company from the Note totaled $350,000. In the event that any payment is not made when due, either of principal or interest, and whether upon maturity or as a result of acceleration, interest shall thereafter accrue at the rate per annum equal to the lesser of (a) the maximum non-usurious rate of interest permitted by the laws of the State of Texas or the United States of America, whichever shall permit the higher rate or (b) twenty percent (20%) per annum, from such date until the entire balance of principal and accrued interest on this Note has been paid. At any time after sixty (60) days following the date hereof, Payee may elect to convert a percentage of the amount of principal and accrued interest outstanding on the Note into common stock of Debtor, in accordance with the following terms: (i) If prior to uplist to Nasdaq or NYSE, Payee may convert up to 50% of the amount outstanding on the Note into common stock. In such event, the price per share of common stock applicable to such conversion (the “Applicable Conversion Price”) shall be the greater of: (a) the Variable Conversion Price or (b) the Fixed Conversion Price. The “Variable Conversion Price” shall be equal to a 20% discount to the average closing price for common stock for the five (5) Trading Day period immediately preceding the Conversion Date. The Fixed Conversion Price shall equal $0.10; and (ii) If following the Uplist, Payee may convert up to 100% of the amount outstanding on the Note into shares of common stock. In such event, the Applicable Conversion Price shall be the greater of: (a) the post-Uplist Variable Conversion Price (i.e., if less than 5 days after the Uplist, then the average of the days available since the Uplist up to 5) or (b) the Fixed Conversion Price. On March 30, 2023, the maturity date was extended to May 30, 2023. In connection with the extension, the Company issued 2,500,000 warrant shares to the Noteholder and recognized the fair market value of the warrant shares of $170,000 as debt extension fee. On January 6, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (2) (3) (6)   360,500    350,000 

 

On November 22, 2022, the Company entered into a convertible promissory note with an aggregate principal amount of $1,670,000, an annual interest rate of 10%, and a maturity date of November 22, 2023. The Company recorded $90,975 in transaction-related expenses and closing fees and $250,500 of original issue discount to the Note. After payment of transaction-related expenses and closing fees and original issue discount, net proceeds to the Company from the Note totaled $1,328,525 In connection with the execution of the Note, the Company issued 2,100,000 shares of our common stock and 10,500,000 warrant shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the shares of common stock and warrant shares of $640,877 as debt discount. Additionally, the Company recognized $687,648 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the Note. As amended on March 24, 2023, the Noteholder shall have the right, on or before the earlier of (i) the closing of the SPAC Transaction (as defined in that certain business combination agreement between the Company, Minority Equality Opportunities Acquisition Inc., and MEOA Merger Sub, Inc. dated on or around August 30, 2022 (the “SPAC Agreement”, and the transaction contemplated under the SPAC Agreement, the “SPAC Transaction”)) or (ii) March 22, 2023, to convert all or any portion of the Principal Amount and interest (including any Default Interest) into fully paid and non-assessable shares of common stock. The Note conversion price shall equal $0.0956 subject to adjustment as provided in the note. On April 24, 2023, the Noteholder agreed to extend the due date for the first principal payment to May 22, 2023. In connection with the extension of the due date of the first principal on the Note, the Company agreed to increase the principal balance by $20,000. On January 24, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (2) (3) (6)   1,673,592    1,670,000 
           
On December 12, 2022, the Company entered into a convertible promissory note with an aggregate principal amount of $117,647, annual interest rate of 10% and a maturity date of December 12, 2023. The Company recorded $17,647 as original issue discount to the Note, which resulted in net proceeds of $100,000. In connection with the execution of the note, the Company issued 148,295 shares of our common stock and 741,475 warrant shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the common stock and warrant shares of $41,685 as debt discount. Additionally, the Company recognized $58,315 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the Note. The Noteholder shall have the right, on any calendar day, at any time on or following the earlier of (i) April 12, 2023 or (ii) sixty (60) calendar days after the Closing Date (as defined in that certain business combination agreement between the Company, Minority Equality Opportunities Acquisition Inc., and MEOA Merger Sub, Inc. dated on or around August 30, 2022 (the “SPAC Agreement”, and the transaction contemplated under the SPAC Agreement, the “SPAC Transaction”), to convert all or any portion of the Principal Amount and interest (including any Default Interest) into fully paid and non-assessable shares of common stock. The Note conversion price shall equal $0.0956, subject to adjustment as provided in the note. On January 11, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (3) (6)   123,489    119,897 

 

24

 

 

On December 20, 2022, the Company entered into a convertible promissory note with an aggregate principal amount of $176,471, an annual interest rate of 10%, and a maturity date of December 20, 2023. The Company recorded $5,000 in deferred finance costs and $26,471 of original issue discount to the Note. After payment of transaction-related expenses, net proceeds to the Company from the Note totaled $145,500. In connection with the execution of the Note, the Company issued 221,909 shares of our common stock and 1,109,545 warrant shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the common stock and warrant shares of $59,374 as debt discount. Additionally, the Company recognized $79,014 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the Note. The Noteholder shall have the right, on any calendar day, at any time on or following the earlier of (i) April 12, 2023 or (ii) sixty (60) calendar days after the closing of the Merger, to convert all or any portion of the Principal Amount and interest (including any Default Interest) into fully paid and non-assessable shares of common stock. The Note conversion price shall equal to $0.0956, subject to adjustment as provided in the Note. In connection with the extension of the principal payment due date on the Note, the Company agreed to increase the principal balance by $10,000. On January 24, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (2) (3) (6)   192,065    186,471 

 

On December 22, 2022, the Company entered into a convertible promissory note with an aggregate principal amount of $188,235, annual interest rate of 10% and a maturity date of December 22, 2023. The Company recorded $10,000 in transaction-related expenses and closing fees and $28,235 of original issue discount to the Note. After payment of transaction-related expenses and closing fees and original issue discount, net proceeds to the Company from the Note totaled $150,000. In connection with the execution of the note, the Company issued 236,703 shares of our common stock and 1,183,515 warrant shares to the holder at the time of issuance. The Company recognized the relative fair market value of the common stock and warrant shares of $66,679 as debt discount. Additionally, the Company recognized $83,321 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the promissory note. The Holder shall have the right, on any calendar day, at any time on or following the earlier of (i) April 22, 2023 or (ii) sixty (60) calendar days after the Closing Date of the Merger, to convert all or any portion of the Principal Amount and interest (including any Default Interest) into fully paid and non-assessable shares of common stock. The Note conversion price shall equal $0.0956, subject to adjustment as provided in the Note. On March 22, 2023, the Noteholder agreed to extend the maturity date until June 22, 2023 or the closing of the Company’s business combination with MEOA. In connection with the extension of the maturity date on the Note, the Company agreed to increase the principal balance by $3,750. On January 29, 2024, the maturity date and principal payments on the Note were extended to December 31, 2024. (1) (2) (3) (6)   157,745    191,985 
           
On January 13, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $110,000, an annual interest rate of 10%, and a maturity date of October 13, 2023. The Company recorded $10,000 in original issue discount to the Note. After payment of the original issue discount, net proceeds to the Company from the Note totaled $100,000. In connection with the execution of the Note, the Company issued 138,000 shares of our common stock shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the shares of common stock of $11,177 as debt discount. Additionally, the Company recognized $21,507 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the Note. The Noteholder shall have the right, on any calendar day, at any time on or following the earlier of (i) May 12, 2023 or (ii) sixty (60) calendar days after listing on Nasdaq or the New York Stock Exchange to convert any portion of the outstanding and unpaid Conversion into fully paid and nonassessable shares of common stock, at the Conversion Price. The Note conversion price shall equal $0.10, subject to adjustment as provided in the Note. On January 23, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (3) (5)   113,300    110,000 

 

25

 

 

On January 24, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $660,000, an annual interest rate of 10%, and a maturity date of May 24, 2023. The Company recorded $60,000 in original issue discount to the Note. After payment of the original issue discount, net proceeds to the Company from the Note totaled $600,000. In connection with the execution of the Note, the Company issued 660,000 shares of our common stock shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the shares of Common stock of $53,850 as debt discount. Additionally, the Company recognized $104,610 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the promissory note. The Payee may elect to convert up to 100% of the Principal Amount outstanding on the Note into common stock of Debtor or any shares of capital stock or other securities of the Debtor into which such common stock shall hereafter be changed or reclassified at any time on the earlier of (i) one hundred and twenty (120) calendar days following the funding of this Note or (ii) sixty (60) calendar days after the Closing Date as defined in that certain business combination agreement between the Debtor, Minority Equality Opportunities Acquisition Inc., and MEOA Merger Sub, Inc. dated on or around August 30, 2022 (the “Conversion Shares”). The Note conversion price shall equal $0.10, subject to adjustment as provided in the Note. On September 6, 2023, the Noteholder agreed to extend the maturity date until September 24, 2023. As consideration with the execution of the Note, the Company issued 495,000 shares of our common stock to the Noteholder. On January 8, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (2) (3) (6)   679,800    660,000 

 

On January 24, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $660,000, an annual interest rate of 10%, and a maturity date of May 24, 2023. The Company recorded $60,000 in original issue discount to the Note. After payment of the original issue discount, net proceeds to the Company from the Note totaled $600,000. In connection with the execution of the Note, the Company issued 660,000 shares of our common stock shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the shares of Common stock of $53,850 as debt discount. Additionally, the Company recognized $104,610 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the promissory note. The Payee may elect to convert up to 100% of the Principal Amount outstanding on the Note into common stock of Debtor or any shares of capital stock or other securities of the Debtor into which such common stock shall hereafter be changed or reclassified at any time on the earlier of (i) one hundred and twenty (120) calendar days following the funding of this Note or (ii) sixty (60) calendar days after the Closing Date as defined in that certain business combination agreement between the Debtor, Minority Equality Opportunities Acquisition Inc., and MEOA Merger Sub, Inc. dated on or around August 30, 2022 (the “Conversion Shares”). The Note conversion price shall equal $0.10, subject to adjustment as provided in the Note. On September 6, 2023, the Noteholder agreed to extend the maturity date until September 24, 2023. As consideration with the execution of the Note, the Company issued 495,000 shares of our common stock to the Noteholder. On January 8, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (2) (3) (6)   679,800    660,000 
           
On March 7, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $110,000, annual interest rate of 10% and a maturity date of December 7, 2023. The Company recorded $10,000 of original issue discount to the Note. After payment of original issue discount, net proceeds to the Company from the Note totaled $100.000. In connection with the execution of the Note, the Company issued 300,000 shares of our common stock at the time of issuance. The Company recognized the relative fair market value $38,850 for shares of common stock to debt discount, which will be amortized to interest expense during the term of the Note. The Noteholder shall have the right, on any calendar day, at any time on or following the earlier of (i) July 7, 2023 or (ii) sixty (60) calendar days after listing on Nasdaq or the New York Stock Exchange to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of common stock at the Conversion Price of $0.10, subject to adjustment as provided in the Note. On January 23, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (3) (5)   113,300    110,000 

 

26

 

 

On March 17, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $192,000, annual interest rate of 10% and a maturity date of March 17, 2024. The Company recorded $17,160 in transaction-related expenses and closing fees and $28,800 of original issue discount to the Note. After payment of transaction-related expenses and closing fees and original issue discount, net proceeds to the Company from the Note totaled $146,040. In connection with the execution of the note, the Company issued 241,500 shares of our common stock and 1,207,186 warrant shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value $8,140 for the common shares and $62,481 for the warrant shares, both of which, were considered to be debt discount. Additionally, the Company recognized $47,806 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the promissory note. The Holder shall have the right, on any calendar day, at any time on or following the earlier of (i) July 17, 2023 or (ii) sixty (60) calendar days after the closing date of the Merger to convert all or any portion of the then outstanding and unpaid principal amount and interest (including any Default Interest) into fully paid and non-assessable shares of common stock, as such common stock exists on the Issue Date. The Note conversion price shall equal $0.0956, subject to adjustment as provided in the Note. On January 24, 2024, the maturity date on the Note was extended to December 31, 2024. (1) (3) (6)   195,592    192,000 
           
On April 14, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $275,000, an annual interest rate of 10%, and a maturity date of October 11, 2023. The Company recorded $25,000 in original issue discount to the Note. After payment of the original issue discount, net proceeds to the Company from the Note totaled $250,000. In connection with the execution of the Note, the Company issued 358,000 shares of our common stock shares to the note holder at the time of issuance. The Company recognized the relative fair market value of the common shares of $28,354 as debt discount. All debt discount will be amortized to interest expense during the term of the promissory note. The note holder may elect to convert up to 50% of the principal amount outstanding and any accrued interest on the Note into common stock at any time, on the date of the debtor’s up-list transaction on the NASDAQ. The Note conversion price shall equal $0.10 subject to adjustment as provided in the Note. On January 5, 2024, the maturity date on the Note was extended to December 31, 2024.  (1) (3) (6)   283,250    275,000 
           
On May 9, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $55,000, an annual interest rate of 8%, and a maturity date of February 9, 2024. The Company recorded $5,000 in original issue discount to the Note. After payment of the original issue discount, net proceeds to the Company from the Note totaled $50,000. In connection with the execution of the Note, the Company issued 300,000 shares of our common stock shares to the note holder at the time of issuance. The Company recognized the relative fair market value of the common shares of $16,390 as debt discount. The Company recognized $15,560 debt discount related to beneficial conversion feature. All debt discount will be amortized to interest expense during the term of the promissory note. The Noteholder shall be entitled to convert any portion of the outstanding and unpaid conversion amount into fully paid and nonassessable shares of our common stock at the conversion price below. The Note conversion price shall equal the greater of $0.10 (ten) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American subject to adjustment as provided in the Note. On January 23, 2024, the maturity date on the Note was extended to December 31, 2024.   (1) (3) (5)   56,650    55,000 
           
Total convertible notes payables non-derivative:  $6,989,361   $8,114,603 

 

27

 

 

CONVERTIBLE NOTES PAYABLE - DERIVATIVE        
On July 27, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $275,000, an annual interest rate of 8%, and a maturity date of March 27, 2021. On January 17, 2023, the Note was amended so that the Holder shall be entitled, at any time, to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of common stock the Note Conversion Price shall equal the greater of $0.05 (five) or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in this Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a) $0.05 or (b) 75% of the lowest traded price in the prior fifteen trading days immediately preceding the Notice of Conversion. The maturity date has been extended multiple times. On March 30, 2023, the lender agreed to extend the maturity date until June 30, 2023. In connection with the extension of the maturity date on the Note, the Company agreed to increase the principal balance by $30,000, which was charged to interest expense, and issued 250,000 shares of common stock with a market value of $19,225. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. On January 23, 2024, the maturity date on the Note was extended to December 31, 2024. (2) (4)    390,000    390,000 
           

 

On January 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $80,235, annual interest rate of 8% and a maturity date of February 17, 2022. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of common stock the Note Conversion Price shall equal the greater of $0.05 (five) or seventy-five percent (75%) of the lowest daily volume weighted average price (“VWAP”) over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. As a result, the Company recognized derivative liability for the convertible note of $59,413. During the last fiscal year, the holder agreed to extend the maturity date until July 31, 2023. On January 29, 2024, the maturity date on the Note was extended to December 31, 2024. (2) (4)    149,872    149,872 
           
On April 15, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $113,000, an annual interest rate of 8%, and a maturity date of January 15, 2022. After payment of transaction-related expenses and closing fees of $13,000, net proceeds to the Company from the Note totaled $100,000. Additionally, the Company recorded $13,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the Note, the Company issued 100,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $14,138 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of common stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.15 or (b). seventy-five percent of the lowest traded price in the prior fifteen (15) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”). Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company recognized derivative liability for the convertible note of $64,561, of which $42,822 was recorded as debt discount and amortized over the term of the Note. The maturity date has been extended multiple times since inception. On March 30, 2023, the lender agreed to extend the maturity until June 30, 2023. In connection with the extension of the maturity date on the Note, the Company agreed to increase the principal balance by $25,000, which was charged to interest expense, and issued 150,000 shares of common stock with a market value of $11,995. On January 23, 2024, the maturity date on the Note was extended to December 31, 2024. (2) (4) (5)   233,000    233,000 

 

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On October 10, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $275,000, annual interest rate of 8% and a maturity date of April 10, 2023. After payment of transaction-related expenses and closing fees of $25,000, net proceeds to the Company from the note totaled $250,000. The Company recorded the $25,000 as debt discount and amortized to interest expense over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the note holder shall be entitled to convert any portion of the outstanding and unpaid conversion amount into fully paid and nonassessable shares of common stock. The note conversion price shall equal the greater of $0.15 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the note. Any Principal Amount or interest on this Note which is not paid when due shall bear interest at the rate the lesser of (a) twenty-four percent (24%) per annum from the due date thereof until the same is paid (“Default Interest”); or (b) the maximum rate allowed by law. During the last fiscal year, the holder agreed to extend the maturity date until July 31, 2023. As compensation for the extension of the maturity date, $13,750 was added to the principal balance of the Note. On January 29, 2024, the maturity date on the Note was extended to December 31, 2024, which added $50,000 to the principal balance of the Note as compensation for the extension of the maturity date. (2) (4) (5)   338,750    288,750 
           
Total convertible notes payable - derivative:  $1,111,622   $1,061,622 
           
Total convertible notes payable derivative and non-derivative   8,100,983    9,176,225 
Less: debt discount   (316,564)   (959,922)
Total convertible notes payable, net of discount   7,784,419    8,216,303 
Less: current portion of convertible notes payable   (7,784,419)   (8,216,303)
Long-term portion of convertible notes payable  $
-
   $
-
 

 

Additional terms No.1: The Holder of the Note originally dated October 13, 2020 with a balance of $178,448 as of April 30, 2024, shall have the right to convert any portion of the outstanding and unpaid principal balance into fully paid and nonassessable shares of common stock. The conversion price (the “Conversion Price”) shall equal $0.05 (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Borrower relating to the Borrower’s securities or the securities of any subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions, and similar events).

 

The total unamortized discount on the convertible notes as of April 30, 2024 and July 31, 2023 was $316,564 and $959,922, respectively. The total principal balance outstanding as of April 30, 2024 and July 31, 2023 was $8,100,983 and $9,176,225 respectively. During the nine months ended April 30, 2024 and 2023, the Company amortized $1,118,211 and $1,749,307, respectively, of debt discount as interest expense.

 

(1) The Company determines at each reporting period if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument.

 

(2) The Company evaluated the amendment(s) and accounted for these changes as an extinguishment of debt.

 

(3) The Company analyzed the Note and determined that it does not require to be accounted as a derivative instrument.

 

(4) 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.
   
(5) The conversion price was amended to be $0.05 for 40% of the outstanding principal balance at December 31, 2023 and a 3% fee was applied as consideration of the Extension and Forbearance Agreement dated January 2024.
   
(6) The conversion price was amended to be $0.05 for 20% of the outstanding principal balance at December 31, 2023 and a 3% fee was applied as consideration of the Extension and Forbearance Agreement dated January 2024.

 

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The future principal payments for the Company’s convertible debt are as follows:

 

Future Principal Payments

 

Year ended July 31,  Amount 
2025  $7,784,419 
Total future payments:  $7,784,419 

 

NOTE 10 – LEASES  

 

The leased properties have a remaining lease term of four to forty-four months as of April 30, 2024. At the option of the Company, it can elect to extend the term of the leases. See table below:

 

Location  Annual
Rent
   Lease
Expiration 
Date
  Business Use  Approx.
Sq. Ft.
 
8023 Vantage Dr., Suite 660, San Antonio, Texas 78230  $49,136   Sep-27  Executive offices   2,843 
10967 Via Frontera, San Diego, CA 92127  $369,229   Mar-26  Office space   18,541 
9701 S. John Young Parkway, Orlando, FL 32819  $25,440   May-26  Network facilities   540 
8333 NW 53rd St, Doral, FL 33166  $14,021   Jul-25  Wireless internet network   100 
9517 Fontainebleau Blvd., Miami, FL 33172  $11,907   Aug-24  Wireless internet network   100 

 

The Company has not entered into any sale and leaseback transactions during the quarter ended April 30, 2024. 

 

In February 2022, as part of the acquisition of NLI, the Company secured an office lease, with a monthly base lease payment of $30,222. The lease expires in March 2026. At the option of the Company, the lease can be extended for two additional five-year terms, with a base rent at the prevailing market rate at the time of the renewal. The Company is not reasonably certain that it will exercise the renewal option.

 

In December 2021, as part of the acquisition of Skynet’s assets, the Company assumed an office lease in San Antonio, Texas. In May 2022, the lease was extended until September 2027, and at the option of the Company, the lease can be extended for a period of five years, with a base rent at the prevailing market rate at the time of the renewal. The Company accounted for the extension as a lease modification.

 

Effective December 31, 2023, the Company vacated its office located in Ft. Myers, Florida. As consideration, the Company agreed to pay the landlord $75,000 divided in three $25,000 installments due within 90 days.

 

Effective December 31, 2023, the Company vacated its office located in Coral Gables, Florida. The Company signed a Consent to Assignment and Assumption of Lease with LD Telecommunications, Inc. (“LDT”). As consideration, the Company agreed to assign its security deposit of $12,000 to LTD.

 

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Amounts recognized as of July 31, 2023 and April 30, 2024 for operating leases are as follows:

 

ROU Asset  July 31, 2023  $1,911,639 
Amortization     $(405,988)
Cancellation - Asset     $(561,931)
ROU Asset  April 30, 2024  $943,720 
         
Lease Liability  July 31, 2023  $1,981,976 
Amortization     $(437,245)
Cancellation - Liability     $(561,931)
Lease Liability  April 30, 2024  $982,800 
         
Lease Liability  Short term  $517,651 
Lease Liability  Long term  $465,149 
Lease Liability  Total:  $982,800 
         
Operating lease cost:     $466,740 
         
Cash paid for amounts included in the measurement of lease labilities:        
         
Operating cashflow from operating leases:     $466,471 
         
Weighted-average remain lease term-operating lease:      2.2 years 
         
Weighted-average discount rate      5.0%

 

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

 

   Lease 
Period Ending July 31,  Payments 
2024  $126,813 
2025   506,331 
2026   340,867 
2027   58,424 
2028   6,481 
Total:  $1,038,916 
      
Less: amounts representing interest   56,116 
      
Present value of net minimum operating lease payments  $982,800 

 

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NOTE 11 – EQUIPMENT FINANCING

 

The Company entered into various financing agreements for equipment purchased. Under the term of the agreements, assets with a cost of approximately $1,204,936, were financed under various financing agreements during the nine months ended April 30, 2024. The equipment financing is net of costs associated with the assets such as maintenance, insurance and property taxes are for the account of the Company. The equipment financing agreements are between twelve (12) months and sixty (60) months, with the first payments starting July 1, 2022, and monthly principal and interest payments of up to $7,078. The interest rate under the financing agreement is 5.0% per annum.

 

Amounts recognized as of July 31, 2023 and April 30, 2024 for equipment financing are as follows:

 

ROU Asset  July 31, 2023  $577,566 
Amortization     $(416,184)
Addition - Asset     $1,204,936 
ROU Asset  April 30, 2024  $1,366,318 
         
Equipment Financing  July 31, 2023  $581,505 
Amortization     $(421,911)
Addition - Equipment Financing     $1,204,936 
Equipment Financing  April 30, 2024  $1,364,530 
         
Equipment Financing  Short term  $595,341 
Equipment Financing  Long term  $769,189 
Equipment Financing  Total:  $1,364,530 

 

The future payments under the equipment financing agreements are as follows:

 

Year  Amount 
2024  $249,410 
2025   587,211 
2026   483,884 
2027   125,808 
2028   7,017 
Total future payments:  $1,453,330 
      
Less: amounts representing interest   88,800 
      
Present value of net minimum equipment financing payments  $1,364,530 
Lease cost:     
Amortization of ROU assets  $416,184 
Interest on lease liabilities   63,692 
      
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cashflow from equipment financing:  $63,692 
Financing cashflow from equipment financing:   421,911 
      
Weighted-average remaining lease term - equipment financing:   2.1 years 
      
Weighted-average discount rate   5.0%

 

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NOTE 12 – EQUITY

 

During the nine months ended April 30, 2024, the Company issued 990,000 shares of common stock as consideration for the extension of maturity dates for the convertible promissory notes. The Company recognized the fair market value of the common shares of approximately $42,000 as interest at the time of each extension.

 

During the nine months ended April 30, 2024, the Company issued 6,505,841 shares of common stock in connection with the conversion of $315,870 of convertible promissory notes.

 

During the nine months ended April 30, 2024, the Company issued 10,051,678 shares of common stock to various Noteholders for the exchange of 17,241,721 warrants.

 

During the nine months ended April 30, 2024, one of our vendors converted $120,000 of amounts owed to them by the Company into 1,255,230 shares of common stock.

  

NOTE 13 – SUBSEQUENT EVENTS  

  

On May 15, 2024, the Company agreed to sell all of its investment in Itellum Comunicaciones Costa Rica, S.R.L, for a total purchase price of $185,000.

 

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

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). “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.

 

The following is a discussion of the unaudited interim consolidated financial condition and results of operations of Digerati for the three and nine months ended April 30, 2024 and 2023. 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, 2023, filed with the Securities and Exchange Commission on November 24, 2023. For purposes of the following discussion, fiscal 2024 or 2024 refers to the year that will end on July 31, 2024, and fiscal 2023 or 2023 refers to the year ended July 31, 2023.

 

Overview

 

Digerati Technologies, Inc., a Nevada corporation (including our subsidiaries, “we,” “us,” “Company” or “Digerati”), through its operating subsidiaries, (i) Verve Cloud, Inc. (formerly known as T3 communications, Inc.), a Nevada corporation (“Verve Cloud Nevada”), (ii) Verve Cloud, Inc. (formerly known as Shift8 Networks, Inc.), a Texas corporation (“Verve Cloud Texas”), (iii) T3 Communications, Inc., a Florida corporation (“T3 Communications”), (iv) Nexogy, Inc., a Florida corporation (“Nexogy”) and (v) NextLevel Internet, Inc., a California corporation (“Next Level” and, together with Verve Cloud Nevada, Verve Cloud Texas, T3 Communications and Nexogy, the “Operating Subsidiaries”), which, as of June 1, 2023, operate as a single business unit under the Verve Cloud name and have locations in Texas, Florida and California, provides cloud services specializing in Unified Communications as a Service (“UCaaS”) and broadband connectivity 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 Wide Area Network (“WAN”) or Software-defined Wide Area Network (“SD WAN”) solutions. Digerati Technologies, Inc. was incorporated in the State of Nevada in 1994.

 

We 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 Internet Protocol (“IP”)/private branch exchange (“PBX”), video conferencing, mobile applications, Voice over Internet Protocol (“VoIP”) transport, Session Initiation Protocol (“SIP”) trunking, and customized VoIP services all delivered Only in the Cloud. Our broadband connectivity solutions for the delivery of digital oxygen are designed for reliability, business continuity and to optimize bandwidth for businesses using the Company’s cloud communication services and other cloud-based applications.

 

34

 

 

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

 

The adoption of cloud communication services is being driven by the convergence of several market trends, including the increasing costs of maintaining installed legacy communications systems, the fragmentation resulting from use of multiple on-premise systems, and the proliferation of personal smartphones used in the workplace. Today, businesses are increasingly looking for an affordable path to modernizing their communications system to improve productivity, business performance and customer experience. Modernization has also led to businesses adopting other cloud-based business applications, including customer relationship management (“CRM”), payroll, and accounting software, placing an even more important emphasis on reliable Internet connectivity.

 

We believe 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. By providing a variety of comprehensive and scalable solutions, we can cater to businesses of different sizes on a monthly subscription basis, regardless of the stage of development for the business.

   

Non-GAAP Financial Measures - Reconciliation of Net Income (Loss) to Adjusted EBITDA – OPCO and Adjusted EBITDA – Income

 

EBITDA from operations, as adjusted (“Adjusted EBITDA - OPCO”) and EBITDA from income, as adjusted (“Adjusted EBITDA - Income”), are non-GAAP financial measures and should be considered in addition to, not as a substitute for, net income (loss), cash flow and other measures of financial performance reported in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In addition, these measures do not reflect cash available to fund requirements and excludes items, such as corporate expenses, transactional legal expenses, stock option expense, and depreciation and amortization, which are significant components in assessing the Company’s financial performance. The Company believes that the presentation of Adjusted EBITDA - OPCO and Adjusted EBITDA - Income provides useful information regarding the Company’s operations and other factors that affect the Company’s reported results. Specifically, the Company believes that by excluding certain one-time or non-cash items such as transactional legal fees and depreciation and amortization, as well as potential distortions between periods caused by factors such as financing and capital structures, the Company provides users of its consolidated financial statements with insight into both its operations as well as the factors that affect reported results between periods but which the Company believes are not representative of its operations. As a result, users of the Company’s consolidated financial statements are better able to evaluate changes in the financial consolidated results of the Company across different periods. 

 

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The following tables provide information regarding certain non-GAAP financial measures for Digerati for the three and nine months ended April 30, 2024 and 2023. Management utilizes these metrics to track and forecast revenue trends and expected results from operations:

 

Consolidated Statement of Operations

(In thousands)

 

Reconciliation of Net Loss to Adjusted EBITDA

(In thousands)

 

   Three Months ended April 30,   Nine Months ended April 30, 
   2024   2023   Variances   %   2024   2023   Variances   % 
OPERATING REVENUES:                                
Cloud-based hosted services  $7,430   $7,837   $(407)   -5%  $22,649   $23,908   $(1,259)   -5%
                                         
Total operating revenues   7,430    7,837    (407)   -5%   22,649    23,908    (1,259)   -5%
                                         
Cost of services (exclusive of depreciation and amortization)   2,912    2,879    33    1%   8,123    8,698    (575)