Peak One Opportunity Fund, L.P. (“Peak
One”) (the selling stockholder identified in this prospectus) may offer up to (i) 250,000 shares of the Company’s common
stock, par value $0.001 (the “Common Stock”) issued to Peak One as commitment shares (the “Commitment Shares”)
in January 2018; and (ii) 6,074,142 shares of Common Stock to be issued in connection with the January 12, 2018 Equity Purchase
Agreement (the “Financing Agreement”) for a total of 6,324,142 shares of Common Stock. If issued presently, the 6,324,142
shares of Common Stock registered for resale by Peak One would represent approximately 19% of our issued and outstanding shares
of common stock as of November 18, 2019. Additionally, as of November 18, 2019, the 6,324,142 shares of Common Stock registered
for resale herein would represent approximately 25% of the Company’s public float.
Peak One (the selling stockholder identified
in this prospectus) may sell all or a portion of the shares being offered pursuant to this prospectus at fixed prices and prevailing
market prices at the time of sale, at varying prices, or at negotiated prices.
Peak One may sell the shares of common
stock described in this Prospectus in a number of different ways and at varying prices. See “Plan of Distribution”
for more information about how Peak One may sell the shares of common stock being registered pursuant to this Prospectus.
Our common stock is traded on OTC Markets
under the symbol “DTGI”. On November 19, 2019, the reported closing price for our common stock was $0.0601 per share.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
You
should read the following discussion of our financial condition and results of operations in conjunction with financial statements
and notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect
our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly
in the section labeled “Risk Factors.”
This
section of the prospectus includes a number of forward-looking statements that reflect our current views with respect to future
events and financial performance. Forward-looking statements are often identified by words like “believe,” “expect,”
“estimate,” “anticipate,” “intend,” “project,” and similar expressions, or words
that, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which
apply only as of the date of this prospectus. These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results or our predictions.
The
following is a discussion of the consolidated financial condition and results of operations for the fiscal years ended July 31,
2019 and 2018. It should be read in conjunction with our audited Consolidated Financial Statements, the Notes thereto, and the
other financial information included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2019
filed with the Securities and Exchange Commission on October 28, 2019. For purposes of the following discussion, fiscal 2019 or
2019 refers to the year ended July 31, 2019 and fiscal 2018 or 2018 refers to the year ended July 31, 2018.
Overview
Digerati
Technologies, Inc., a Nevada corporation (including our subsidiaries, “we,” “us,” “Company”
or “Digerati”), through its operating subsidiaries in Texas and Florida, Shift8 Networks, Inc., dba, T3 Communications
(“T3”) and T3 Communications, Inc. (“T3”), provides cloud services specializing in Unified Communications
as a Service (“UCaaS”) solutions for the business market. Our product line includes a portfolio of Internet-based
telephony products and services delivered through our cloud application platform and session-based communication network and network
services including Internet broadband, fiber, and cloud WAN solutions. Our services are designed to provide enterprise-class,
carrier-grade services to the small-to-medium-sized business (“SMB”) at cost-effective monthly rates. Our UCaaS or
cloud communication services include fully hosted IP/PBX, mobile applications, Voice over Internet Protocol (“VoIP”)
transport, SIP trunking, and customized VoIP services all delivered Only in the Cloud™.
As
a provider of cloud communications solutions to the SMB, we are seeking to capitalize on the migration by businesses from the
legacy telephone network to the Internet Protocol (“IP”) telecommunication network and the migration from hardware-based
on-premise telephone systems to software-based communication systems in the cloud. Most SMBs are lagging in technical capabilities
and advancement and seldom reach the economies of scale that their larger counterparts enjoy, due to their achievement of a critical
mass and ability to deploy a single solution to a large number of workers. SMBs are typically unable to afford comprehensive enterprise
solutions and, therefore, need to integrate a combination of business solutions to meet their needs. Cloud computing has revolutionized
the industry and opened the door for businesses of all sizes to gain access to enterprise applications with affordable pricing.
This especially holds true for cloud telephony applications, but SMBs are still a higher-touch sale that requires customer support
for system integration, network installation, cabling, and troubleshooting. We have placed a significant emphasis on that “local”
touch when selling, delivering, and supporting our services which we believe will differentiate us from the national providers
that are experiencing high attrition rates due to poor customer support model.
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 smart phones used in the workplace. Today, businesses are increasingly looking for an affordable
path to modernizing their communications system to improve productivity, business performance and customer experience.
Our
cloud solutions offer the SMB reliable, robust, and full-featured services at affordable monthly rates that eliminates high-cost
capital expenditures and provides for integration with other cloud-based systems.
Recent
Acquisitions
In
September 2019, we entered into a definitive agreement to acquire Nexogy, Inc. (“Nexogy”),
a leading provider in South Florida of UCaaS and managed services, offering a portfolio of cloud-based solutions to the high-growth
SMB market. We are expecting to close during our second quarter of FY 2020
(prior to January 31, 2020), subject to FCC regulatory approval and finalizing debt financing for the transaction that has previously
been committed to be provided to the Company by an established and traditional lending source.
Sources
of revenue:
Cloud-based
hosted Services: We provide UCaaS or cloud communication services and managed cloud-based solutions to small and medium size
enterprise customers and to other resellers. Our Internet-based services include fully hosted IP/PBX services, SIP trunking, call
center applications, auto attendant, voice and web conferencing, call recording, messaging, voicemail to email conversion, integrated
mobility applications that are device and location agnostic, and other customized IP/PBX features in a hosted or cloud environment.
Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud
WAN or SD-WAN (Software-defined Wide Area Network), fiber, and Ethernet over copper. We also offer remote network monitoring,
data backup and disaster recovery.
Direct
Costs:
Cloud-based
hosted Services: We incur bandwidth and colocation charges in connection with our UCaaS or cloud communication services. The
bandwidth charges are incurred as part of the connectivity between our customers to allow them access to our various services.
We also incur costs from underlying providers for fiber, Internet broadband, and telecommunication circuits in connection with
our data and connectivity solutions.
Results
of Operations
Cloud-based
hosted Services. Cloud-based hosted services revenue increased by $4,039,000, or 202% from the year ended July 31, 2018 to
the year ended July 31, 2019. The increase in revenue between periods is primarily attributed to the increase in total customers
acquired from the acquisitions of T3 Communications, Inc. and Synergy Telecom’s assets. Our total number of customers increased
from 622 customers for the year ended July 31, 2018 to 702 customers for the year ended July 31, 2019. Additionally, our average
monthly revenue per customer increased from $667 for the year ended July 31, 2018 to $743 for the year ended July 31, 2019.
Cost
of Services (exclusive of depreciation and amortization). The cost of services increased by $2,075,000, or 197%, from the
year ended July 31, 2018 to the year ended July 31, 2019. The increase in cost of services between periods is primarily attributed
to the additional costs arising from our acquisitions and the acquired customer base. Although our consolidated cost of services
increased between periods, our consolidated gross margin increased by $1,964,00 or 207%, from the year ended July 31, 2018 to
the year ended July 31, 2019. The increase in gross margin between periods is attributed to a higher concentration of enterprise
customers revenue, which generate a higher margin than services provided via resellers.
Selling,
General and Administrative (SG&A) Expenses (exclusive of legal and professional fees). SG&A expenses increased by
$1,601,000, or 102%, from the year ended July 31, 2018 to the year ended July 31, 2019. The increase in SG&A expenses between
periods is primarily attributed to the additional salaries and other employee related expenses of approximately $1,336,000 attributable
to the acquisition of T3 Communications, Inc. and $160,000 increase in additional salaries and other related expenses attributable
to the asset acquisition from Synergy Telecom.
Stock
Compensation expense. Stock compensation expense decreased by $477,000, from the year ended July 31, 2018 to the year ended
July 31, 2019. The decrease between periods is attributed to the recognition during FY 2018 of stock compensation expense of $226,000
associated with the Profit-Sharing Plan contribution and stock compensation expense of $526,000 for the stock issued in lieu of
cash to the Company’s management team. In addition, during the year ended July 31, 2018 the Company recognized $268,000
in warrant expense for warrants issued to various professionals, $300,000 in other stock-based compensation to the employees,
and $186,000 in stock-based compensation for professional services. During the year ending July 31, 2019 the Company only recognized
$64,000 in warrant expense for warrants issued to professionals. Additionally, during the year ended July 31, 2019, the Company
recognized as stock compensation expense $114,000 associated with the Profit-Sharing Plan contribution and stock compensation
expense of $198,000 for the stock issued in lieu of cash to the Company’s management team. In addition, during the year
ended July 31, 2019 the Company recognized $419,000 in other stock-based compensation to the employees and recognized $248,000
as stock compensation expense for shares of common stock issued for consulting services.
Legal
and professional fees. Legal and professional fees decreased by $100,000, or 20%, from year ended July 31, 2018 to the year
ended July 31, 2019. The decrease between periods is attributed to the recognition during FY 2018 of $161,000 in professional
and legal expenses incurred related to the professionals conducting the due diligence and audit work on the acquisition of T3
Communications. The Company only recognized $34,000 in legal and professional expenses associated with due diligence for other
potential acquisitions during the year ended July 31, 2019. In addition, during FY 2019 the Company recognized $77,500 in professional
fees related to investor relations services. Also, during the period ended July 31, 2019 the Company recognized $8,000 in legal
expenses associated with the preparation of the consolidated tax return for 2018.
Bad
debt. Bad debt improved by $9,000 between periods. During FY 2019 the Company recognized an expense of $6,000 for accounts
that were deemed uncollectable.
Depreciation
and amortization. Depreciation and amortization increased by $442,000, from the year ended July 31, 2018 to the year ended
July 31, 2019, mainly due to increase in amortization expense and depreciation expense related to the intangible and tangible
assets obtained in the acquisitions of T3 Communications Inc., and Synergy Telecom during FY 2018.
Operating
loss. The Company reported an operating loss of $2,361,000 for the fiscal period ended July 31, 2019 compared to an operating
loss of $2,868,000 for the fiscal period ended July 31, 2018. The improvement in operating loss between periods is primarily due
to the increase of $1,964,000 in gross margin, the decrease of $477,000 in stock compensation expense and the decrease of $100,000
in legal and professional fees. These positive improvements were slightly offset by the increase of $1,601,000 in SG&A and
the increase of $442,000 in depreciation and amortization expense.
Gain
(loss) on derivative instruments. Gain on derivative instruments improved by $17,000 between periods. We are required to re-measure
all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re-
measurement of all derivative instruments we recognized a loss between the years ended July 31, 2018 and 2019.
Income
tax expense. During the year ended July 31, 2019, the Company recognized an income tax expense of $47,000. The primary reason
for the income tax expense is due to the accrual of state income tax.
Interest
expense. Interest income (expense) increased by $1,787,000 from the year ended July 31, 2018 to the year ended July 31, 2019.
The primary reason for the increase in interest expenses is attributed to the recognition of non-cash interest / accretion expense
of $1,466,000 related to the adjustment to the present value of various convertible notes and debentures. Additionally, the company
recognized $541,000 in interest expense for cash interest payments on various promissory notes and interest income of $10,000.
Net
income (loss) including noncontrolling interest. Net loss including noncontrolling interest for the year ended July 31, 2019
was $4,648,000 compared to a net loss for the year ended July 31, 2018 of $3,220,000. The increase in net loss between periods
is primarily attributed to the increase of $1,601,000 in SG&A, the increase of $442,000 in depreciation and amortization,
and the increase of $1,787,000 in interest expense. The increases were slightly offset by the decrease of $17,000 in loss on derivative
instruments, the increase of $1,964,000 in gross margin, the decrease of $477,000 in stock compensation expense and the decrease
of $100,000 in legal and professional fees.
Net
income (loss) attributable to the noncontrolling interest. During the year ended July 31, 2019, the consolidated entity recognized
income in noncontrolling interest of $128,000. The noncontrolling interest is presented as a separate line item in the Company’s
stockholders equity section of the balance sheet.
Net
income (loss) attributable to Digerati’s shareholders. Net loss attributable to Digerati’s shareholder for the
year ended July 31, 2019 was $4,520,000 compared to a net loss for the year ended July 31, 2018 of $3,163,000.
Deemed
dividend on Series A Convertible Preferred Stock Net income (loss). Deemed dividend on convertible preferred stock for the
year ended July 31, 2019 was $29,000 compared to a Deemed dividend on convertible preferred stock for the year ended July 31,
2018 of $0.
Net
income (loss) attributable to Digerati’s common shareholders. Net loss for the year ended July 31, 2019 was $4,549,000
compared to a net loss for the year ended July 31, 2018 of $3,163,000.
Liquidity
and Capital Resources
Cash
Position: We had a consolidated cash balance of $406,000 as of July 31, 2019. Net cash consumed by operating activities during
the year ended July 31, 2019 was approximately $527,000, primarily as a result of operating expenses, that included $1,044,000
in stock compensation and warrant expense, amortization of debt discount of $1,466,000, interest expense from stock issued for
debt extension of $24,000, loss on derivative liability of $74,000, depreciation and amortization expense of $669,000. Additionally,
we had an increase of $171,000 in accounts payable, increase in accrued expenses of $661,000, increase in accounts receivables
of $40,000, increase in deferred income of $23,000, a decrease in prepaid expenses and other current assets of $18,000
Cash
used in investing activities during the year ended July 31, 2019 was $135,000. The Company used $52,000 to purchase equipment
and used $83,000 in the acquisition of a minority interest in Itellum.
Cash
provided by financing activities during the year ended July 31, 2019 was $680,000, the Company secured $40,000 from an accredited
investor through the issuance of 80,000 restricted common shares with a price of $0.50 per share and 15,000 warrants with an exercise
price of $0.50 per share. Also, the Company secured $75,000 from an accredited investor through the issuance of 258,621 restricted
common shares with a price of $0.29 per share. The Company also secured $150,000 from an accredited investor through the issuance
of 600,000 restricted common shares with a price of $0.25 per share. Furthermore, the Company secured $200,000 from accredited
investors under a private placement and issued 200,000 shares of Series A Convertible Preferred Stock at a conversion price of
$0.30 per share and warrants to purchase an additional 400,000 shares of its common stock at an exercise price of $0.20 per share.
The Company also secured $7,500 for the exercise of 75,000 warrants, with an exercise price of $0.10 per warrant. In addition,
the Company secured $100,000 from 3rd party promissory notes. The Company also secured $1,044,000 from convertible notes, net
of issuance costs and discounts. Furthermore, the Company secured $25,000 from a promissory note with a related party. Also, the
Company made principal payments of $153,000 on related party notes, $651,000 in principal payments on convertible notes, $125,000
in principal payments on 3rd party promissory notes and $33,000 in principal payments on equipment financing. Overall, our net
operating, investing and financing activities during the year ended July 31, 2019 provided approximately $18,000 of our available
cash.
We
implemented initiatives to reduce our overall cash deficiencies on a monthly basis. During FY 2020 we anticipate reducing fixed
costs and general expenses, in addition, certain members of our management team have taken a significant portion of their compensation
in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to invest in a new marketing
and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers to tap into new sources
of revenue streams, we have also secured various agent agreements to accelerate revenue growth. In addition, we will continue
to focus on selling a greater number of comprehensive services to our existing customer base. Further, in an effort to increase
our revenues, we will continue to evaluate the acquisition of various assets with emphasis in VoIP Services and Cloud Communication
Services. As a result, during the due diligence process we anticipate incurring significant legal and professional fees. During
the year ended FY 2018, the Company acquired T3 Communications, Inc., a leading provider of cloud communication and Internet broadband
solutions in Southwest Florida. The acquisition of T3 allowed the Company to accelerate its revenue growth and expand into new
markets.
Management
believes that current available resources will not be sufficient to fund the Company’s operations over the next 12 months.
The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, among
other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team
in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding,
the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales
of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or
securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or
privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds
by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If
the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required
to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional
funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to
execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off
its obligations, if and when they come due.
Our
current cash expenses are expected to be approximately $95,000 per month, including wages, rent, utilities and corporate professional
fees. As described elsewhere herein, we are not generating sufficient cash from operations to pay for our ongoing operating expenses,
or to pay our current liabilities. As of July 31, 2019, our total liabilities were approximately $6,897,000, which included $927,000
in derivative liabilities. We will continue to use our available cash on hand to cover our deficiencies in operating expenses.
We
estimate that we need approximately $500,000 of additional working capital to fund our ongoing operations during FY 2020. We used
proceeds secured from 3rd party promissory notes to pay existing notes and we anticipate raising additional debt financing to
meet our working capital needs.
Digerati’s
consolidated financial statements for the year ending July 31, 2019 have been prepared on a going concern basis, which contemplates
the realization of assets and the settlement of liabilities in the normal course of business. Since the Company’s inception
in 1993, Digerati has incurred net losses and accumulated a deficit of approximately $85,320,000 and a working capital deficit
of approximately $5,865,000 which raises doubt about Digerati’s ability to continue as a going concern.
Critical
Accounting Policies
Revenue
Recognition. On August 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which
were not completed as of August 1, 2018. Results for reporting periods beginning after August 1, 2018 are presented under Topic
606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under
Topic 605. There was no impact to the opening balance of accumulated deficit or revenues for the year ended July 31, 2019 as a
result of applying Topic 606.
The
Company recognizes cloud-based hosted services revenue, mainly from subscription services for its cloud telephony applications
that includes hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice and web conferencing, call
recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and
other customized applications. Other services include enterprise-class data and connectivity solutions through multiple broadband
technologies including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, and Ethernet over copper. We also offer
remote network monitoring, data backup and disaster recovery services. The Company applies a five-step approach in determining
the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance
obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations
in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s
revenue is recognized at the time control of the products transfers to the customer.
Service Revenue
Service
revenue from subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over
the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received
in advance of subscription services being rendered are recorded as a deferred revenue. Usage fees, either bundled or not bundled,
are recognized when the Company has a right to invoice. Professional services for configuration, system integration, optimization,
customer training and/or education are primarily billed on a fixed-fee basis and are performed by the Company directly. Alternatively,
customers may choose to perform these services themselves or engage their own third-party service providers. Professional services
revenue is recognized over time, generally as services are activated for the customer.
Product
Revenue
The
Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is
generally upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical experience.
Disaggregation of Revenue
Summary
of disaggregated revenue is as follows (in thousands):
|
|
For the Years ended
July 31,
|
|
|
|
2019
|
|
|
2018
|
|
Service revenue
|
|
$
|
5,847
|
|
|
$
|
1,994
|
|
Product revenue
|
|
|
193
|
|
|
|
7
|
|
Total operating revenues
|
|
$
|
6,040
|
|
|
$
|
2,001
|
|
Contract Assets
Contract
assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations are
completed. The revenue is recognized when the customer receives services or equipment for a reduced consideration at the onset
of an arrangement; for example, when the initial month’s services or equipment are discounted. Contract assets are included
in prepaid and other current assets in the consolidated balance sheets, depending on if their reduction is recognized during the
succeeding 12-month period or beyond. Contract assets as of July 31, 2019 and July 31, 2018, were $22,967 and $12,155, respectively.
Deferred Income
Deferred
income represents billings or payment received in advance of revenue recognition and is recognized upon transfer of control. Balances
consist primarily of annual plan subscription services, for services not yet provided as of the balance sheet date. Deferred revenues
that will be recognized during the succeeding 12-month period are recorded as current deferred revenues in the consolidated balance
sheets, with the remainder recorded as other noncurrent liabilities in the consolidated balance sheets. Deferred income as of
July 31, 2019 and July 31, 2018, were $285,000 and $262,000, respectively.
Costs to Obtain a Customer Contract
Sales
commissions are paid upon collections of related revenue and are expensed during the same period. Sales commissions for the year
ended July 31, 2019 and the year ended July 31, 2018, were $52,613 and $36,233, respectively.
Goodwill, Intangible
Assets, and Long-Lived Assets. Goodwill is carried at cost and is not amortized. The Company tests goodwill for impairment
on an annual basis at the end of each fiscal year, relying on a number of factors including operating results, business plans,
economic projections, anticipated future cash flows and marketplace data. Company management uses its judgment in assessing whether
goodwill has become impaired between annual impairment tests according to specifications set forth in ASC 350. The Company completed
an evaluation of goodwill at July 31, 2019 and 2018 and determined that there was no impairment.
The
fair value of the Company’s reporting unit is dependent upon the Company’s estimate of future cash flows and other
factors. The Company’s estimates of future cash flows include assumptions concerning future operating performance and economic
conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate
derived from the Company’s market capitalization plus a suitable control premium at date of the evaluation.
The
financial and credit market volatility directly impacts the Company’s fair value measurement through the Company’s
weighted average cost of capital that the Company uses to determine its discount rate and through the Company’s stock price
that the Company uses to determine its market capitalization. Therefore, changes in the stock price may also affect the amount
of impairment recorded.
The
Company recognizes an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other
legal rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged,
either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their useful
lives. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable
from expected future cash flows and its carrying amount exceeds its fair value.
The
Company reviews its long-lived assets, including property and equipment, identifiable intangibles, and goodwill annually or whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows will be
less than the carrying amount of the assets.
Business
combinations. Each investment in a business is being measured and determined whether the investment should be accounted for
as a cost-basis investment, an equity investment, a business combination or a common control transaction. An investment in which
the Company do not have a controlling interest and which the Company is not the primary beneficiary but where the Company has
the ability to exert significant influence is accounted for under the equity method of accounting. For those investments that
we account for in accordance ASC 805, Business Combinations, the Company records the assets acquired and liabilities assumed at
the management’s estimate of their fair values on the date of the business combination. The assessment of the estimated
fair value of each of these can have a material effect on the reported results as intangible assets are amortized over various
lives. Furthermore, according to ASC 805-50-30-5, when accounting for a transfer of assets or exchange of shares between entities
under common control, the entity that receives the net assets or the equity interests shall initially measure the recognized assets
and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of transfer.
Stock-based
compensation. In June 2018 FASB adopted the Accounting Standards Update No. 2018-07, Compensation –
Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting. This update simplifies the
accounting for non-employee share-based payment transactions by expanding the scope of Topic 718, Compensation-Stock Compensation,
to include share-based payment transactions for acquiring goods and services from non-employees. The guidance is effective for
annual periods beginning after December 15, 2018, and interim periods within that reporting period. The Company adopted the
updated standard as of May 1, 2018, adopting this guidance did not have a material effect on its consolidated financial statements.
During FY 2018 and 2019, the Company issued 2,213,512 common shares and 1,827,927 common shares, respectively to various employees
as part of our profit sharing-plan contribution and stock in lieu of cash. At the time of issuance during FY 2018 and 2019 we
recognized stock-based compensation expense of approximately $1,240,000 and $312,328, respectively equivalent to the market value
of the shares issued calculated based on the share’s closing price at the grant dates.
Derivative
financial instruments. Digerati does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency
risks. However, Digerati analyzes 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 is recorded as non-operating, non-cash income
or expense for each reporting period. For derivative notes payable conversion options 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.
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 6,000,000 treasury shares for consideration for future conversions and exercise of warrants. The Company will evaluate
the reserved treasury shares on a quarterly basis, and if necessary, reserve additional treasury shares. As of July 31, 2019,
we believe that the treasury share reserved are sufficient for any future conversions of these instruments. As a result, these
debt instruments and warrants are excluded from derivative consideration.
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 July 31, 2019 and 2018 of $927,000 and $632,000, respectively.
The
following table provides the fair value of the derivative financial instruments measured at fair value using significant unobservable
inputs:
|
|
|
|
|
Fair value measurements at reporting date
using:
|
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
liabilities
|
|
|
inputs
|
|
|
inputs
|
|
Description
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Convertible promissory notes derivative liability at July 31, 2018
|
|
$
|
632,268
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
632,268
|
|
Convertible promissory notes derivative liability at July 31, 2019
|
|
$
|
927,171
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
927,171
|
|
The
fair market value of all derivatives during the year ended July 31, 2019 was determined using the Black-Scholes option pricing
model which used the following assumptions:
Expected dividend yield
|
0.00%
|
Expected stock price volatility
|
120.27% - 208.29%
|
Risk-free interest rate
|
1.74% -2.93%
|
Expected term
|
0.21 - 2.75 years
|
Level
3 inputs.
The
following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value
on a recurring basis using significant unobservable inputs:
Balance
at July 31, 2018
|
|
$
|
632,268
|
|
Derivative
from new convertible promissory notes
|
|
|
1,043,834
|
|
Derivative liability resolved to additional
paid in capital due to debt conversion
|
|
|
(822,922
|
)
|
Derivative
loss
|
|
|
73,991
|
|
Balance
at July 31, 2019
|
|
$
|
927,171
|
|
DIRECTORS
AND EXECUTIVE OFFICERS
The following table contains the name,
age of our Directors and executive officers as of November 18, 2019.
Name
|
|
Age
|
|
Position
Held
|
|
Held
Office Since
|
Arthur L. Smith
|
|
54
|
|
President, Chief
Executive Officer & Director
|
|
2003
|
Craig K. Clement
|
|
61
|
|
Chairman of the
Board
|
|
2014
|
Maxwell A. Polinsky
|
|
61
|
|
Director
|
|
2014
|
Antonio Estrada
Jr.
|
|
44
|
|
Chief Financial
Officer
|
|
2007
|
Arthur
L. Smith (54) is our Chief Executive Officer, President, and Director. Mr. Smith has over 25 years of specialized
experience in the telecommunications, technology, and oil and gas industries. As the founder of Digerati, formerly known
as ATSI Communications, Inc. (“ATSI”), he led the Company’s start-up operation focused on the USA – Mexico
telecommunications corridor to over US$65 million in annual revenue and a listing on the American Stock Exchange that resulted
in a market value of over US$450 million. Between 1999 and 2009, ATSI was a three-time recipient of Deloitte and Touche’s
Fast 500 Award for recognition as one of the 500 fastest growing technology companies in North America. As CEO of ATSI,
Mr. Smith also co-founded the Company’s highly successful Internet software subsidiary, GlobalSCAPE, Inc., in 1996 (NYSE
MKT: GSB). As Chairman of the Board of GlobalSCAPE, he led the Company’s strategic and business development efforts
from inception through its growth strategy that resulted in a listing on a public stock exchange and the subsequent sale
of ATSI’s ownership to private investors in June 2002. Mr. Smith is currently President and CEO of the Company’s
cloud communications subsidiary, Shift8 Technologies, Inc.
Craig
K. Clement (61) is the Executive Chairman of Digerati Technologies. Craig has over thirty-five years of executive and director
experience with Technology (telecom, Internet software) and Oil Exploration and Production (E&P) entities where he has been
responsible for asset management, acquisitions and divestitures, strategic and tactical planning, financial operations, corporate
finance, legal, transaction structuring, business development, and investor relations. He assisted in the growth of a San Antonio-based
telecom provider (AMEX: AI) from 10 employees to 500, achieving a public market valuation of US$500 million. Craig was the founding
CEO of GlobalSCAPE, Inc. (NYSE: GSB), and was the former COO of XPEL Technologies Corp. (TSXV:DAP.U). Craig was also
the former Chairman of the South Texas Regional Center for Innovation and Commercialization, which screened and supported entrepreneurs
through the Texas Emerging Technology Fund managed by the Texas Governor’s office, which invested more than $350 million
in Texas-based technology start-ups.
Maxwell
A. Polinsky (61) is our Director. Mr. Polinsky is currently the President, CFO and a Director of Winston Gold Corp, a Canadian-based
mineral exploration company that is traded on the CSE Exchange, and a principal in Venbanc Investment and Management Group Inc.,
an investment and merchant bank he co-founded in 1994. From 2009 to 2011, Mr. Polinsky was the Chief Financial Officer and a director
of RX Exploration Inc., a company that successfully re opened the previous old historic Drumlummon gold mine in Montana. Mr. Polinsky
also served as a director of Nerium Biotechnology from 2006 to 2010, XPEL Technologies from 2003 to 2009, and Nighthawk Systems
from 2001 to 2007 and Cougar Minerals from 2012 to 2014. Mr. Polinsky holds a Bachelor of Commerce degree from the University
of Manitoba.
Antonio
Estrada Jr. (44) is our Chief Financial Officer and Treasurer. Mr. Estrada is a seasoned financial executive with over 19
years of experience in the telecommunications and oil and gas industries. Mr. Estrada’s vast experience includes financial
reporting and modeling, strategic planning, grant writing, and cash management. Mr. Estrada served as the Sr. VP of Finance and
Corporate Controller of Digerati, formerly known as ATSI Communications, Inc., from 2008 to 2013. From 1999 to 2008, Mr. Estrada
served in various roles within ATSI, including International Accounting Manager, Treasurer, Internal Auditor, and Controller.
Mr. Estrada graduated from the University of Texas at San Antonio, with a Bachelors of Business Administration, with a concentration
in Accounting.
Delinquent
Section 16(a) Reports
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our Directors and executive officers and persons who own more
than 10% of a registered class of our equity securities to file various reports with the Securities and Exchange Commission concerning
their holdings of, and transactions in, securities we issued. Each such person is required to provide us with copies of the reports
filed. Based on a review of the copies of such forms furnished to us and other information we believe that none of our officers,
Directors or owners of 10% of any class of our securities failed to report transactions in our securities or reported transactions
in our securities late, with the following exceptions:
Due
to an administrative oversight, the following equity awards were not reported on Form 4 filings during the fiscal year
ended July 31, 2019, (i) Mr. Smith, Mr. Estrada and Mr. Clement each did not file a report covering the issuances of common
stock to each in December 2018 and June 2019, and the issuances of stock options to each in February 2019 and (ii) Mr. Polinsky
did not file a report covering the issuance of stock options in December 2018.
Code
of Ethics
We
adopted an Executive Code of Ethics that applies to the Chief Executive Officer, Chief Financial Officer, Controller and other
members of our management team. The Executive Code of Ethics may be viewed on our Website, www.digerati-inc.com. A copy of the
Executive Code of Ethics will be provided without charge upon written request to Digerati Technologies, Inc., 825 W. Bitters,
Suite 104, San Antonio, Texas 78216.
Nominating
Committee and Nomination of Directors
We
do not have a nominating committee because the size of our Board of Directors is too small to establish separate standing committees.
Our Directors perform the function of a nominating committee.
The
Directors consider candidates recommended by other members of the Board of Directors, by executive officers and by one or more
substantial, long-term stockholders. In addition, the Board of Directors may seek candidates through a third-party recruiter.
Generally, stockholders who individually or as a group have held 5% of our shares for over one year will be considered substantial,
long-term stockholders. In considering candidates, the Directors take into consideration the needs of the Board of Directors and
the qualifications of the candidate. The Board of Directors has not established a set of criteria or minimum qualifications for
candidacy and each candidate is considered based on the demonstrated competence and knowledge of the individual. To have a candidate
considered by the Directors, a stockholder must submit the recommendation in writing and must include the following information:
|
●
|
The name of the
stockholder and evidence of ownership of our shares, including the number of shares owned and the length of time of ownership;
and
|
|
●
|
The name of the
candidate, the candidate’s resume or a listing of her or his qualifications to be one of our Directors and the person’s
consent to be named as a Director if nominated by the Directors.
|
The
stockholder’s recommendation and information described above must be sent to us at 825 W. Bitters, Suite 104, San Antonio,
Texas 78216.
Audit
Committee and Audit Committee Financial Expert
We
do not have an audit or other committee of our Board of Directors that performs equivalent functions. Our Board of Directors performs
all functions of the audit committee. Mr. Maxwell A. Polinsky served as the Audit Committee Financial Expert during the year ended
July 31, 2019.
Involvement
in Certain Legal Proceedings
There
are no known pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company,
any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a
party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject
of any other pending legal proceedings
Transactions
with Related Persons
On
April 30, 2018, T3 entered into a convertible secured promissory note for $525,000 with an effective annual interest rate of 8%
and a maturity date of April 30, 2020. With a principal payment of $100,000 due on June 1, 2018 and a principal payment of $280,823
due on April 30, 2020. Payment are based on a 60-month repayment schedule. At any time while this Note is outstanding, but only
upon: (i) the occurrence of an Event of Default under the Note or the Pledge and Escrow Agreement; or (ii) mutual agreement between
the Borrower and the Holder, the Holder may convert all or any portion of the outstanding principal, accrued and unpaid interest,
Premium, if applicable, and any other sums due and payable hereunder (such total amount, the “Conversion Amount”)
into shares of Common Stock (the “Conversion Shares”) at a price equal to: (i) the Conversion Amount (the numerator);
divided by (ii) a conversion price of $1.50 per share of Common Stock, which price shall be indicated in the conversion
notice (the denominator) (the “Conversion Price”). The Holder shall submit a Conversion Notice indicating the Conversion
Amount, the number of Conversion Shares issuable upon such conversion, and where the Conversion Shares should be delivered. The
promissory note is secured by a Pledge and Escrow Agreement, whereby T3 agreed to pledge 51% of the securities owned in its Florida
operations, T3 Communications, Inc., until the principal payment is paid in full. In conjunction with the promissory note, the
Company issued 3-year warrants to purchase 75,000 shares of common stock at an exercise price of $0.50 per share. Under a Black-Scholes
valuation the relative fair market value of the warrants at time of issuance was approximately $19,267 and was recognized as a
discount on the promissory note, the company amortized $6,395 as interest expense during the year ended July 31, 2019. During
the year ended July 31, 2019, the Company paid $73,223 of the principal balance. The total principal outstanding and unamortized
discount as of July 31, 2019 were $332,985 and $7,298, respectively. One of the note holders also serves as President, CEO and
Board Member of T3 Communications, Inc., one of our operating subsidiaries.
On
May 1, 2018, Shift8 Technologies, Inc. (now known as T3 Communications, Inc. (a Nevada corporation) (“Shift8”) entered
into a Stock Purchase Agreement (“SPA”), whereby in an exchange for $250,000, Shift8 agreed to sell to the buyer 199,900
shares of common stock equivalent to 19.99% of the issued and outstanding common share of Shift8 Technologies, Inc. The $250,000
of the cash received under this transaction was recognized as an adjustment to the carrying amount of the noncontrolling interest
and as an increase in additional paid-in capital in Shift8. For the years ended July 31, 2019 and 2018, the Company accounted
for a noncontrolling interest of $128,000 and $57,000, respectively. Additionally, one of the buyers serves as President, CEO
and Board Member of T3 Communications, Inc., one of our operating subsidiaries.
On
May 1, 2018, T3 entered into a secured promissory note for $275,000 with an effective annual interest rate of 0% with an interest
and principal payment of $6,000 per month and shall continue perpetuity until the entire principal amount is paid in full. The
promissory note is guaranteed to the lender by 15% of the stock owned by T3 in its Florida operations, T3 Communications, Inc.,
the secured interest will continue until the principal balance is paid in full. In conjunction with the promissory note, the Company
issued 3-year warrants to purchase 100,000 shares of common stock at an exercise price of $0.50 per share. Under a Black-Scholes
valuation the relative fair market value of the warrants at time of issuance was approximately $26,543 and was recognized as a
discount on the promissory note, the company amortized $7,738 as interest expense during the year ended July 31, 2019. During
the year ended July 31, 2019, the Company paid $52,721 of the principal balance. The total principal outstanding and unamortized
discount as of July 31, 2019 were $209,732 and $16,686, respectively. The note holder also serves as Board Member of T3 Communications,
Inc., one of our operating subsidiaries.
On
December 7, 2018, Digerati entered into an unsecured promissory note for $28,000 with an effective annual interest rate of 0%,
and a maturity date of January 21, 2019. Subsequently, the maturity date was extended to May 06, 2019. In conjunction with the
note, the Company issued 28,000 shares of Common Stock, the shares vested at time of issuance. Under a Black-Scholes valuation
the relative fair market value of the shares of Common Stock at time of issuance was approximately $3,000 and was recognized as
a discount on the promissory note, the company amortized $3,000 as interest expense during the year ended July 31, 2019. On May
5, 2019, the Company paid in full the principal amount of $28,000 and accrued interest of $1,334. The note holder also serves
as Board Member of T3 Communications, Inc., one of our operating subsidiaries.
Director
Independence
The
common stock of the Company is currently quoted on the OTCQB which currently do not have director independence requirements. On
an annual basis, each director and executive officer will be obligated to disclose any transactions with the Company in which
a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest in
accordance with Item 407(a) of Regulation S-K. Following completion of these disclosures, the Board will make an annual determination
as to the independence of each director using the current standards for “independence” that satisfy the criteria for
the Nasdaq.
For
a director to be considered independent according to the standards set forth in Section 303A.02 of the New York Stock Exchange
Listed Company Manual (the “NYSE Manual”), the Board of Directors must affirmatively determine that the director has
no material relationship with Digerati, either directly or as a partner, shareholder or officer of an organization that has a
relationship with Digerati. In addition, the NYSE Manual provides that a director will not be considered independent if, within
the preceding three years, the director or an immediate family member (i) was an employee of Digerati, (ii) received
more than $120,000 per year in direct compensation from Digerati, (iii) is affiliated with or employed by a present or former
internal or external auditor of Digerati, (iv) employed as an executive officer of another company for which an executive
officer of Digerati serves on the compensation committee or (v) is an executive officer or employee that makes payments to
or receives payments from Digerati of more than $1,000,000 or two percent of such other company’s gross revenues.
The
Board has determined that Mr. Maxwell A. Polinsky satisfies the independence requirements in the NYSE Manual.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders
Digerati
Technologies, Inc.
San
Antonio, Texas
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Digerati Technologies, Inc. and its subsidiaries (collectively, the
“Company”) as of July 31, 2019 and July 31, 2018, and the related consolidated statements of operations, stockholders’
deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
July 31, 2019 and July 31, 2018, and the results of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
Going
Concern Matter
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency
that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters
are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/
MaloneBailey, LLP
www.malonebailey.com
Houston,
Texas
We
have served as the Company’s auditor since 2018
October 28, 2019, except for Note 17,
as to which the date is November 21, 2019
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
406
|
|
|
$
|
388
|
|
Accounts receivable, net
|
|
|
262
|
|
|
|
229
|
|
Prepaid and other current assets
|
|
|
107
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
775
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
1,832
|
|
|
|
2,211
|
|
Goodwill, net
|
|
|
810
|
|
|
|
835
|
|
Property and equipment, net
|
|
|
579
|
|
|
|
713
|
|
Other assets
|
|
|
58
|
|
|
|
59
|
|
Investment in Itellum
|
|
|
185
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,239
|
|
|
$
|
4,559
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,264
|
|
|
$
|
1,177
|
|
Accrued liabilities
|
|
|
1,493
|
|
|
|
893
|
|
Equipment financing
|
|
|
65
|
|
|
|
30
|
|
Convertible note payable, current, net $547 and $460, respectively
|
|
|
1,005
|
|
|
|
618
|
|
Note payable, current, related party, net of $7 and $0, respectively
|
|
|
383
|
|
|
|
126
|
|
Note payable, current, net $0 and $0, respectively
|
|
|
1,218
|
|
|
|
725
|
|
Deferred income
|
|
|
285
|
|
|
|
262
|
|
Derivative liability
|
|
|
927
|
|
|
|
632
|
|
Total current liabilities
|
|
|
6,640
|
|
|
|
4,463
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Convertible debenture, net $29 and $273, respectively
|
|
|
21
|
|
|
|
27
|
|
Notes payable, related party, net $17 and $38, respectively
|
|
|
136
|
|
|
|
505
|
|
Note payable
|
|
|
-
|
|
|
|
500
|
|
Equipment financing
|
|
|
100
|
|
|
|
64
|
|
Total long-term liabilities
|
|
|
257
|
|
|
|
1,096
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,897
|
|
|
|
5,559
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001, 50,000,000 shares authorized, 225,000 and 0 issued and outstanding,
respectively
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001, 150,000,000 shares authorized, 23,740,406 and 12,775,143 issued and
outstanding, respectively (6,000,000 reserved in Treasury)
|
|
|
24
|
|
|
|
13
|
|
Additional paid in capital
|
|
|
82,972
|
|
|
|
79,993
|
|
Accumulated deficit
|
|
|
(85,320
|
)
|
|
|
(80,800
|
)
|
Other comprehensive income
|
|
|
1
|
|
|
|
1
|
|
Total Digerati’s stockholders’ deficit
|
|
|
(2,323
|
)
|
|
|
(793
|
)
|
Noncontrolling interest
|
|
|
(335
|
)
|
|
|
(207
|
)
|
Total stockholders’ deficit
|
|
|
(2,658
|
)
|
|
|
(1,000
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
4,239
|
|
|
$
|
4,559
|
|
See
accompanying notes to consolidated financial statements
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
|
|
For
the Years ended
July 31,
|
|
|
|
2019
|
|
|
2018
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
Cloud-based
hosted services
|
|
$
|
6,040
|
|
|
$
|
2,001
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
|
6,040
|
|
|
|
2,001
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization)
|
|
|
3,128
|
|
|
|
1,053
|
|
Selling,
general and administrative expense
|
|
|
4,208
|
|
|
|
3,084
|
|
Legal
and professional fees
|
|
|
390
|
|
|
|
490
|
|
Bad
debt
|
|
|
6
|
|
|
|
15
|
|
Depreciation
and amortization expense
|
|
|
669
|
|
|
|
227
|
|
Total
operating expenses
|
|
|
8,401
|
|
|
|
4,869
|
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(2,361
|
)
|
|
|
(2,868
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME
(EXPENSE):
|
|
|
|
|
|
|
|
|
Gain
(loss) on derivative instruments
|
|
|
(74
|
)
|
|
|
(91
|
)
|
Income
(tax) benefit
|
|
|
(47
|
)
|
|
|
118
|
|
Interest
income (expense)
|
|
|
(2,166
|
)
|
|
|
(379
|
)
|
Total
other income (expense)
|
|
|
(2,287
|
)
|
|
|
(352
|
)
|
|
|
|
|
|
|
|
|
|
NET
LOSS INCLUDING NONCONTROLLING INTEREST
|
|
|
(4,648
|
)
|
|
|
(3,220
|
)
|
|
|
|
|
|
|
|
|
|
Less:
Net loss attributable to the noncontrolling interests
|
|
|
128
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS
|
|
|
(4,520
|
)
|
|
|
(3,163
|
)
|
|
|
|
|
|
|
|
|
|
Deemed
dividend on Series A Convertible preferred stock
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS
|
|
$
|
(4,549
|
)
|
|
$
|
(3,163
|
)
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) PER COMMON SHARE - BASIC
|
|
$
|
(0.27
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) PER COMMON SHARE - DILUTED
|
|
$
|
(0.27
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING - BASIC
|
|
|
16,650,507
|
|
|
|
10,339,371
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING - DILUTED
|
|
|
16,650,507
|
|
|
|
10,339,371
|
|
See
accompanying notes to consolidated financial statements
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
YEARS
ENDED JULY 31, 2018 AND 2019
(In
thousands, except for share amounts)
|
|
Equity Digerati’s Shareholders
|
|
|
|
|
|
|
|
|
|
Convertible Preferred
|
|
|
Common
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Other
Comprehensive
|
|
|
Stockholders
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Par
|
|
|
Shares
|
|
|
Par
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
Interest
|
|
|
Totals
|
|
BALANCE, July 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
8,386,056
|
|
|
$
|
8
|
|
|
$
|
76,986
|
|
|
$
|
(77,637
|
)
|
|
$
|
1
|
|
|
$
|
(642
|
)
|
|
$
|
-
|
|
|
$
|
(642
|
)
|
Stock issued for services, to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
1,807,012
|
|
|
|
2
|
|
|
|
1,052
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,054
|
|
|
|
-
|
|
|
|
1,054
|
|
Stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
406,500
|
|
|
|
-
|
|
|
|
186
|
|
|
|
-
|
|
|
|
-
|
|
|
|
186
|
|
|
|
-
|
|
|
|
186
|
|
Stock issued for AP settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
35,575
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
Stock issued for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
960,000
|
|
|
|
1
|
|
|
|
479
|
|
|
|
-
|
|
|
|
-
|
|
|
|
480
|
|
|
|
-
|
|
|
|
480
|
|
Stock issued for convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
505,000
|
|
|
|
1
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
Stock issued, extension of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
13
|
|
Stock issued for Acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
1
|
|
|
|
174
|
|
|
|
-
|
|
|
|
-
|
|
|
|
175
|
|
|
|
-
|
|
|
|
175
|
|
Stock issued, exercise of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
150,000
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
Value of warrants issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
670
|
|
|
|
-
|
|
|
|
-
|
|
|
|
670
|
|
|
|
-
|
|
|
|
670
|
|
Sale of subsidiary shares to a noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400
|
|
|
|
(150
|
)
|
|
|
250
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,163
|
)
|
|
|
-
|
|
|
|
(3,163
|
)
|
|
|
(57
|
)
|
|
|
(3,220
|
)
|
BALANCE, July 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
12,775,143
|
|
|
$
|
13
|
|
|
$
|
79,993
|
|
|
$
|
(80,800
|
)
|
|
$
|
1
|
|
|
$
|
(793
|
)
|
|
$
|
(207
|
)
|
|
$
|
(1,000
|
)
|
Stock issued for services, to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
1,827,926
|
|
|
|
2
|
|
|
|
310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
312
|
|
|
|
-
|
|
|
|
312
|
|
Amortization of employee stock options
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
419
|
|
|
|
-
|
|
|
|
-
|
|
|
|
419
|
|
|
|
-
|
|
|
|
419
|
|
Common stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
925,000
|
|
|
|
1
|
|
|
|
248
|
|
|
|
-
|
|
|
|
-
|
|
|
|
249
|
|
|
|
-
|
|
|
|
249
|
|
Common stock issued for settlement of accounts payable
|
|
|
-
|
|
|
|
-
|
|
|
|
138,714
|
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
|
37
|
|
Common stock and warrants issued for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
938,621
|
|
|
|
1
|
|
|
|
264
|
|
|
|
-
|
|
|
|
-
|
|
|
|
265
|
|
|
|
-
|
|
|
|
265
|
|
Series A Convertible preferred stock issued for cash
|
|
|
225,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
225
|
|
|
|
-
|
|
|
|
-
|
|
|
|
225
|
|
|
|
-
|
|
|
|
225
|
|
Stock issued for investment in Itellum
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
1
|
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85
|
|
|
|
-
|
|
|
|
85
|
|
Common stock issued for debt
|
|
|
-
|
|
|
|
-
|
|
|
|
288,000
|
|
|
|
-
|
|
|
|
43
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43
|
|
|
|
-
|
|
|
|
43
|
|
Common Stock issued for debt conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
4,592,002
|
|
|
|
5
|
|
|
|
311
|
|
|
|
-
|
|
|
|
-
|
|
|
|
316
|
|
|
|
-
|
|
|
|
316
|
|
Common stock issued concurrent with convertible debt
|
|
|
|
|
|
|
|
|
|
|
1,050,000
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Derivative liability resolved to APIC due to note
conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
823
|
|
|
|
-
|
|
|
|
-
|
|
|
|
823
|
|
|
|
-
|
|
|
|
823
|
|
Common stock issued for debt extension
|
|
|
-
|
|
|
|
-
|
|
|
|
255,000
|
|
|
|
-
|
|
|
|
54
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
-
|
|
|
|
54
|
|
Common Stock issued for accrued interest payments
on debt
|
|
|
-
|
|
|
|
-
|
|
|
|
375,000
|
|
|
|
-
|
|
|
|
60
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
|
|
-
|
|
|
|
60
|
|
Common stock issued, exercise of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
7
|
|
Debt discount from warrants issued with debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31
|
|
|
|
-
|
|
|
|
31
|
|
Warrants expense amortization
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
|
|
-
|
|
|
|
64
|
|
Beneficial conversion feature on Series A Convertible
preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
|
|
29
|
|
Deemed dividend from beneficial conversion feature
on Series A Convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
(29
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,520
|
)
|
|
|
-
|
|
|
|
(4,520
|
)
|
|
|
(128
|
)
|
|
|
(4,648
|
)
|
BALANCE, July 31, 2019
|
|
|
225,000
|
|
|
|
-
|
|
|
|
23,740,406
|
|
|
$
|
24
|
|
|
$
|
82,972
|
|
|
$
|
(85,320
|
)
|
|
$
|
1
|
|
|
$
|
(2,323
|
)
|
|
$
|
(335
|
)
|
|
$
|
(2,658
|
)
|
See
accompanying notes to consolidated financial statements
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
For
the Years ended
July 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,648
|
)
|
|
$
|
(3,220
|
)
|
Adjustments to reconcile net loss to cash
used in by operating activities:
|
|
|
|
|
|
|
|
|
Deferred tax benefit
|
|
|
|
|
|
|
(159
|
)
|
Depreciation and
amortization
|
|
|
669
|
|
|
|
227
|
|
Stock compensation
and warrant expense
|
|
|
1,044
|
|
|
|
1,508
|
|
Stock issued for
extension of debt
|
|
|
-
|
|
|
|
13
|
|
Bad debt
|
|
|
6
|
|
|
|
-
|
|
Loss on accounts
payable settled with stock
|
|
|
5
|
|
|
|
-
|
|
Interest expense
from stock issued for debt extension
|
|
|
24
|
|
|
|
-
|
|
Amortization of
debt discount
|
|
|
1,466
|
|
|
|
277
|
|
Loss (Gain) on
derivative liabilities
|
|
|
74
|
|
|
|
91
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(40
|
)
|
|
|
56
|
|
Prepaid expenses
and other current assets
|
|
|
18
|
|
|
|
(18
|
)
|
Accounts payable
|
|
|
171
|
|
|
|
181
|
|
Accrued expenses
|
|
|
661
|
|
|
|
120
|
|
Deferred
income
|
|
|
23
|
|
|
|
(61
|
)
|
Net cash used
in operating activities
|
|
|
(527
|
)
|
|
|
(985
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash received from
selling of noncontrolling interest
|
|
|
-
|
|
|
|
250
|
|
Cash paid in business
acquisition, net of cash acquired
|
|
|
-
|
|
|
|
(1,788
|
)
|
Cash paid for cost
method investment
|
|
|
(83
|
)
|
|
|
-
|
|
Cash
paid in acquisition of equipment
|
|
|
(52
|
)
|
|
|
-
|
|
Net cash used
in investing activities
|
|
|
(135
|
)
|
|
|
(1,538
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from sale
of stock and warrants
|
|
|
473
|
|
|
|
495
|
|
Borrowings from
convertible debt, net of original issuance cost and discounts
|
|
|
1,044
|
|
|
|
1,397
|
|
Borrowings from
related party note, net
|
|
|
25
|
|
|
|
525
|
|
Borrowings from
3rd party promissory notes, net
|
|
|
100
|
|
|
|
890
|
|
Principal payments
on convertible notes, net
|
|
|
(651
|
)
|
|
|
(120
|
)
|
Principal payments
on related party notes, net
|
|
|
(153
|
)
|
|
|
(131
|
)
|
Principal payments
on 3rd party promissory notes, net
|
|
|
(125
|
)
|
|
|
(815
|
)
|
Principal
payment on equipment financing
|
|
|
(33
|
)
|
|
|
(3
|
)
|
Net cash provided
by financing activities
|
|
|
680
|
|
|
|
2,238
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
18
|
|
|
|
(285
|
)
|
CASH AND CASH
EQUIVALENTS, beginning of period
|
|
|
388
|
|
|
|
673
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, end of period
|
|
$
|
406
|
|
|
$
|
388
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
541
|
|
|
$
|
143
|
|
Income
tax paid
|
|
$
|
-
|
|
|
$
|
116
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Debt discount
from derivative liabilities
|
|
$
|
1,044
|
|
|
$
|
542
|
|
Debt discount
from warrants issued with debt
|
|
$
|
31
|
|
|
$
|
402
|
|
Debt discount
from common stock issued with debt
|
|
$
|
43
|
|
|
$
|
4
|
|
Common Stock
issued for debt conversion
|
|
$
|
316
|
|
|
$
|
-
|
|
Common Stock
issued for accrued interest payments on debt
|
|
$
|
60
|
|
|
|
|
|
Common Stock
issued for debt extension
|
|
$
|
29
|
|
|
$
|
-
|
|
Common Stock
issued to settle accounts payable
|
|
$
|
-
|
|
|
$
|
15
|
|
Derivative liability
resolved to APIC due to debt conversion
|
|
$
|
823
|
|
|
$
|
-
|
|
Deemed dividend
from beneficial conversion feature on Series A Convertible preferred stock
|
|
$
|
29
|
|
|
$
|
-
|
|
Stock issued
for business acquisition
|
|
$
|
-
|
|
|
$
|
175
|
|
Equipment Financing
on purchased assets
|
|
$
|
104
|
|
|
$
|
98
|
|
Note payable
issued for business acquisition
|
|
$
|
-
|
|
|
$
|
1,425
|
|
Stock issued
for investment in Itellum
|
|
$
|
85
|
|
|
$
|
-
|
|
Note payable
issued for investment in Itellum
|
|
$
|
18
|
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements
DIGERATI
TECHNOLOGIES, INC.
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business. Digerati Technologies, Inc. (“we”, “our”, “Company” or “Digerati”)
was incorporated in the state of Nevada on May 24, 2004. Digerati is a diversified holding company that has no independent operations
apart from its subsidiaries. Through our operating subsidiaries in Texas and Florida, T3 Communications, Inc., and Shift8 Networks,
Inc., dba, T3 Communications, we provide cloud services specializing in Unified Communications
as a Service (“UCaaS”) solutions for the business market. Our product line includes a portfolio of Internet-based
telephony products and services delivered through our cloud application platform and session-based communication network and network
services including Internet broadband, fiber, mobile broadband and cloud WAN 9SD WAN) solutions. Our services are designed to
provide enterprise-class, carrier-grade services to the small-to-medium-sized business (“SMB”) at cost-effective monthly
rates. Our UCaaS or cloud communication services include fully hosted IP/PBX, mobile applications, Voice over Internet Protocol
(“VoIP”) transport, SIP trunking, and customized VoIP services all delivered Only in the Cloud™.
Principles
of Consolidation. The consolidated financial statements include the accounts of Digerati, and its subsidiaries, which
are majority owned by Digerati In accordance with ASC 810-10-05. All significant inter-company transactions and balances have
been eliminated.
Cost
Method Investment. The Company holds a minority interest in Itellum. The Company has no influence over the operating and
financial policies of Itellum. The Company has no controlling interest, is not the primary beneficiary and does not have the ability
to exert significant influence. As a result we accounted for this investment using the cost method of accounting.
Reclassifications.
Certain amounts in the consolidated financial statements of the prior year have been reclassified to conform to the presentation
of the current year for comparative purposes.
Use
of Estimates. In preparing financial statements, management makes estimates and assumptions that affect the reported amounts
of assets and liabilities in the balance sheet and revenue and expenses in the statement of operations. Actual results could differ
from those estimates.
Beneficial
conversion features. The Company evaluates the conversion feature for whether it was beneficial as described in ASC 470-30.
The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted
for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the
convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using
the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount
is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing
the effective conversion price, after considering the relative fair value of detachable instruments included in the financing
transaction, if any, to the fair value of the shares of common stock at the commitment date to be received upon conversion.
Related
parties. The Company accounts for related party transactions in accordance with ASC 850 (“Related Party Disclosures”).
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries,
controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the
Company, its management, members of the immediate families of principal owners of the Company and its management and other parties
with which the Company may deal if one party controls or can significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party
which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest
in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties
might be prevented from fully pursuing its own separate interests is also a related party.
Concentration
of Credit Risk. Financial instruments that potentially subject Digerati to concentration of credit risk consist primarily
of trade receivables. In the normal course of business, Digerati provides credit terms to its customers. Accordingly, Digerati
performs ongoing credit evaluations of its customers and maintains allowances for possible losses, which, when realized, have
been within the range of management’s expectations. Digerati maintains cash in bank deposit accounts, which, at times, may
exceed federally insured limits. Digerati has not experienced any losses in such accounts and Digerati does not believe it’s
exposed to any significant credit risk on cash and cash equivalents.
Revenue
Recognition. On August 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts
which were not completed as of August 1, 2018. Results for reporting periods beginning after August 1, 2018 are presented under
Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting
under Topic 605. There was no impact to the opening balance of accumulated deficit or revenues for the year ended July 31, 2019
as a result of applying Topic 606.
Sources
of revenue:
Cloud-based
hosted Services. The Company recognizes cloud-based hosted services revenue, mainly from subscription services for its cloud telephony
applications that includes hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice and web conferencing,
call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic,
and other customized applications. Other services include enterprise-class data and connectivity solutions through multiple broadband
technologies including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, and Ethernet over copper. We also offer
remote network monitoring, data backup and disaster recovery services. The Company applies a five-step approach in determining
the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance
obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations
in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s
revenue is recognized at the time control of the products transfers to the customer.
Service Revenue
Service
revenue from subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over
the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received
in advance of subscription services being rendered are recorded as a deferred revenue. Usage fees, either bundled or not bundled,
are recognized when the Company has a right to invoice. Professional services for configuration, system integration, optimization,
customer training and/or education are primarily billed on a fixed-fee basis and are performed by the Company directly. Alternatively,
customers may choose to perform these services themselves or engage their own third-party service providers. Professional services
revenue is recognized over time, generally as services are activated for the customer.
Product
Revenue
The
Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is
generally upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical experience.
Disaggregation of Cloud-based
hosted revenues
Summary
of disaggregated revenue is as follows (in thousands):
|
|
For
the Years ended
July
31,
|
|
|
|
2019
|
|
|
2018
|
|
Service revenue
|
|
$
|
5,847
|
|
|
$
|
1,994
|
|
Product revenue
|
|
|
193
|
|
|
|
7
|
|
Total operating revenues
|
|
$
|
6,040
|
|
|
$
|
2,001
|
|
Contract Assets
Contract
assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations are
completed. The revenue is recognized when the customer receives services or equipment for a reduced consideration at the onset
of an arrangement; for example, when the initial month’s services or equipment are discounted. Contract assets are included
in prepaid and other current assets in the consolidated balance sheets, depending on if their reduction is recognized during the
succeeding 12-month period or beyond. Contract assets as of July 31, 2019 and July 31, 2018, were $22,967 and $12,155, respectively.
Deferred Income
Deferred
income represents billings or payment received in advance of revenue recognition and is recognized upon transfer of control. Balances
consist primarily of annual plan subscription services, for services not yet provided as of the balance sheet date. Deferred revenues
that will be recognized during the succeeding 12-month period are recorded as current deferred revenues in the consolidated balance
sheets, with the remainder recorded as other noncurrent liabilities in the consolidated balance sheets. Deferred income as of
July 31, 2019 and July 31, 2018, were $285,000 and $262,000, respectively.
Costs to Obtain a Customer Contract
Sales
commissions are paid upon collections of related revenue and are expensed during the same period. Sales commissions for the year
ended July 31, 2019 and the year ended July 31, 2018, were $52,613 and $36,233, respectively.
Direct
Costs - Cloud-based hosted Services
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.
Cash
and cash equivalents. The Company considers all bank deposits and highly liquid investments with original maturities of
three months or less to be cash and cash equivalents.
Allowance
for Doubtful Accounts.
Bad
debt expense is recognized based on management’s estimate of likely losses each year based on past experience and an estimate
of current year uncollectible amounts. As of July 31, 2019 and 2018, Digerati’s allowance for doubtful accounts balance
was $115,000 and $122,000, respectively.
Customer
deposits.
The
Company in some instances requires customers to make deposits for equipment, installation charges and training. As equipment is
installed and training takes places the deposits are then applied to revenue. As of July 31, 2019 and 2018, Digerati’s customer
deposits balance was $285,000 and $262,000, respectively.
Property
and equipment. Property and equipment are recorded at cost. Additions are capitalized and maintenance and repairs are
charged to expense as incurred. Gains and losses on dispositions of equipment are reflected in operations. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets, which are one (1) to seven (7) years.
Goodwill, Intangible
Assets, and Long-Lived Assets
Goodwill
is carried at cost and is not amortized. The Company tests goodwill for impairment on an annual basis at the end of each fiscal
year, relying on a number of factors including operating results, business plans, economic projections, anticipated future cash
flows and marketplace data. Company management uses its judgment in assessing whether goodwill has become impaired between annual
impairment tests according to specifications set forth in ASC 350. The Company completed an evaluation of goodwill at July 31,
2019 and determined that there was no impairment.
The
fair value of the Company’s reporting unit is dependent upon the Company’s estimate of future cash flows and other
factors. The Company’s estimates of future cash flows include assumptions concerning future operating performance and economic
conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate
derived from the Company’s market capitalization plus a suitable control premium at date of the evaluation.
The
financial and credit market volatility directly impacts the Company’s fair value measurement through the Company’s
weighted average cost of capital that the Company uses to determine its discount rate and through the Company’s stock price
that the Company uses to determine its market capitalization. Therefore, changes in the stock price may also affect the amount
of impairment recorded.
The
Company recognizes an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other
legal rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged,
either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their useful
lives. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable
from expected future cash flows and its carrying amount exceeds its fair value.
The
Company reviews its long-lived assets, including property and equipment, identifiable intangibles, and goodwill annually or whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows will be
less than the carrying amount of the assets.
Impairment
of Long-Lived Assets. Digerati reviews the carrying value of its long-lived assets annually or whenever events or changes
in circumstances indicate that the value of an asset may no longer be appropriate. Digerati assesses recoverability of the carrying
value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition.
If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference
between the asset’s carrying value and fair value.
Business
combinations. Each investment in a business is being measured and determined whether the investment should be accounted
for as a cost-basis investment, an equity investment, a business combination or a common control transaction. An investment in
which the Company do not have a controlling interest and which the Company is not the primary beneficiary but where the Company
has the ability to exert significant influence is accounted for under the equity method of accounting. For those investments that
we account for in accordance ASC 805, Business Combinations, the Company records the assets acquired and liabilities assumed at
the management’s estimate of their fair values on the date of the business combination. The assessment of the estimated
fair value of each of these can have a material effect on the reported results as intangible assets are amortized over various
lives. Furthermore, according to ASC 805-50-30-5, when accounting for a transfer of assets or exchange of shares between entities
under common control, the entity that receives the net assets or the equity interests shall initially measure the recognized assets
and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of transfer.
Derivative
financial instruments. Digerati does not use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks. However, Digerati analyzes 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 is recorded as non-operating, non-cash income
or expense for each reporting period. For option-based derivative financial instruments, warrants and notes payable conversion
options 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.
Notes
payable conversion options are recorded as debt discounts and are amortized as interest expense over the term of the related debt
instrument.
Treasury
Shares. As a result of entering into various convertible debt instruments, warrants with fixed exercise price, and convertible
notes with fixed conversion price or with a conversion price floor, we reserved 6,000,000 treasury shares for consideration for
future conversions and exercise of warrants. The Company will evaluate the reserved treasury shares on a quarterly basis, and
if necessary, reserve additional treasury shares. As of July 31, 2019, we believe that the treasury share reserved are sufficient
for any future conversions of these instruments. As a result, these debt instruments and warrants are excluded from derivative
consideration.
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 July 31, 2019 and 2018 of $927,000 and $632,000, respectively.
The
following table provides the fair value of the derivative financial instruments measured at fair value using significant unobservable
inputs:
|
|
|
|
|
Fair value measurements at reporting date using:
|
|
|
|
|
|
|
Quoted
prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active
markets
|
|
|
Significantother
|
|
|
Significant
|
|
|
|
|
|
|
for
identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
liabilities
|
|
|
inputs
|
|
|
inputs
|
|
Description
|
|
Fair
Value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Convertible promissory
notes derivative liability at July 31, 2018
|
|
$
|
632,268
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
632,268
|
|
Convertible promissory notes derivative liability
at July 31, 2019
|
|
$
|
927,171
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
927,171
|
|
The
fair market value of all derivatives during the year ended July 31, 2019 was determined using the Black-Scholes option pricing
model which used the following assumptions:
Expected dividend yield
|
0.00%
|
Expected stock price volatility
|
120.27% - 208.29%
|
Risk-free interest rate
|
1.74% -2.93%
|
Expected term
|
0.21 - 2.75 years
|
Level
3 inputs.
The
following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value
on a recurring basis using significant unobservable inputs:
Balance at July 31, 2017
|
|
$
|
-
|
|
Derivative discount - convertible debt
|
|
|
541,671
|
|
Derivative loss
|
|
|
90,597
|
|
Balance at July 31, 2018
|
|
$
|
632,268
|
|
Derivative from new convertible promissory notes recorded as debt discount
|
|
|
1,043,834
|
|
Derivative liability resolved to additional paid in capital due to debt conversion
|
|
|
(822,922
|
)
|
Derivative loss
|
|
|
73,991
|
|
Balance at July 31, 2019
|
|
$
|
927,171
|
|
Income
taxes. Digerati recognizes deferred tax assets and liabilities based on differences between the financial reporting and
tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences
are expected to be recovered. Digerati provides a valuation allowance for deferred tax assets for which it does not consider realization
of such assets to be more likely than not.
Since
January 1, 2007, Digerati accounts for uncertain tax positions in accordance with the authoritative guidance issued by the Financial
Accounting Standards Board on income taxes which addresses how an entity should recognize, measure and present in the financial
statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to this guidance,
Digerati recognizes a tax benefit only if it is “more likely than not” that a particular tax position will be sustained
upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated
with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement. As of
July 31, 2019 we have no liability for unrecognized tax benefits.
Stock-based
compensation. In June 2018 FASB adopted the Accounting Standards Update No. 2018-07, Compensation –
Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting. This update simplifies the
accounting for non-employee share-based payment transactions by expanding the scope of Topic 718, Compensation-Stock Compensation,
to include share-based payment transactions for acquiring goods and services from non-employees. The guidance is effective for
annual periods beginning after December 15, 2018, and interim periods within that reporting period. The Company adopted the
updated standard as of May 1, 2018, adopting this guidance did not have a material effect on its consolidated financial statements.
During FY 2018 and 2019, the Company issued 2,213,512 common shares and 1,827,927 common shares, respectively to various employees
as part of our profit sharing-plan contribution and stock in lieu of cash. At the time of issuance during FY 2018 and 2019 we
recognized stock-based compensation expense of approximately $1,240,000 and $312,328, respectively equivalent to the market value
of the shares issued calculated based on the share’s closing price at the grant dates.
Basic
and diluted net income (loss) per share. The basic net loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted
on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive
securities. For the years ended July 31, 2019 and 2018, potential dilutive securities including options and warrants were not
included in the calculation of diluted net (loss) per common share. Potential dilutive securities, which are not included in dilutive
weighted average shares are as follows:
|
|
7/31/2019
|
|
|
7/31/2018
|
|
Options to purchase common
stock
|
|
|
4,940,000
|
|
|
|
3,415,000
|
|
Warrants to purchase common stock
|
|
|
2,700,000
|
|
|
|
2,370,000
|
|
Convertible
debt
|
|
|
13,113,643
|
|
|
|
3,268,214
|
|
Total:
|
|
|
20,753,643
|
|
|
|
9,053,214
|
|
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 and
other comprehensive income (loss). For the year ended July 31, 2019 and 2018, the Company recognized a noncontrolling deficits
of $128,000 and $57,000, respectively.
Recently
issued accounting pronouncements.
In February
2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments under this pronouncement will change
the way all leases with a duration of one year or more are treated. Under this guidance, lessees will be required to capitalize
virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease
liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the
specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease,
measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases.
Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized like capital leases are
under current accounting, as amortization expense and interest expense in the statement of operations. Operating lease liabilities
are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. This update
is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2018.
In July 2018 the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842),
Targeted Improvements, which provided additional implementation guidance on the previously issued ASU. The Company evaluated
this amendment as of August 1, 2018, and concluded that did not have a material effect on the presentation of our consolidated
financial statements.
In June
2018, the FASB issued Accounting Standards Update No. 2018-07, Compensation – Stock Compensation (Topic
718): Improvements to Non-employee Share-Based Payment Accounting. This update simplifies the accounting for non-employee
share-based payment transactions by expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based
payment transactions for acquiring goods and services from non-employees. The guidance is effective for annual periods beginning
after December 15, 2018, and interim periods within that reporting period. The Company adopted this updated standard as of
May 1, 2018, and adopting this guidance did not have a material effect on the presentation of our consolidated financial statements.
NOTE
2 – GOING CONCERN
Financial
Condition
Digerati’s
consolidated financial statements for the year ending July 31, 2019 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. Digerati has incurred net losses
and accumulated a deficit of approximately $85,320,000 and a working capital deficit of approximately $5,865,000 which raises
substantial doubt about Digerati’s ability to continue as a going concern.
Management
Plans to Continue as a Going Concern
Management
believes that current available resources will not be sufficient to fund the Company’s operations over the next 12 months.
The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, among
other things, raising additional capital or generating sufficient revenue in excess of costs. At such time as the Company requires
additional funding, the Company will seek to secure such additional funding from various possible sources, including the public
equity market, private financings, sales of assets, collaborative arrangements and debt. If the Company raises additional capital
through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such
securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes.
If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt
covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic
partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company
will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable
terms, it may be unable to execute its business plan, the Company could be required to delay or reduce the scope of its operations,
and the Company may not be able to pay off its obligations, if and when they come due.
The
Company will continue to work with various funding sources to secure additional debt and equity financings. However, Digerati
cannot offer any assurance that it will be successful in executing the aforementioned plans to continue as a going concern.
Digerati’s
consolidated financial statements as of July 31, 2019 do not include any adjustments that might result from the inability to implement
or execute Digerati’s plans to improve our ability to continue as a going concern.
NOTE
3 – INTANGIBLE ASSETS
During
FY 2008, Digerati made a loan of $150,000 to NetSapiens Inc. The note receivable had a maturity date of June 26, 2008 with interest
at 8% per year. The note was secured by NetSapiens’ proprietary Starter Platform License and SNAPsolution modules. On June
26, 2008 Digerati converted the outstanding interest and principal balance into a lifetime and perpetual NetSapiens’ License.
The License provides Digerati with the ability to offer Hosted PBX (Private Branch eXchange), IP Centrex application, prepaid
calling, call center, conferencing, messaging and other innovative telephony functionality necessary to offer standard and/or
custom services to enterprise markets. The NetSapiens’ License, in the amount of $150,000, is being amortized equally over
a period of 10 years. For the years ended July 31, 2019 and 2018, amortization totaled approximately $0 and $13,750, respectively.
As of July 31, 2019 the NetSapiens’ License is fully amortized.
On
December 1, 2017, Shift8 and Synergy Telecom, Inc., a Delaware corporation (“Synergy”), closed a transaction to acquire
all the assets, assumed all customers, and critical vendor arrangements from Synergy. The total purchase price was $425,000, the
acquisition was accounted for under the purchase method of accounting, with Digerati identified as the acquirer. Under the purchase
method of accounting, the aggregate amount of consideration assumed by Digerati was allocated to customer contracts acquired,
software licenses, and goodwill based on their fair values as of December 1, 2017.
The
following information summarizes the allocation of the fair values assigned to the assets. The allocation of fair values is based
on an extensive analysis and is subject to changes in the future during the measurement period.
|
|
|
|
|
Useful life
|
|
|
|
Synergy
|
|
|
(years)
|
|
|
|
|
|
|
|
|
Customer relationship
|
|
$
|
40,000
|
|
|
5
|
|
License - software
|
|
|
105,000
|
|
|
3
|
|
Goodwill
|
|
|
280,000
|
|
|
-
|
|
Total Purchase price
|
|
$
|
425,000
|
|
|
|
|
For
the years ended July 31, 2019 and 2018, amortization expense for the acquired intangible was $60,500 and $25,000, respectively.
On
May 2, 2018, the Company closed on the Merger Agreement with T3 Communications, Inc. to increase its customer base and obtain
higher efficiency of its existing infrastructure.
The
total purchase price was $3,211,945 paid in cash at closing. The acquisition was accounted for under the purchase method of accounting,
with the Company identified as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed
by the Company was allocated to cash, customer contracts acquired, current assets, property plant and equipment and assumed payables
based on their estimated fair values as of May 2, 2018.
The
following information summarizes the allocation of the purchase price assigned to intangible assets. The allocation of fair values
is based on an extensive analysis and is subject to changes in the future during the measurement period.
|
|
|
|
|
Useful life
|
|
|
|
T3
|
|
|
(years)
|
|
Customer relationships
|
|
$
|
1,480,000
|
|
|
7
|
|
Marketing & Non-compete
|
|
|
800,000
|
|
|
5
|
|
Goodwill
|
|
|
530,353
|
|
|
-
|
|
Total
|
|
$
|
2,810,353
|
|
|
|
|
For
the years ended July 31, 2019 and 2018, amortization expense for the acquired assets totaled approximately $371,000 and $93,000,
respectively.
Intangible
assets at July 31, 2019 and 2018 are summarized in the tables below:
July 31, 2019
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
NetSapiens - license, 10 years
|
|
$
|
150,000
|
|
|
$
|
(150,000
|
)
|
|
$
|
-
|
|
Customer relationships, 5 years
|
|
|
40,000
|
|
|
|
(12,672
|
)
|
|
|
27,328
|
|
Customer relationships, 7 years
|
|
|
1,480,000
|
|
|
|
(276,077
|
)
|
|
|
1,203,923
|
|
Marketing & Non-compete, 5 years
|
|
|
800,000
|
|
|
|
(200,000
|
)
|
|
|
600,000
|
|
Total Define-lived Assets
|
|
|
2,470,000
|
|
|
|
(638,749
|
)
|
|
|
1,831,251
|
|
Goodwill, Indefinite
|
|
|
810,353
|
|
|
|
-
|
|
|
|
810,353
|
|
Balance, July 31, 2019
|
|
$
|
3,280,353
|
|
|
$
|
(638,749
|
)
|
|
$
|
2,641,604
|
|
July 31, 2018
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
NetSapiens - license, 10 years
|
|
$
|
150,000
|
|
|
$
|
(150,000
|
)
|
|
$
|
-
|
|
Customer relationships, 5 years
|
|
|
40,000
|
|
|
|
(4,667
|
)
|
|
|
35,333
|
|
Customer relationships, 7 years
|
|
|
1,480,000
|
|
|
|
(64,652
|
)
|
|
|
1,415,348
|
|
Marketing & Non-compete, 5 years
|
|
|
800,000
|
|
|
|
(40,000
|
)
|
|
|
760,000
|
|
Total Define-lived Assets
|
|
|
2,470,000
|
|
|
|
(259,319
|
)
|
|
|
2,210,681
|
|
Goodwill, Indefinite
|
|
|
834,828
|
|
|
|
-
|
|
|
|
834,828
|
|
Balance, July 31, 2018
|
|
$
|
3,304,828
|
|
|
$
|
(259,319
|
)
|
|
$
|
3,045,509
|
|
Total
amortization expense for the periods ended July 31, 2019 and 2018 was approximately $379,000 and $123,000, respectively.
NOTE
4 – PROPERTY AND EQUIPMENT
Following
is a summary of Digerati’s property and equipment at July 31, 2019 and 2018 (in thousands):
|
|
Useful lives
|
|
2019
|
|
|
2018
|
|
Telecom equipment & software
|
|
1-5 years
|
|
$
|
978
|
|
|
$
|
831
|
|
Less: accumulated depreciation
|
|
|
|
|
(399
|
)
|
|
|
(118
|
)
|
Net–property and equipment
|
|
|
|
$
|
579
|
|
|
$
|
713
|
|
The
Company uses straight-line depreciation, for the years ended July 31, 2019 and 2018, depreciation totaled approximately $289,000
and $104,000, respectively.
NOTE
5 – INCOME TAXES
Digerati
files a consolidated tax return. The current tax year is subject to examination by the Internal Revenue Service and certain state
taxing authorities. As of July 31, 2019, Digerati had net operating loss carry-forwards of approximately $8,596,715 to reduce
future federal income tax liabilities; the loss carry-forwards will start to expire in 2020. Under the recently enacted Tax Cuts
and Jobs Act (TCJA), the new effective Corporate flat tax rate is 21% (effective for tax years beginning after December 31, 2017).
Income tax benefit (provision) for the years ended July 31, 2019 and 2018 are as follows:
The
effective tax rate for Digerati is reconciled to statutory rates as follows:
|
|
2019
|
|
|
2018
|
|
Expected Federal benefit (provision), at statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Change in valuation allowance
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Deferred
tax assets are comprised of the following as of July 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Net operating loss carryover
|
|
$
|
1,805,310
|
|
|
$
|
1,239,503
|
|
Valuation allowance
|
|
|
(1,805,310
|
)
|
|
|
(1,239,503
|
)
|
Total deferred tax asset, net
|
|
$
|
-
|
|
|
$
|
-
|
|
At
July 31, 2019, realization of Digerati’s deferred tax assets was not considered likely to be realized. The change in the
valuation allowance for 2019 was resulted in an increase of approximately $565,807. Management has evaluated and concluded that
there are no significant uncertain tax positions requiring recognition in Digerati’s combined financial statements. The
current year remains open to examination by the major taxing jurisdictions in which Digerati is subject to tax. The Company files
a calendar year return and the net operating loss was adjusted for the fiscal year ended July 31, 2019.
During
the year ended July 31, 2019 the Company issued 10,965,263 common shares, and under our initial assessment this will likely result
in a change of control and the net operation loss (NOL’s) became subject to the separate return limitation year. We will
evaluate during the tax year and consider the limitations.
We
record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes
as a result of the evaluate on new information not previously available. Because of the complexity of some of these uncertainties,
the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax
benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which
new information is available.
NOTE
6 – COMMITMENTS AND CONTINGENCIES
Commitments
Digerati
leases its corporate facilities, sales office and network facilities in Texas and Florida. The annual rent expense under the operating
leases was $141,546 and $81,670, for 2019 and 2018, respectively. Below is a list of our primary operating leases:
Location
|
|
Lease Expiration Date
|
|
Annual
Rent
|
|
|
Business Use
|
|
Approx. Sq.
Ft.
|
|
825 W. Bitters Rd., Suite 104
San Antonio, TX 78216
|
|
July-22
|
|
$
|
23,654
|
|
|
Executive offices
|
|
|
1,546
|
|
2401 First Street, Suite 300, Ft.
|
|
|
|
|
|
|
|
Lease of network facilities and
|
|
|
|
|
Myers, FL 34901
|
|
Nov-20
|
|
$
|
107,534
|
|
|
office space
|
|
|
6,800
|
|
7218 McNeail Dr, Austin, TX 78729
|
|
Aug-21
|
|
$
|
14,222
|
|
|
Lease of network facilities
|
|
|
25
|
|
6606 Lyndon B. Johnson, Fwy., FL1, Suite 125, Dallas, TX 75240
|
|
Sep-21
|
|
$
|
25,161
|
|
|
Lease of network facilities
|
|
|
25
|
|
9701 S. John Young Parkway,
Orlando, FL 32819
|
|
May-23
|
|
$
|
30,528
|
|
|
Lease of network facilities
|
|
|
540
|
|
The
future minimum lease payment under the operating leases are as follows:
Years Ending July 31,
|
|
Lease
Payments
|
|
2020
|
|
$
|
160,574
|
|
2021
|
|
|
108,409
|
|
2022
|
|
|
57,057
|
|
2023
|
|
|
25,440
|
|
Total:
|
|
$
|
351,480
|
|
NOTE
7 – STOCK-BASED COMPENSATION
In
November 2015, Digerati adopted the Digerati Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan
authorizes the grant of up to 7.5 million stock options, restricted common shares, non-restricted common shares and other awards
to employees, directors, and certain other persons. The Plan is intended to permit Digerati to retain and attract qualified individuals
who will contribute to the overall success of Digerati. Digerati’s Board of Directors determines the terms of any grants
under the Plan. Exercise prices of all stock options and other awards vary based on the market price of the shares of common stock
as of the date of grant. The stock options, restricted common stock, non-restricted common stock and other awards vest based on
the terms of the individual grant.
During
the year ended July 31, 2018, we issued:
|
●
|
644,732 common shares
to various employees as part of the Company’s profit-sharing plan contribution. The Company recognized stock-based compensation
expense of approximately $226,000 equivalent to the value of the shares calculated based on the share’s closing price
at the grant dates.
|
|
|
|
|
●
|
515,493 common shares
to management for services in lieu of cash compensation. The Company recognized stock-based compensation expense of approximately
$222,000 equivalent to the value of the shares calculated based on the share’s closing price at the grant dates.
|
|
|
|
|
●
|
646,787 common
shares to management for services in lieu of cash compensation. The Company recognized stock-based compensation expense of
approximately $306,000 equivalent to the value of the shares calculated based on the share’s closing price at the grant
dates.
|
|
|
|
|
●
|
1,025,000 options
to purchase common shares to various employees with an exercise price of $0.35 per share and a term of 5 years. The options
vest equally over a period of one year. The options have a fair market value of $218,200.
|
|
|
|
|
●
|
275,000 options
to purchase common shares to various employees with an exercise price of $0.35 per share and a term of 5 years. The options
vest equally over a period of two years. The options have a fair market value of $74,600.
|
|
|
|
|
●
|
545,000 options
to purchase common shares to various employees with an exercise price of $0.35 per share and a term of 5 years. The options
vest equally over a period of three years. The options have a fair market value of $164,600.
|
|
|
|
|
●
|
420,000 options
to purchase common shares to various employees with an exercise price of $0.45 per share and a term of 5 years. The options
vest equally over a period of three years. The options have a fair market value of $160,000.
|
The
fair market value of all options issued was determined using the Black-Scholes option pricing model which used the following assumptions:
Expected dividend yield
|
|
|
0.00%
|
|
Expected stock price volatility
|
|
|
162.72% - 169.76%
|
|
Risk-free interest rate
|
|
|
2.13%
-2.78%
|
|
Expected term
|
|
|
1.0
- 3.0 years
|
|
During
the year ended July 31, 2018 we issued the following to non-employee professionals:
|
●
|
In September 2017,
the Company issued an aggregate of 12,500 shares of common stock with a market value at time of issuance of $4,375. The shares
were issued for consulting services.
|
|
●
|
In December 2017,
the Company issued an aggregate of 100,000 shares of common stock with a market value at time of issuance of $40,000. The
shares were issued for consulting services.
|
|
●
|
In June 2018, the
Company issued an aggregate of 100,000 shares of common stock with a market value at time of issuance of $48,000. The shares
were issued for consulting services.
|
|
●
|
In July 2018, the
Company issued an aggregate of 194,000 shares of common stock with a market value at time of issuance of $93,720. The shares
were issued to various professionals for consulting services.
|
Also,
during the year ended July 31, 2018 we issued the following to settle accounts payables:
|
●
|
In June 2018, the
Company issued an aggregate of 35,575 shares of common stock with a market value at time of issuance of $15,288. The shares
were issued to settle accounts payables with various professionals, the Company recognized a loss of $5,700 upon issuance
of the shares.
|
During
the year ended July 31, 2019, we issued:
|
●
|
635,156 common
shares to various employees as part of the Company’s Non-Standardized profit-sharing plan contribution. The Company
recognized stock-based compensation expense of approximately $114,000 equivalent to the value of the shares calculated based
on the share’s closing price at the grant dates.
|
|
●
|
100,000 options
to purchase common shares to a member of the Board of Directors with an exercise price of $0.18 per share and a term of 5
years. The options vest equally over a period of one year. At the time of issuance the options had a fair market value of
$11,406.
|
|
●
|
1,725,000 options
to purchase common shares to members of the Management team with an exercise price of $0.19 per share and a term of 5 years.
The options vest equally over a period of one year. At the time of issuance the options had a fair market value of $217,263.
|
|
●
|
250,000 options
to purchase common shares to an employee with an exercise price of $0.25 per share and a term of 5 years. The options vest
equally over a period of two years. At the time of issuance the options had a fair market value of $39,175.
|
|
●
|
1,192,770 common
shares to members of the Management team for services in lieu of cash compensation. The Company recognized stock-based compensation
expense of approximately $198,000 equivalent to the value of the shares calculated based on the share’s closing price
at the grant dates.
|
|
●
|
1,350,000 shares
of common stock to the Executive Officers, with a market value at time of issuance of $256,500, the Stock Grant will vest
upon the earlier of the Company achieving $15 million in annualized revenue or listing on a primary stock exchange (e.g. NASDAQ
or NYSE American) and will be subject to adjustment for any forward or reverse split of the Company’s stock. The Company
recognized approximately $85,500 in stock-based compensation expense related to this issuance during the year ended July 31,
2019. Unamortized compensation cost totaled $171,000 at July 31, 2019.
|
During
the year ended July 31, 2019 we issued the following to non-employee professionals:
|
●
|
In November 2018,
the Company issued an aggregate of 200,000 shares of common stock with a market value at time of issuance of $69,600. The
shares were issued for consulting services.
|
|
●
|
In February 2019,
the Company issued an aggregate of 325,000 shares of common stock with a market value at time of issuance of $78,000. The
shares were issued for consulting services.
|
|
●
|
In February 2019,
the Company issued an aggregate of 400,000 shares of common stock with a market value at time of issuance of $100,000. The
shares were issued for consulting services.
|
The
fair market value of all options issued was determined using the Black-Scholes option pricing model which used the following assumptions:
Expected dividend yield
|
|
0.00%
|
Expected stock price volatility
|
|
178.79% - 260.07%
|
Risk-free interest
rate
|
|
1.84% - 2.73%
|
Expected term
|
|
1.0 - 2.0 years
|
Digerati
recognized approximately $733,000 and $1,054,000 in stock-based compensation expense to employees during the years ended July
31, 2019 and 2018, respectively. Unamortized compensation cost totaled $433,608 and $397,000 at July 31, 2019 and July 31, 2018,
respectively.
A
summary of the stock options as of July 31, 2019 and July 31, 2018 and the changes during the years ended July 31, 2019 and July
31,2018:
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
|
Weighted-average
|
|
|
remaining contractual
|
|
|
|
Options
|
|
|
exercise price
|
|
|
term (years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2017
|
|
|
1,170,000
|
|
|
$
|
0.24
|
|
|
|
4.30
|
|
Granted
|
|
|
2,265,000
|
|
|
$
|
0.37
|
|
|
|
5.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited and cancelled
|
|
|
(20,000
|
)
|
|
$
|
0.24
|
|
|
|
3.30
|
|
Outstanding at July 31, 2018
|
|
|
3,415,000
|
|
|
$
|
0.33
|
|
|
|
4.58
|
|
Granted
|
|
|
2,075,000
|
|
|
$
|
0.20
|
|
|
|
4.58
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited and cancelled
|
|
|
(550,000
|
)
|
|
$
|
0.36
|
|
|
|
3.39
|
|
Outstanding at July 31, 2019
|
|
|
4,940,000
|
|
|
$
|
0.27
|
|
|
|
3.65
|
|
Exercisable at July 31, 2019
|
|
|
3,452,405
|
|
|
$
|
0.28
|
|
|
|
3.31
|
|
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 4,940,000 and 3,415,000 stock options outstanding
at July 31, 2019 and July 31, 2018 was $0 and $706,372, respectively.
The
aggregate intrinsic value of 3,452,405 and 2,006,111 stock options exercisable at July 31, 2019 and July 31, 2018 was $0 and $587,389,
respectively.
NOTE
8 – WARRANTS
During
the year ended July 31, 2018, the Company issued the following warrants:
The
Company secured $480,000 from various accredited investors under a private placement and issued 960,000 shares of its common stock
at a price of $0.50 per share and warrants to purchase an additional 180,000 shares of its common stock at an exercise price of
$0.50 per share. We determined that the warrants issued in connection with the private placement were equity instruments and did
not represent derivative instruments.
In
December 2017, Digerati issued 100,000 warrants to a consultant for services, the warrants vested at time of issuance. The warrants
have a term of 5 years, with an exercise price of $0.50. Under a Black-Scholes valuation the fair market value of the warrants
at time of issuance was approximately $49,000, the company will amortize the fair market value as warrant expense over 12 months.
Additionally, Digerati committed to issue 100,000 warrants if the Company’s stock price traded at $0.75 per share for 10
consecutive days, to issue 100,000 warrants if the Company’s stock price traded at $1.00 per share for 10 consecutive days,
and to issue 100,000 warrants if the Company’s stock price traded at $1.25 per share for 10 consecutive days. Under a Black-Scholes
valuation the fair market value of the warrants at time of issuance was approximately $143,000, the company will amortize the
fair market value as warrant expense over 12 months.
In
January 2018, Digerati issued 220,000 warrants to a consultant for services, the warrants vested at time of issuance. The warrants
have a term of 5 years, with an exercise price of $0.001. At time of issuance the company recognized approximately $119,000 in
warrant expense using Black-Scholes valuation.
In
March 2018, Digerati issued 300,000 warrants under two promissory notes and, the warrants vested at time of issuance. The warrants
have a term of 3 years, with an exercise price of $0.10. Under a Black-Scholes valuation the relative fair market value of the
warrants at time of issuance was approximately $127,000 and was recognized as a discount on the two promissory notes, the company
will amortize the fair market value as interest expense over 9 months.
In
March 2018, Digerati issued 30,000 warrants under various promissory notes, the warrants vested at time of issuance. The warrants
have a term of 3 years, with an exercise price of $0.15. Under a Black-Scholes valuation the relative fair market value of the
warrants at time of issuance was approximately $12,000 and was recognized as a discount on the two promissory notes, the company
will amortize the fair market value as interest expense over 4 months.
In
April 2018, Digerati issued 400,000 warrants under various promissory notes, the warrants vested at time of issuance. The warrants
have a term of 5 years, with an exercise price of $0.15. Under a Black-Scholes valuation the relative fair market value of the
warrants at time of issuance was approximately $107,000 and was recognized as a discount on the promissory notes, the company
will amortize the fair market value as interest expense over 4 months.
In
April 2018, Digerati issued 100,000 warrants under a promissory note, the warrants vested at time of issuance. The warrants have
a term of 3 years, with an exercise price of $0.50. Under a Black-Scholes valuation the relative fair market value of the warrants
at time of issuance was approximately $27,000 and was recognized as a discount on the promissory notes, the company will amortize
the fair market value as interest expense over 55 months.
In
April 2018, Digerati issued 75,000 warrants under a promissory note, the warrants vested at time of issuance. The warrants have
a term of 3 years, with an exercise price of $0.50. Under a Black-Scholes valuation the relative fair market value of the warrants
at time of issuance was approximately $19,000 and was recognized as a discount on the promissory notes, the company will amortize
the fair market value as interest expense over 25 months.
In
June 2018, Digerati issued 255,000 warrants under various promissory notes, the warrants vested at time of issuance. The warrants
have a term of 3 years, with an exercise price of $0.10. Under a Black-Scholes valuation the relative fair market value of the
warrants at time of issuance was approximately $110,000 and was recognized as a discount on the promissory notes, the company
will amortize the fair market value as interest expense over 9 months.
In
July 2018, Digerati issued 50,000 warrants to a consultant for services, the warrants vested at time of issuance. The warrants
have a term of 3 years, with an exercise price of $0.50. At time of issuance the company recognized approximately $21,000 in warrant
expense using Black-Scholes valuation.
In
July 2018, Digerati received $15,000 for the exercise of 150,000 warrants, with an exercise price of $0.10 per warrant.
The
fair market value of all warrants issued was determined using the Black-Scholes option pricing model which used the following
assumptions:
Expected dividend yield
|
|
|
0.00%
|
|
Expected stock price volatility
|
|
|
153.99% - 176.56%
|
|
Risk-free interest rate
|
|
|
2.05%
-2.80%
|
|
Expected term
|
|
|
3.0
- 5.0 years
|
|
During
the year ended July 31, 2019, the Company issued the following warrants:
In
August 2018, Digerati secured $40,000 from an accredited investor under a private placement and issued 80,000 shares of its common
stock at a price of $0.50 per share and warrants to purchase an additional 15,000 shares of its common stock at an exercise price
of $0.50 per share. We determined that the warrants issued in connection with the private placement were equity instruments and
did not represent derivative instruments. The Company adopted a sequencing policy and determined that the warrants with fixed
exercise price were excluded from derivative consideration.
In
October 2018, Digerati issued 200,000 warrants under an extension of payments to existing promissory notes, with a combined current
principal balance of $75,000, the warrants vested at time of issuance. The warrants have a term of 3 years, with an exercise price
of $0.10. Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance was approximately
$31,000 and was recognized as a discount on the promissory note, the company amortized the fair market value as interest expense
over 3 months.
In
January 2019, Digerati cancelled 260,000 warrants with an exercise price of $0.15. Additionally, the Company issued 260,000 common
shares to replace these warrants, in conjunction with two promissory notes with a principal balance of $50,000, in addition at
the time of issuance we recognized a discount of $36,000 for the common stock issued in replacement of warrants.
In
February 2019, the Company received $1,500 for the exercise of 15,000 warrants, with an exercise price of $0.10 per warrant.
In
March 2019, the Company received $6,000 for the exercise of 60,000 warrants, with an exercise price of $0.10 per warrant.
In
April 2019, the Company secured $50,000 from accredited investors under a private placement and issued 50,000 shares of Series
A Convertible Preferred Stock at a conversion price of $0.30 per share and warrants to purchase an additional 100,000 shares of
its common stock at an exercise price of $0.20 per share. We determined that the warrants issued in connection with the private
placement were equity instruments and did not represent derivative instruments. The Company adopted a sequencing policy and determined
that the warrants with fixed exercise price were excluded from derivative consideration.
In
May 2019, the Company secured $175,000 from accredited investors under a private placement and issued 175,000 shares of Series
A Convertible Preferred Stock at a conversion price of $0.30 per share and warrants to purchase an additional 350,000 shares of
its common stock at an exercise price of $0.20 per share. We determined that the warrants issued in connection with the private
placement were equity instruments and did not represent derivative instruments. The Company adopted a sequencing policy and determined
that the warrants with fixed exercise price were excluded from derivative consideration.
The
fair market value of all warrants issued was determined using the Black-Scholes option pricing model which used the following
assumptions:
Expected dividend yield
|
|
0.00%
|
|
Expected stock price volatility
|
|
153.99% - 330.94%
|
|
Risk-free interest rate
|
|
2.00% -2.93%
|
|
Expected term
|
|
3.0 years
|
|
A
summary of the warrants as of July 31, 2019 and 2018 and the changes during the years ended July 31, 2019 and 2018 are presented
below:
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
|
Weighted-average
|
|
|
remaining contractual
|
|
|
|
Warrants
|
|
|
exercise price
|
|
|
term (years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2017
|
|
|
510,000
|
|
|
$
|
0.29
|
|
|
|
2.87
|
|
Granted
|
|
|
2,010,000
|
|
|
$
|
0.26
|
|
|
|
3.34
|
|
Exercised
|
|
|
(150,000
|
)
|
|
$
|
0.10
|
|
|
|
3.00
|
|
Forfeited and cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at July 31, 2018
|
|
|
2,370,000
|
|
|
$
|
0.28
|
|
|
|
2.90
|
|
Granted
|
|
|
665,000
|
|
|
$
|
0.18
|
|
|
|
2.61
|
|
Exercised
|
|
|
(75,000
|
)
|
|
$
|
0.10
|
|
|
|
2.15
|
|
Forfeited and cancelled
|
|
|
(260,000
|
)
|
|
$
|
0.15
|
|
|
|
3.75
|
|
Outstanding at July 31, 2019
|
|
|
2,700,000
|
|
|
$
|
0.32
|
|
|
|
2.19
|
|
Exercisable at July 31, 2019
|
|
|
2,400,000
|
|
|
$
|
0.24
|
|
|
|
2.09
|
|
The
aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period
and the exercise price, multiplied by the number of in-the-money warrants) of the 2,700,000 and 2,370,000 warrants outstanding
at July 31, 2019 and July 31, 2018 was $63,602 and $607,557, respectively.
The
aggregate intrinsic value of 2,400,000 and 2,070,000 warrants exercisable at July 31, 2019 and July 31, 2018 was $63,602 and $597,927,
respectively.
Warrant
expense for the years ended July 31, 2019 and 2018 was $64,000 and $268,000, respectively. Unamortized warrant expense totaled
$0 and $64,000 respectively as of July 31, 2019 and July 31, 2018.
NOTE
9 – NON-STANDARDIZED PROFIT-SHARING PLAN
We
currently provide a Non-Standardized Profit-Sharing Plan, adopted September 15, 2006. Under the plan our employees qualify to
participate in the plan after one year of employment. Contributions under the plan are based on 25% of the annual base salary
of each eligible employee up to $54,000 per year. Contributions under the plan are fully vested upon funding.
During
the years ended July 31, 2019 and July 31, 2018, the Company issued 635,156 and 644,732 respectively, common shares to various
employees as part of the Company’s profit-sharing plan contribution. The Company recognized stock-based compensation expense
for July 31, 2019 and July 31, 2018 of $114,000 and $226,000, respectively, equivalent to the value of the shares calculated based
on the share’s closing price at the grant dates.
NOTE
10 – SIGNIFICANT CUSTOMERS
During
the years ended July 31, 2018 and 2019, the Company did not derive a significant amount of revenue from one single customer.
As
of the year ended July 31, 2019, the company derived 9%, 7%, 6% and 6% total accounts receivable from four customers.
During the
year ended July 31, 2018, the company derived 13% and 23% total accounts receivable from two customers.
NOTE
11 – DEBT
Non-convertible
- debt
On
December 1, 2017, Shift8 Networks, Inc., dba, T3 Communications (“T3”) and Synergy Telecom, Inc., a Delaware corporation
(“Synergy”), closed a transaction to acquire all the assets, assumed all customers, and critical vendor arrangements
from Synergy. In conjunction with the transaction, T3 entered into a promissory note for $125,000 with an effective annual interest
rate of 6% with 5 quarterly payments and a maturity date of February 28, 2019. The note holder agreed to extend three of the quarterly
payment until March 31, 2019.In conjunction with the extension, the Company issued 200,000 warrants with a fair value of $31,000,
which was recorded a debt discount and amortized during the year ending July 31, 2019. During the year ended July 31, 2018, the
Company made a principal payment of $50,000, and as of July 31, 2018 the outstanding principal balance was $75,000. During the
year ended July 31, 2019 the Company paid in full the outstanding principal balance of $75,000 and accrued interest of $3,105.
On
January 17, 2018, the Company entered into a Promissory Note for $30,000, bearing interest at a rate of 5% per annum, with maturity
date of January 19, 2018. The Company paid the full principal amount outstanding and accrued interest on January 19, 2018.
On
February 21, 2018, the Company entered into a Promissory Note for $35,000, bearing interest at a rate of 5% per annum, with maturity
date of March 2, 2018. The Company paid the full principal amount outstanding and accrued interest on March 2, 2018.
On
March 13, 2018, the Company entered into various Promissory Notes (the “Notes”) for $200,000, bearing interest at
a rate of 12% per annum, with maturity date of April 13, 2018. The Company paid the full principal amount outstanding and accrued
interest on April 13, 2018. In conjunction with the Notes, the Company issued 30,000 warrants under the promissory notes, the
warrants vested at time of issuance. The warrants have a term of 3 years, with an exercise price of $0.15. Under a Black-Scholes
valuation the relative fair market value of the warrants at time of issuance was approximately $12,000 and was recognized as a
discount on the promissory notes, the company amortized the relative fair market value as interest expense during the year ended
July 31, 2018. During the year ended July 31, 2018, the Company paid the full principal amount outstanding and accrued interest.
On
April 27, 2018, T3 entered into a promissory note for $350,000 with an effective annual interest rate of 12% and a maturity date
of June 27, 2018. With a principal payment of $200,000 due on May 31, 2018 and a principal payment of $150,000 due on June 27,
2018. The promissory note is secured by a Pledge and Security Agreement, whereby Shift8 agreed to pledge the cash on hand at one
of the bank accounts owned by T3 until the principal payment is paid in full. In conjunction with the Notes, the Company issued
3-year warrants to purchase 400,000 shares of common stock each at an exercise price of $0.15 per share. Under a Black-Scholes
valuation the relative fair market value of the warrants at time of issuance was approximately $107,000 and was recognized as
a discount on the promissory notes during the year ended July 31, 2018. During the year ended July 31, 2018, the promissory note
was paid in full.
On
April 30, 2018, T3 entered into a secured promissory note for $650,000 with an effective annual interest rate of 0% and a maturity
date of May 14, 2018, provided, however, the Maturity Date will automatically be extended by one (1) additional period of thirty
(30) days, until June 14, 2018. In addition, T3 entered into a Security Agreement, whereby T3 agreed to pledge one third of the
outstanding shares of its Florida operations, T3 Communications, Inc., the secured interest will continue until the principal
balance is paid in full. Furthermore, a late fee of $3,000 per calendar week will be accessed beginning on May 15, 2018 and will
continue until he principal balance is paid in full. The lender agreed to extend the maturity date until October 31, 2019, we
are currently paying a $3,000 per week late fee. As of July 31, 2019 and July 31, 2018, the outstanding principal balance was
$650,000.
On
April 30, 2018, T3 entered into a credit facility under a secured promissory note of $500,000, interest payment for the first
twenty-three months with a balloon payment on the twenty-fourth month and a maturity date of April 30, 2020. Collateralized by
T3’s accounts receivables and with an effective annual interest rate of prime plus 5.25%, adjusted quarterly on the first
day of each calendar quarter. However, the rate will never be less than 9.50% per annum. In the event of default, the interest
rate will be the maximum non-usurious rate of interest per annum permitted by whichever of applicable United States federal law
or Louisiana law permits the higher interest rate. T3 agreed to pay the lender a commitment fee of 1.00% upon payment of the first
interest payment under the credit facility and 1.00% on the first anniversary of the credit facility. In addition, T3 agreed to
pay a monitoring fee of 0.33% of the credit facility, payable in arrears monthly. T3 also agreed to pay an over-advance fee of
3.00% of the amount advanced in excess of the borrowing base or maximum amount of the credit facility, payable in arrears monthly.
T3 is required to maintain the following financial covenants: 1) A consolidated debt service coverage ratio, as of the last day
of each fiscal quarter, of at least 1.25 to 1.00, 2) A fixed charge coverage ratio, as of the last day of each fiscal quarter,
of at least 1.25 to 1.00, and 3) A tangible net worth, at all times of at least $100,000. As of July 31, 2019 and July 31, 2018,
the outstanding principal balance was $500,000.
On
May 1, 2018, T3 entered into a promissory note for $150,000 with an effective annual interest rate of 3% and a maturity date of
May 7, 2018. On May 4, 2018 the promissory note was paid in full.
On
October 12, 2018, the Company issued an unsecured promissory note for $25,000, bearing interest at a rate of 8% per annum, with
maturity date of November 12, 2018, subsequently the maturity date was extended to December 10, 2018. In conjunction with the
promissory note, the Company issued 140,000 common shares, the shares vested at time of issuance, these shares replaced previously
issued warrants with an exercise price of $0.15, therefore the exercise price of $21,000 was recognized as a discount on the promissory
note. On December 10, 2018, the Company paid in full the principal amount of $25,000 and accrued interest of $323. In addition,
the Company amortized $21,000 of the debt discount as interest expense related to the note.
On
October 18, 2018, the Company issued an unsecured promissory note for $25,000, bearing interest at a rate of 8% per annum, with
maturity date of November 18, 2018. In conjunction with the promissory note, the Company issued 100,000 common shares, the shares
vested at time of issuance, these shares replaced previously issued warrants with an exercise price of $0.15, therefore the exercise
price of $15,000 was recognized as a discount on the promissory note. On November 16, 2018, the Company paid in full the principal
outstanding balance of $25,000 and accrued interest of $159. In addition, the Company amortized $15,000 of the debt discount as
interest expense during the term the promissory note.
On
October 22, 2018, the Company issued a secured promissory note for $50,000, bearing interest at a rate of 8% per annum, with maturity
date of December 31, 2018. The promissory note is secured by a Pledge and Escrow Agreement, whereby the Company agreed to pledge
rights to a collateral due under certain Agreement. In June 2019, the maturity date was extended to July 31, 2019. As of the date
of this filing, we are working with the lender to extend the maturity date on the note. The outstanding balance as of July 31,
2019 was $50,000.
On
June 14, 2019, the Company, entered into a Stock Purchase Agreement (the “Agreement”) to acquire a 12% minority interest
in Itellum Comunicacions Costa Rica, S.R.L. In conjunction with this transaction, we entered into a non-recourse promissory note
for $17,500 with an effective annual interest rate of 8% and an initial maturity date of September 14, 2019. As of the date of
this filing, we are working with the lender to extend the maturity date on the note. The outstanding balance as of July 31, 2019
was $17,500.
Notes
payable, related party
On
April 30, 2018, T3 entered into a convertible secured promissory note for $525,000 with an effective annual interest rate of 8%
and a maturity date of April 30, 2020. With a principal payment of $100,000 due on June 1, 2018 and a principal payment of $280,823
due on April 30, 2020. Payment are based on a 60-month repayment schedule. At any time while this Note is outstanding, but only
upon: (i) the occurrence of an Event of Default under the Note or the Pledge and Escrow Agreement; or (ii) mutual agreement between
the Borrower and the Holder, the Holder may convert all or any portion of the outstanding principal, accrued and unpaid interest,
Premium, if applicable, and any other sums due and payable hereunder (such total amount, the “Conversion Amount”)
into shares of Common Stock (the “Conversion Shares”) at a price equal to: (i) the Conversion Amount (the numerator);
divided by (ii) a conversion price of $1.50 per share of Common Stock, which price shall be indicated in the conversion
notice (the denominator) (the “Conversion Price”). The Holder shall submit a Conversion Notice indicating the Conversion
Amount, the number of Conversion Shares issuable upon such conversion, and where the Conversion Shares should be delivered. The
promissory note is secured by a Pledge and Escrow Agreement, whereby T3 agreed to pledge 51% of the securities owned in its Florida
operations, T3 Communications, Inc., until the principal payment is paid in full. In conjunction with the promissory note, the
Company issued 3-year warrants to purchase 75,000 shares of common stock at an exercise price of $0.50 per share. Under a Black-Scholes
valuation the relative fair market value of the warrants at time of issuance was $19,267 and was recognized as a discount on the
promissory note. During the years ended July 31, 2019 and 2018, the company amortized $6,395 and $5,604, respectively, as interest
expense. The total unamortized discount as of July 31, 2019 and 2018 were $7,298 and $13,693, respectively. In addition, during
the years ended July 31, 2019 and 2018, the Company paid $73,223 and $119,000, respectively, of the principal outstanding balance.
The total principal outstanding as of July 31, 2019 and 2018 were $332,985 and $406,208, respectively. One of the note holders
also serves as President, CEO and Board Member of T3 Communications, Inc., one of our operating subsidiaries.
On
May 1, 2018, T3 entered into a secured promissory note for $275,000 with an effective annual interest rate of 0% with an interest
and principal payment of $6,000 per month and shall continue perpetuity until the entire principal amount is paid in full. The
promissory note is guaranteed to the lender by 15% of the stock owned by T3 in its Florida operations, T3 Communications, Inc.,
the secured interest will continue until the principal balance is paid in full. In conjunction with the promissory note, the Company
issued 3-year warrants to purchase 100,000 shares of common stock at an exercise price of $0.50 per share. Under a Black-Scholes
valuation the relative fair market value of the warrants at time of issuance was approximately $26,543 and was recognized as a
discount on the promissory note, the company amortized $7,738 and $2,119 as interest expense during the years ended July 31, 2019
and 2018, respectively. The total unamortized discount as of July 31, 2019 and 2018 were $16,686 and $24,424, respectively. During
the years ended July 31, 2019 and 2018, the Company paid $52,721 and $12,547, respectively, of the principal balance. The total
principal outstanding as of July 31, 2019 and 2018 were $209,732 and $262,453, respectively. The note holder also serves as Board
Member of T3 Communications, Inc., one of our operating subsidiaries.
On
December 7, 2018, Digerati entered into an unsecured promissory note for $28,000, the Company received net proceeds of $25,000
and added to the principal balance $3,000 of late penalty fee. The note had an effective annual interest rate of 0%, and a maturity
date of January 21, 2019. Subsequently, the maturity date was extended to May 06, 2019. In conjunction with the note, the Company
issued 28,000 shares of Common Stock, the shares vested at time of issuance. Under a Black-Scholes valuation the relative fair
market value of the shares of Common Stock at time of issuance was minimal. In addition, the Company recognized $3,000 as a discount
for penalty fee on the promissory note, and amortized $3,000 as interest expense during the year ended July 31, 2019. On May 6,
2019, the Company assigned the principal outstanding balance of $28,000 and accrued interest of $1,334 to another holder under
a convertible promissory note (See section convertible promissory note assignment - April 2019 for the details on the assignment).
The note holder also serves as Board Member of T3 Communications, Inc., one of our operating subsidiaries.
Convertible
debt non-derivative
In
March 2018, the Company entered into two (2) Promissory Notes (the “Notes”) for $250,000 each, bearing interest at
a rate of 12% per annum. The Notes have a maturity date of September 15, 2018, provided, however, the Company shall have the right
to request that the maturity date to be extended by one (1) additional period of ninety (90) days, until December 14, 2018. The
Notes are payable every month, commencing April 15, 2018, in monthly payments of interest only and a single payment of the principal
amount outstanding plus accrued interest on September 15, 2018. The Company agreed
to repay the Notes from the proceeds from the Company’s current private placement. As proceeds from the Private Placement
are received, the Company shall direct all funds to the Note Holders until the principal amount outstanding and accrued interest
are paid in full. In addition, on March 15, 2018, the Company entered into a Note Conversion Agreement (the “Agreement”)
with the Note holders, whereby, the holders may elect to convert up to 50% of the principal amount outstanding on the Notes into
Common Stock of Digerati at any time after 90 days of funding the Notes. The Conversion Price shall be the greater of: (i) the
Variable Conversion Price (as defined herein) or (ii) the Fixed Conversion Price (as defined herein). The “Variable
Conversion Price” shall be equal to the average closing price for Digerati’s Common Stock (the “Shares”)
for the ten (10) Trading Day period immediately preceding the Conversion Date. “Trading Day” shall mean any day on
which the Common Stock is tradable for any period on the OTCQB, or on the principal securities exchange or other securities market
on which the Common Stock is then being traded. The “Fixed Conversion Price” shall mean $0.50. In conjunction
with the notes, the Company issued 300,000 warrants, the warrants vested at time of issuance. The warrants have a term of 3 years,
with an exercise price of $0.10. Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance
was approximately $126,538 and was recognized as a discount on the promissory notes. The company amortized $84,433 and $42,105
as a non-cash interest during the years ended July 31, 2019 and 2018, respectively. The total unamortized discount as of July
31, 2019 and 2018 were $0 and $84,433, respectively. Additionally, during the year ended the Company issued 375,000 shares of
common stock for payment of $60,000 in accrued interest for the notes. The total principal outstanding balance as of July 31,
2019 and 2018 was $500,000. On December 27, 2018, the Company entered into an Amendment to the Loan Agreements, under the amendments
the note holders agreed to extend the maturity date until September 14, 2019. In addition, as part of the amendment, the Company
agreed to modify the “Fixed Conversion Price” to $0.35, all other terms under the Promissory Notes remained
the same. We accounted for the extensions to the Notes as debt modifications and not extinguishment of debt since the changes
in fair value are not substantial in accordance with ASC 470-50. Subsequently, on October 7, 2019, the holders agreed to extend
the maturity date until March 30, 2020. In addition, as part of the amendments, the Company agreed to issue 400,000 shares of
common stock. The shares were recorded as debt discount and amortized over the remaining term of the notes.
On
June 19, 2018, the Company entered into various Promissory Notes (the “Notes”) for $272,000, bearing interest at a
rate of 10% per annum, with an initial maturity date of April 10, 2019. In conjunction with the Notes, the Company issued 255,000
warrants under the promissory notes, the warrants vested at time of issuance. The warrants have a term of 3 years, with an exercise
price of $0.10. Under a Black-Scholes valuation the relative fair market value of the warrants at time of issuance was approximately
$118,400 and was recognized as a discount on the promissory notes. The company amortized $109,552 and $8,848 as a non-cash interest
during the years ended July 31, 2019 and 2018, respectively. The total unamortized discount as of July 31, 2019 and 2018 were
$0 and $109,552, respectively. On March 29, 2019, the Company entered into a First Amendment to the Promissory Notes, under the
amendments the note holders agreed to extend the maturity date until June 30, 2019. In addition, as part of the amendments, the
Company agreed to issue 85,000 shares of common stock. The shares were recorded as debt discount of $17,425 and amortized over
the remaining term of the notes. The company amortized $17,425 as a non-cash interest during the years ended July 31, 2019. The
total unamortized discount as of July 31, 2019 for the issuance of the first amendment shares was $0. On June 30, 2019, the Company
entered into a Second Amendment to the Promissory Notes, under the amendments the note holders agreed to extend the maturity date
until November 30, 2019. In addition, as part of the amendments, the Company agreed to issue 85,000 shares of common stock. The
shares were recorded as debt discount of $14,450 and amortized over the remaining term of the notes. The company amortized $2,890
as a non-cash interest during the years ended July 31, 2019. The total unamortized discount as of July 31, 2019 for the issuance
of the second amendment shares was $11,560. The total principal outstanding balance as of July 31, 2019 and 2018 was $272,000.
Convertible
debt - derivative
On
January 12, 2018, the Company entered into a securities purchase agreement with Peak One Opportunity Fund, L.P., a Delaware limited
partnership (“Peak One”). Under the agreement, Peak One agreed to purchase from us up to $600,000 aggregate principal
amount of our convertible debentures (together the “Debentures” and each individual issuance a “Debenture”),
bearing interest at a rate of 0% per annum, with maturity on the third anniversary of the respective date of issuance. On July
25, 2018, the securities purchase agreement was amended to increase to $620,000 the aggregate principal amount of the convertible
debentures.
Peak
One - First Debenture
The
Company issued the first debenture (the “Debenture”) to Peak One on January 17, 2018 in the principal amount of $200,000
for a purchase price of $180,000 and 0% percent stated interest rate. The Company paid Peak One $6,000 for legal and compliance
fees. In addition, the Company paid $14,400 in other closing costs, these fees were deducted from the proceeds at time of issuance.
The Company recorded these discounts and cost of $40,400 as a discount to the Debenture was amortized to interest expense.
On
July 17, 2018, the Company redeemed $120,000 of the principal outstanding, at a redemption price of $156,000. The Company recognized
the redemption price as interest expense during the period.
The
Company analyzed the Debenture for derivative accounting consideration and determined that the embedded conversion option qualified
as a derivative instrument, due to the variable conversion price. Therefore, the company recognized derivative liability of $112,000
at July 31, 2018, of which $80,000 was recorded as debt discount and was amortized during the term of the note, and $32,000 was
recorded as derivative loss. In connection with the execution of the Debenture, we issued 250,000
shares of our common stock to Peak One, the shares were recorded with a relative fair value of $0, the Company also recorded debt
discount of $80,000 and amortized to interest expense.
On
August 2, 2018, the Company redeemed $40,000 of the principal outstanding under the convertible debenture, dated January 12, 2018
with Peak One Opportunity Fund, L. P., at a redemption price of $56,000. The Company recognized the difference between the redemption
price and principal balance paid as interest expense of $16,000. On November 26, 2018, the Company issued 139,860 shares of common
stock for the conversion of $20,000 of the principal outstanding under the convertible debenture. On December 20, 2018, the Company
issued 356,007 shares of common stock for the conversion of $20,000 of the principal outstanding under the convertible debenture.
During
the years ended July 31, 2019, the Company amortized $80,000 of the debt discount as interest expense related to the convertible
debenture. The total unamortized discount as of July 31, 2019 and 2018 were $0 and $80,000, respectively. The total principal
outstanding balance as of July 31, 2019 and 2018, were $0 and $80,000, respectively.
Peak
One - Second Debenture
The
Company issued a second debenture (the “Debenture”) to Peak One on July 31, 2018 in the principal amount of $220,000
for a purchase price of $198,000 and 0% percent stated interest rate. The Company paid Peak One $5,000 for legal and compliance
fees, these fees were deducted from the proceeds at time of issuance. The Company recorded these discounts and cost of $22,000
as a discount to the Debenture and amortized to interest expense.
The
Company analyzed the Debenture for derivative accounting consideration and determined that the embedded conversion option qualified
as a derivative instrument, due to the variable conversion price. Therefore, the company recognized derivative liability of $189,171.
In connection with the execution of the Debenture, we issued 130,000 shares of our common
stock to Peak One, the shares were recorded with a relative fair value of $3,627 and $192,798 was recorded as debt discount
and amortized during the term of the note.
On
February 12, 2019, the Company issued 475,511 shares of common stock for the conversion of $20,000 of the principal outstanding
under the convertible debenture.
On
March 8, 2019, the Company issued 356,633 shares of common stock for the conversion of $25,000 of the principal outstanding under
the convertible debenture.
On
April 9, 2019, the Company issued 356,633 shares of common stock for the conversion of $25,000 of the principal outstanding under
the convertible debenture.
On
May 10, 2019, the Company issued 713,266 shares of common stock for the conversion of $50,000 of the principal outstanding under
the convertible debenture.
On
June 19, 2019, the Company issued 713,266 shares of common stock for the conversion of $50,000 of the principal outstanding under
the convertible debenture.
During
the years ended July 31, 2019 and 2018, the Company amortized $163,584 and $0, respectively of the debt discount as interest expense.
The total unamortized discount as of July 31, 2019 and 2018, were $29,214 and $192,798, respectively. The total principal outstanding
balance as of July 31, 2019 and 2018 were $50,000 and $220,000, respectively.
The
Convertible debentures dated January 17, 2018 and July 31, 2018 with Peak One provide the option to the holder to convert at any
time on or after the 180th calendar day after the issue date, to convert all or any portion of the then outstanding and unpaid
principal amount and interest under the Promissory notes into shares of Common Stock of the Company at a conversion price for
each share of Common Stock equal to the lower of (i) $0.50 (the “Fixed Conversion Price”) , or (ii) 70% of the lowest
closing bid price of the Company’s Common Stock during the twenty (20) Trading Days immediately preceding the date of the
date of conversion of the Debentures (provided, further, that if either the Company is not DWAC Operational at the time of conversion
or the Common Stock is traded on the OTC Pink (“OTCP”) at the time of conversion, then seventy percent (70%) shall
automatically adjust to sixty-five percent (65%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock
for the twenty (20) Trading Days immediately preceding the date of conversion of the Debentures), subject in each case to equitable
adjustments resulting from any stock splits, stock dividends, recapitalizations or similar events. (the “Alternate Conversion
Price”)
The
Debentures called for redemption shall be redeemable by the Company, upon not more than two (2) days written notice, for an amount
(the “Redemption Price”) equal to: (i) if the Redemption Date (as defined below) is ninety (90) days or less from
the date of issuance of this Debenture, One Hundred Ten percent (110%) of the sum of the Principal Amount so redeemed plus accrued
interest, if any; (ii) if the Redemption Date is greater than or equal to one ninety-one (91) days from the date of issuance of
this Debenture and less than or equal to one hundred twenty (120) days from the date of issuance of this Debenture, One Hundred
Fifteen percent (115%) of the sum of the Principal Amount so redeemed plus accrued interest, if any; (iii) if the Redemption Date
is greater than or equal to one hundred twenty one (121) days from the date of issuance of this Debenture and less than or equal
to one hundred fifty (150) days from the date of issuance of this Debenture, One Hundred Twenty percent (120%) of the sum of the
Principal Amount so redeemed plus accrued interest, if any; (iv) if the Redemption Date is greater than or equal to one hundred
fifty one (151) days from the date of issuance of this Debenture and less than or equal to one hundred eighty (180) days from
the date of issuance of this Debenture, One Hundred Thirty percent (130%) of the sum of the Principal Amount so redeemed plus
accrued interest, if any; and (v) if the Redemption Date is greater than or equal to one hundred eighty one (181) days from the
date of issuance of this Debenture, One Hundred Forty percent (140%) of the sum of the Principal Amount so redeemed plus accrued
interest, if any. The date upon which the Debentures are redeemed and paid shall be referred to as the “Redemption Date”.
In
the Event of Default to the Holders of all Debentures then outstanding, and in each and every such case, unless such Event of
Default shall have been waived in writing by a majority in interest of the Holders of the Debentures (which waiver shall not be
deemed to be a waiver of any subsequent default), then at the option of a majority in interest of the Holders and in the discretion
of a majority in interest of the Holders, take any or all of the following actions: (i) pursue remedies against the Company in
accordance with any of the Holder’s rights, (ii) increase the interest rate applicable to the Debentures to the lesser of
eighteen percent (18%) per annum and the maximum interest rate allowable under applicable law, (iii) in the case of an Event of
Default under Section 10(e)(ii)(1) based on the Company’s failure to be DWAC Operational, increase the Principal Amount
to an amount equal to one hundred ten percent (110%) of the then-outstanding Principal Amount, (iv) in the case of an Event of
Default under Section 10(d)(i), increase the Principal Amount to an amount equal to one hundred twenty percent (120%) of the then-outstanding
Principal Amount and an additional ten percent (10%) discount shall be factored into the Conversion Price until this Debenture
is no longer outstanding, (v) in the case of an Event of Default under Section 10(d)(i) through (v), increase the Principal Amount
of the relevant Holder’s Debenture by One Thousand Dollars and 00/100 ($500.00) for each day the related failure continues,
(vi) in the case of an Event of Default under Section 10(d)(ii) through (v) arising from an untimely delivery to the Holder of
Conversion Shares or shares of Common Stock in de-legended form, if the closing bid price of the Common Stock on the Trading Day
immediately prior to the actual date of delivery of Conversion Shares or de-legended shares, as the case may be, is less than
the closing bid price on the Trading Day immediately prior to the date when Conversion Shares or de-legended shares were required
to be delivered, increase the Principal Amount of the relevant Holder’s Debenture by an amount per share equal to such difference,
and (vii) following the expiration of the applicable grace period (if any), at the option and discretion of the Holder, accelerate
the full indebtedness under this Debenture, in an amount equal to one hundred forty percent (140%) of the outstanding Principal
Amount and accrued and unpaid interest (the “Acceleration Amount”), whereupon the Acceleration Amount shall be immediately
due and payable, without presentment, demand, protest or notice of any kinds, all of which are hereby expressly waived, anything
contained herein, in the Securities Purchase Agreement or in any other note or instruments to the contrary notwithstanding. In
the case of an Event of Default under Section 10(d)(ii), the Holder may either (i) declare the Acceleration Amount to exclude
the Conversion Amount that is the subject of the Event of Default, in which case the Acceleration Amount shall be based on the
remaining Principal Amount and accrued interest (if any), in which case the Company shall continue to be obligated to issue the
Conversion Shares, or (ii) declare the Acceleration Amount to include the Conversion Amount that is the subject of the Event of
Default, in which case the Acceleration Amount shall be based on the full Principal Amount, including the Conversion Amount, and
accrued interest (if any), whereupon the Notice of Conversion shall be deemed withdrawn.
Firstfire
- Promissory Note
On
May 30, 2018, the Company entered into a securities purchase agreement with Firstfire Global Opportunities Fund, LLC, a Delaware
limited liability company (“Firstfire”). Under the agreement, we issued Firstfire a $305,556 principal amount of a
convertible promissory note for a cash purchase price of $275,000 (“Promissory note”), bearing interest at a rate
of 6% per annum, with maturity on the first anniversary of the date of issuance. The Company paid Firstfire $2,500 for legal and
compliance fees. The Company recorded the legal fees and other cost for a total of $33,000 as a discount to the Promissory note
and they will be amortized over the term to interest expense. In connection with the execution
of the securities purchase agreement, we issued 125,000 shares of our common stock to Firstfire as a commitment fee, the
shares were recorded with a relative fair value of $0, the Company also recorded debt discount of $272,500 and amortized to interest
expense over the term of the note.
The
Company analyzed the Promissory note for derivative accounting consideration and determined that the embedded conversion option
qualified as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the company
recognized derivative liability of $330,830 and a debt discount of $272,500 that will be amortized during the term of the note.
In addition, the Company recorded a $58,330 as a loss in derivative liability.
On
November 21, 2018 the Company issued 85,000 shares of common stock for an amendment on the Promissory note and recorded the fair
market value of the shares of $23,800 as interest expense.
On
January 3, 2019, the Company issued 218,181 shares of common stock for the conversion of $15,000 of the principal outstanding
under the convertible note.
On
January 11, 2019, the Company issued 427,972 shares of common stock for the conversion of $30,000 of the principal outstanding
under the convertible note.
On
January 18, 2019, the Company redeemed the full outstanding principal balance on the convertible debenture of $260,556, at a redemption
price of $370,000. The Company recognized the difference between the redemption price and principal balance paid as interest expense
of $109,444.
During
the year ended July 31, 2019 and 2018, the Company amortized $272,500 and $0, respectively, of the debt discount as interest expense
related to the convertible note. The total unamortized discount as of July 31, 2019 and 2018 were $0 and $272,500, respectively.
The total principal outstanding balance as of July 31, 2019 and 2018 were $0 and $305,556, respectively.
The
Promissory note with Firstfire provide the option to the holder to convert at any time on or after the 180th calendar day after
the issue date, to convert all or any portion of the then outstanding and unpaid principal amount and interest under the Promissory
note into shares of Common Stock of the Company at a conversion price for each share of Common Stock equal to the lower of (i)
$0.50 (the “Fixed Conversion Price”) , or (ii) 65% of the lowest closing bid price of the Company’s Common Stock
during the twenty (20) consecutive trading day period immediately preceding the trading day that the Company receives a Notice
of Conversion (the “Alternate Conversion Price”)
The
Company may Prepay at any time prior to the 180th calendar day after the funding of the Promissory note all or part of the outstanding
principal balance, with the exception of any portion thereof which is the subject of a previously-delivered notice of conversion,
prior to the maturity date for an amount equal to: (i) if the prepayment date is 90 days or less from the date of issuance, 105%
of the sum of the principal amount to be prepaid plus accrued interest, if any; (ii) if the prepayment date is greater than or
equal to 91 days from the date of issuance and less than or equal to 120 days from the date of issuance, 110% of the sum of the
principal amount to be prepaid plus accrued interest, if any; (iii) if the prepayment date is greater than or equal to 121 days
from the date of issuance and less than or equal to 180 days from the date of issuance, 115% of the sum of the principal amount
to be prepaid plus accrued interest, if any.
In
the event of default, the note shall become immediately due and paid in full in an amount (the “Default Amount”) equal
to the principal amount then outstanding plus accrued interest through the date of full repayment multiplied by 150%. The holder
may, at its sole discretion, determine to accept payment part in Common Stock and part in cash.
The
Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved
Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the Note.
Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time,
increases the Reserved Amount in accordance with the Company’s obligations under the Note.
Pursuant
to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note
(the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock.
The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to
the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales
of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion
Shares.
Convertible
Promissory Notes with four (4) investors - January 2019
On
January 16, 2019, the Company entered into various Securities Purchase Agreements (the SPAs”) with four (4) different investors
(each an “Investor”, and together the “Investors”) pursuant to which each Investor purchased a 10% unsecured
convertible promissory note (each a “Note”, and together the “Notes”) from the Company. Three of the notes
are in the aggregate principal amount of $140,000 each and a maturity date of October 16, 2019. One of the notes is in the aggregate
principal amount of $57,750 and a maturity date of January 24, 2020. The purchase price of $140,000 of each of three Notes were
paid in cash on January 16, 2019. After payment of transaction-related expenses of $51,000, net proceeds to the Company from the
three Notes totaled $369,000. The purchase price of $57,750 Note was paid in cash on January 24, 2019. After payment of transaction-related
expenses of $7,750, net proceeds to the Company from Note totaled $50,000. The Company recorded these discounts and cost of $58,750
as a discount to the Notes and fully amortized as interest expense during the period. In
connection with the execution of the Notes, we issued 500,000 shares of our common stock to the Note holders, the shares
were recorded with a relative fair value of $0 as the notes were fully discounted by derivative liability.
The
Company analyzed the Notes for derivative accounting consideration and determined that the embedded conversion option qualified
as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the company recognized
derivative liability for the four (4) new convertible notes of $655,345, of which $419,000 was recorded as debt discount and will
be amortized during the term of the Notes, and $236,345 was recorded as day 1 derivative loss.
On
July 12, 2019, the Company redeemed the full outstanding principal balance on two of the convertible notes for $280,000, at a
redemption price of $382,726. The Company recognized the difference between the redemption price and principal balance paid as
interest expense of $102,726.
On
July 12, 2019, the Company redeemed $70,000 of the principal outstanding on one of the convertible notes, at a redemption price
of $91,000. The Company recognized the difference between the redemption price and principal balance paid as interest expense
of $21,000.
On
July 19, 2019, the Company issued 156,202 shares of common stock for the conversion of $9,500 of the principal outstanding and
$500 in fees under one of the convertible notes.
On
July 25, 2019, the Company issued 312,500 shares of common stock. The shares were issued in conjunction with a conversion of $20,000
of the principal outstanding under a convertible debenture.
The
total principal balance outstanding and unamortized discount on the Notes as of July 31, 2019 were $98,250 and $29,765, respectively.
The company amortized $389,235 discount from derivative liabilities as interest expense during the year ended July 31, 2019.
Each
Investor is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest
of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock
equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations Bureau
OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period
immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock during
the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion
(the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with the terms
of the Notes.
The
Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved
Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the Notes.
Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time,
increases the Reserved Amount in accordance with the Company’s obligations under the Notes.
Pursuant
to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note
(the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock.
The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to
the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales
of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion
Shares.
Convertible
Promissory Note - February 2019
On
February 22, 2019, the Company entered into a Securities Purchase Agreement (the SPA”) with an investor (an “Investor”)
the Investor purchased a 10% unsecured convertible promissory note (the “Note”) from the Company. The note is in the
aggregate principal amount of $57,750 and a maturity date of February 22, 2020. After payment of transaction-related expenses
of $7,750, net proceeds to the Company from the Note totaled $50,000. The Company recorded these discounts and cost of $7,750
as a discount to the Note and fully amortized as interest expense during the period.
The
Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified
as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the company recognized
derivative liability for the convertible note of $79,729, of which $50,000 was recorded as debt discount and will be amortized
during the term of the Note, and $29,729 was recorded as day 1 derivative loss.
The
total principal balance outstanding and unamortized discount on the Note as of July 31, 2019 were $57,750 and $29,166, respectively.
The company amortized $20,834 discount from derivative liabilities as interest expense during the year ended July 31, 2019. In
connection with the execution of the Note, we issued 50,000 shares of our common stock to the Note holder, the shares were
recorded with a relative fair value of $0 as the notes were fully discounted by derivative liability.
The
Investor is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest
of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock
equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations Bureau
OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period
immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock during
the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion
(the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with the terms
of the Note.
The
Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved
Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the Note.
Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time,
increases the Reserved Amount in accordance with the Company’s obligations under the Note.
Pursuant
to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note
(the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock.
The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to
the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales
of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion
Shares.
Convertible
Promissory Note - April 2019
On
April 20, 2019, the Company entered into a Securities Purchase Agreement (the SPA”) with an investor (an “Investor”)
the Investor purchased a 10% unsecured convertible promissory note (the “Note”) from the Company. The note is in the
aggregate principal amount of $44,000 and a maturity date of January 19, 2020. After payment of transaction-related expenses of
$4,000, net proceeds to the Company from the Note totaled $40,000. The Company recorded these discounts and cost of $4,000 as
a discount to the Note and fully amortized as interest expense during the period. In connection
with the execution of the Note, we issued 50,000 shares of our common stock to the Note holder, the shares were recorded
with a relative fair value of $0 as the notes were fully discounted by derivative liability.
The
Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified
as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized
derivative liability for the convertible note of $55,592, of which $40,000 was recorded as debt discount and will be amortized
during the term of the Note, and $15,592 was recorded as day 1 derivative loss.
The
total principal balance outstanding and unamortized discount on the Note as of July 31, 2019 were $44,000 and $26,668, respectively.
The Company amortized $13,332 discount from derivative liabilities as interest expense during the year ended July 31, 2019.
The
Investor is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest
of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock
equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations Bureau
OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period
immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock during
the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion
(the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with the terms
of the Note.
The
Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved
Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the Note.
Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time,
increases the Reserved Amount in accordance with the Company’s obligations under the Note.
Pursuant
to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note
(the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock.
The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to
the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales
of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion
Shares.
Convertible
Promissory Note Assignment - April 2019
On
April 30, 2019 , the Company entered into an Assignment Agreement whereby Conexus Solutions LLC (the “Assignor”) assigned
a principal balance plus accrued interest in the total amount of $29,334 (the Assigned Amount:), representing the total balance
outstanding on the Convertible Promissory Note dated December 7, 2018 to Jefferson Street Capital LLC (the “Assignee”).
The note is in the aggregate principal amount of $29,334, 10% interest rate and a maturity date of April 30, 2020.
The
Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified
as a derivative instrument, due to the variable conversion price. As a result, at the time of assignment, the Company recognized
derivative liability for the convertible note of $36,683, of which $29,334 was recorded as debt discount and will be amortized
during the term of the Note, and $7,349 was recorded as day 1 derivative loss.
On
June 7, 2019, the Company issued 189,008 shares of common stock for the conversion of $15,000 of the principal outstanding and
$309 in accrued interest under the convertible note.
On
June 14, 2019, the Company issued 176,963 shares of common stock for the conversion of $14,334 of the principal outstanding under
the convertible note.
The
total principal balance outstanding and unamortized discount on the Note as of July 31, 2019 were $0 and $0, respectively. The
Company amortized $29,334 discount from derivative liabilities as interest expense during the year ended July 31, 2019.
The
Investors is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest
of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock
equal to (i) 60% of the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations
Bureau OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day
period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock
during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice
of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection
with the terms of the Note.
The
Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved
Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the Note.
Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from time to time,
increases the Reserved Amount in accordance with the Company’s obligations under the Note.
Pursuant
to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note
(the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock.
The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to
the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales
of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion
Shares.
Convertible
Promissory Notes with four (4) investors - July 2019
In
July 2019, the Company entered into various Securities Purchase Agreements (the SPAs”) with four (4) different investors
(each an “Investor”, and together the “Investors”) pursuant to which each Investor purchased unsecured
convertible promissory note (each a “Note”, and together the “Notes”) from the Company. Three of the notes
are in the aggregate principal amount of $146,625 each, 3% interest rate and a maturity date of April 11, 2020. The purchase price
of $146,625 of each of three Notes were paid in cash on July 11, 2019. After payment of transaction-related expenses of $57,375,
net proceeds to the Company from the three Notes totaled $382,500. One of the notes is in the aggregate principal amount of $140,000,
interest rate of 10% and a maturity date of April 10, 2020. The purchase price of $140,000 Note was paid in cash on July 10, 2019.
After payment of transaction-related expenses of $17,000, net proceeds to the Company from Note totaled $123,000. The Company
recorded these discounts and cost of $74,375 as a discount to the Notes and fully amortized as interest expense during the period.
In connection with the execution of the Notes, we issued 450,000 shares of our common
stock to the Note holders, the shares were recorded with a relative fair value of $0 as the notes were fully discounted by derivative
liability.
The
Company analyzed the Notes for derivative accounting consideration and determined that the embedded conversion option qualified
as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the company recognized
derivative liability for the four (4) new convertible notes of $959,180, of which $505,500 was recorded as debt discount and will
be amortized during the term of the Notes, and $453,680 was recorded as day 1 derivative loss.
The
total principal balance outstanding and unamortized discount on the Notes as of July 31, 2019 were $579,875 and $449,332, respectively.
The company amortized $56,168 discount from derivative liabilities as interest expense during the year ended July 31, 2019.
Each
of the Investors is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid interest
of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common Stock
equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations Bureau
OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period
immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock during
the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion
(the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection with the terms
of the Notes.
The
Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved
Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the each
of the Notes. Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from
time to time, increases the Reserved Amount in accordance with the Company’s obligations under each of the Notes.
Pursuant
to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note
(the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock.
The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to
the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales
of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion
Shares.
Fair
Value of Financial Instruments. Fair value is defined as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. A fair value hierarchy is used which requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy based
on the three levels of inputs that may be used to measure fair value are as follows:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level
3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose
values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments
for which the determination of fair value requires significant judgment or estimation.
For
certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses,
the carrying amounts approximate fair value due to the short maturity of these instruments. The carrying value of our long-term
debt approximates its fair value based on the quoted market prices for the same or similar issues or the current rates offered
to us for debt of the same remaining maturities.
Our
derivative liabilities as of July 31, 2019 and 2018 of $927,000 and $632,000, respectively.
The
fair market value of all derivatives during the year ended July 31, 2019 was determined using the Black-Scholes option pricing
model which used the following assumptions:
Expected dividend yield
|
|
0.00%
|
|
Expected stock price volatility
|
|
120.27% - 208.29%
|
|
Risk-free interest rate
|
|
1.74% -2.93%
|
|
Expected term
|
|
0.21 - 2.75 years
|
|
Level
3 inputs.
The
following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value
on a recurring basis using significant unobservable inputs:
Balance at July 31, 2017
|
|
$
|
-
|
|
Derivative discount - convertible debt
|
|
|
541,671
|
|
Derivative loss
|
|
|
90,597
|
|
Balance at July 31, 2018
|
|
$
|
632,268
|
|
Derivative from new convertible promissory notes recorded as debt discount
|
|
|
1,043,834
|
|
Derivative liability resolved to additional paid in capital due to debt conversion
|
|
|
(822,922
|
)
|
Derivative loss
|
|
|
73,991
|
|
Balance at July 31, 2019
|
|
$
|
927,171
|
|
The
future principal payments for the Company’s debts is as follows:
FY
|
|
Payments
|
|
2020
|
|
$
|
3,159,459
|
|
2021
|
|
|
111,923
|
|
2022
|
|
|
67,114
|
|
2023
|
|
|
23,596
|
|
Total Principal Payments
|
|
$
|
3,362,092
|
|
NOTE
12 – EQUIPMENT FINANCING
The
Company entered into three financing agreements for equipment purchased. Under the terms of these transactions, assets with a
cost of approximately $37,255, $60,408 and $103,509, were financed under three separate financing agreements as of the May 2018,
June 2018, and July 2019, respectively. The equipment financing are 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 for 36 months, with the
first payments starting June 20, 2018, July 20, 2018 and July 12, 2019, respectively and monthly principal and interest payments
of $1,176, $1,856 and $3,172, respectively. The interest rate under the financing agreements range from 6.50% to 8.50% per annum.
During the years ended July 31, 2019 and 2018, the Company made total principal payments of $32,943 and $3,032, respectively.
The future payments under the equipment financing agreements are as follows:
Year
|
|
Amount
|
|
2020
|
|
$
|
80,655
|
|
2021
|
|
|
70,233
|
|
2022
|
|
|
34,897
|
|
|
|
|
|
|
Total future payments:
|
|
$
|
185,785
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
20,618
|
|
|
|
|
|
|
Present value of net minimum equipment financing payments
|
|
$
|
165,167
|
|
|
|
|
|
|
Less current maturities
|
|
|
65,152
|
|
|
|
|
|
|
Long-term equipment financing obligation
|
|
$
|
100,015
|
|
NOTE
13 – NONCONTROLLING INTEREST
On
May 1, 2018, Shift8 Technologies, Inc. (“Shift8”) entered into a Stock Purchase Agreement (“SPA”), whereby
in an exchange for $250,000, Shift8 agreed to sell to the buyer 199,900 shares of common stock equivalent to 19.99% of the issued
and outstanding common share of Shift8 Technologies, Inc. The $250,000 of the cash received under this transaction was recognized
as an adjustment to the carrying amount of the noncontrolling interest and as an increase in additional paid-in capital in Shift8.
At the option of the Company, and for a period of five years following the date of the SPA, the 199,900 shares of common stock
in Shift8 may be converted into Common Stock of Digerati at a ratio of 3.4 shares of DTGI Common stock for every one (1) share
of Shift8 at any time after the DTGI Common Stock has a current market price of $1.50 or more per share for 20 consecutive trading
days.
For
the years ending July 31, 2019 and 2018, the Company accounted for a noncontrolling interest of $128,000 and $57,000, respectively.
Additionally, one of the buyers serves as President, CEO and Board Member of T3 Communications, Inc., one of our operating subsidiaries.
NOTE
14 – BUSINESS ACQUISITIONS
On
December 1, 2017, Shift8 and Synergy Telecom, Inc., a Delaware corporation (“Synergy”), closed a transaction to acquire
all the assets, assumed all customers, and critical vendor arrangements from Synergy. Shift8 acquired Synergy to increase its
customer base and obtain higher efficiency of its existing infrastructure. Shift8 paid $125,000 upon execution of the agreement,
issued 500,000 shares of common stock with a market value of $175,000, and entered into a promissory note for $125,000 with an
effective annual interest rate of 6% with 5 quarterly payments and a maturity date of February 28, 2019. The note holder agreed
to extend three of the quarterly payment until March 31, 2019. During the year ended July 31, 2018, the Company made a principal
payment of $50,000. During the year ended July 31, 2019 the Company paid in full the outstanding principal balance of $75,000
and accrued interest of $3,105.
The
total purchase price was $425,000, the acquisition was accounted for under the purchase method of accounting, with Digerati identified
as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed by Digerati was allocated
to customer contracts acquired, software licenses, and goodwill based on their fair values as of December 1, 2017.
The
following information summarizes the allocation of the fair values assigned to the assets. The allocation of fair values is based
on an extensive analysis and is subject to changes in the future during the measurement period.
|
|
Synergy
|
|
|
Useful life (years)
|
|
Customer relationships
|
|
$
|
40,000
|
|
|
5
|
|
License - software
|
|
|
105,000
|
|
|
3
|
|
Goodwill
|
|
|
280,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total Purchase price
|
|
$
|
425,000
|
|
|
|
|
The
Company incurred approximately $10,000 in costs associated with the acquisition. These included legal, and accounting. The Company
expensed these costs during the year ended July 31, 2018.
Additionally,
on May 2, 2018, the Company closed on the Merger Agreement with T3 Communications, Inc. to increase its customer base and obtain
higher efficiency of its existing infrastructure.
The
total purchase price was $3,211,945, paid in cash upon closing, the acquisition was accounted for under the purchase method of
accounting, with the Company identified as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration
assumed by the Company was allocated to cash, customer contracts acquired, current assets, property plant and equipment and assumed
payables based on their estimated fair values as of May 2, 2018. Allocation of the purchase price is preliminary and based on
the best estimates of management.
The
allocation of fair values is based on an extensive analysis and is subject to changes in the future during the measurement period.
|
|
(in thousands)
|
|
|
|
T3
|
|
|
|
|
|
Cash
|
|
$
|
250
|
|
Accounts receivable & other current assets
|
|
|
367
|
|
Intangible assets and Goodwill
|
|
|
2,835
|
|
Property and equipment, net
|
|
|
568
|
|
Other Assets
|
|
|
140
|
|
|
|
|
|
|
Total identifiable net assets
|
|
$
|
4,160
|
|
|
|
|
|
|
Less: liabilities assumed
|
|
|
(948
|
)
|
|
|
|
|
|
Total Purchase price
|
|
$
|
3,212
|
|
The following table summarizes the cost of amortizable intangible assets related to the acquisition:
|
|
Cost
(in thousands)
|
|
|
Useful life (years)
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,480
|
|
|
7
|
|
Marketing & Non-compete
|
|
|
800
|
|
|
5
|
|
Goodwill
|
|
|
530
|
|
|
-
|
|
Total
|
|
$
|
2,810
|
|
|
|
|
The
Company incurred approximately $160,000 in costs associated with the acquisition. These included legal, and accounting. The Company
expensed these costs during the year ended July 31, 2018.
Proforma
The
following is the unaudited proforma results of operations for both acquisitions for the years ended July 31, 2019 and 2018 as
if the acquisition occurred on August 1, 2016. The proforma results of operations are presented for informational purposes only
and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on August
1, 2016, or of results that may occur in the future.
|
|
For the years Ended
|
|
|
|
July 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
6,040
|
|
|
$
|
5,674
|
|
Loss from operations
|
|
|
(2,361
|
)
|
|
|
(8,705
|
)
|
Net Income (loss)
|
|
|
(4,648
|
)
|
|
|
(3,031
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common shares outstanding - Basic and Diluted
|
|
$
|
(0.27
|
)
|
|
$
|
(0.34
|
)
|
NOTE
15 – INVESTMENT IN ITELLUM
On
June 14, 2019, the Company, entered into a Stock Purchase Agreement (the “Agreement”) to acquire a 12% minority interest
in Itellum Comunicacions Costa Rica, S.R.L. The Company paid $82,500 upon execution of the agreement, issued 500,000 shares of
common stock with a market value of $85,000, and entered into a promissory note for $17,500 with an effective annual interest
rate of 8% and an initial maturity date of September 14, 2019. As of the date of this filing, we are working with the lender to
extend the maturity date on the note. The outstanding balance as of July 31, 2019 was $17,500.
The
minority interest in Itellum was accounted for as a cost-basis investment, and based on the agreed cash and stock issued, the
Company accounted for an initial investment value of $185,000.
NOTE
16 – EQUITY
During
the year ended July 31, 2019, the Company issued the following shares of common stock that are not disclosed in other footnotes:
On
September 28, 2018, the Company issued an aggregate of 21,672 shares of common stock with a market value at time of issuance of
$5,794. The shares were issued to settle accounts payables of $5,287 to a professional, the Company recognized a loss of $507
upon issuance of the shares.
On
November 5, 2018, the Company issued an aggregate of 16,883 shares of common stock with a market value at time of issuance of
$5,875. The shares were issued to settle accounts payables of $5,287 to a professional, the Company recognized a loss of $588
upon issuance of the shares.
On
November 14, 2018, the Company secured $75,000 from an accredited investor under a Securities Purchase Agreement and issued 258,621
shares of its common stock at a price of $0.29.
On
November 29, 2018, the Company issued an aggregate of 39,444 shares of common stock with a market value at time of issuance of
$11,833. The shares were issued to settle accounts payables of $10,545 to a professional, the Company recognized a loss of $1,288
upon issuance of the shares.
On
February 5, 2019, the Company issued an aggregate of 60,715 shares of common stock with a market value at time of issuance of
$13,357. The shares were issued to settle accounts payables of $10,382 to a professional, the Company recognized a loss of $2,975
upon issuance of the shares.
On
February 8, 2019, the Company secured $150,000 from an accredited investor under a Securities Purchase Agreement and issued 600,000
shares of its common stock at a price of $0.25.
On
February 8, 2019 the Company issued an aggregate of 400,000 shares of common stock with a market value at time of issuance of
$100,000 and recognized the total fair market value as stock-based compensation expense at the time of issuance. The shares were
issued for consulting services.
NOTE
17 – SUBSEQUENT EVENTS
Issuance of Shares of Common Stock
On October 31, 2019, the Company issued
3,952,095 common shares to management for services in lieu of cash compensation. The Company recognized stock-based compensation
expense of approximately $276,646 equivalent to the value of the shares calculated based on the share’s closing price at
the grant dates. In addition, the Company issued 1,337,325 common shares to for outstanding compensation to management with a
market value of $93,612.
Convertible
Notes - conversions
On
August 26, 2019, the Company issued 250,000 shares of common stock for the conversion of $14,500 of the principal outstanding
and $500 in administrative fees under a convertible note.
On
August 26, 2019, the Company issued 416,666 shares of common stock for the conversion of $25,000 of the principal outstanding
under a convertible note.
On
September 4, 2019, the Company issued 250,620 shares of common stock for the conversion of $10,000 of the principal outstanding
and $541 in administrative fees under a convertible note.
On
September 10, 2019, the Company issued 277,291 shares of common stock for the conversion of $12,750 of the principal outstanding
and $2,888 in accrued interest and administrative fees under a convertible note.
On
September 26, 2019, the Company issued 342,466 shares of common stock for the conversion of $14,500 of the principal outstanding
and $500 in administrative fees under a convertible note.
On October 27, 2019, the Company issued
332,667 shares of common stock for the conversion of $9,500 of the principal outstanding and $500 in administrative fees under
a convertible note.
On October 29, 2019, the Company issued
465,736 shares of common stock for the conversion of $13,500 of the principal outstanding and $500 in administrative fees under
a convertible note.
On October 31, 2019, the Company issued
310,527 shares of common stock for the conversion of $6,500 of the principal outstanding and $2,834 in accrued interest and administrative
fees under a convertible note.
On October 31, 2019, the Company issued
831,669 shares of common stock for the conversion of $25,000 of the principal outstanding under a convertible note.
On November 14, 2019, the Company
issued 301,697 shares of common stock for the conversion of $7,500 of the principal outstanding and $646 in administrative fees
under a convertible note.
Convertible
Promissory Notes
Convertible
Promissory Note Assignment - August 6, 2019
On
August 6, 2019, the Company entered into an Assignment Agreement whereby Jefferson Street Capital LLC (the “Assignor”)
assigned a principal amount of $25,000, representing a portion of a Convertible Promissory Note dated January 24, 2019 to Armada
Investment Fund LLC (the “Assignee”). The note is in the aggregate principal amount of $25,000 and a maturity date
of January 24, 2020.
The
Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified
as a derivative instrument, due to the variable conversion price. As a result, at the time of assignment, the Company recognized
derivative liability for the convertible note of $27,853, of which $25,000 was recorded as debt discount and will be amortized
during the term of the Note, and $2,853 was recorded as day 1 derivative loss.
On
August 12, 2019, the Company issued 114,123 shares of common stock for the conversion of $7,500 of the principal outstanding and
$500 in administrative fees under the convertible note.
On
August 20, 2019, the Company issued 191,116 shares of common stock for the conversion of $7,500 of the principal outstanding and
$538 in accrued interest and administrative fees under the convertible note.
After
the two above mentioned conversions, the outstanding balance on the promissory note is $10,000.
Convertible
Promissory Note - August 30, 2019
On
August 30, 2019, the Company entered into a Securities Purchase Agreement (the “SPA”) with an investor (an “Investor”)
the Investor purchased a 10% unsecured convertible promissory note (the “Note”) from the Company. The note is in the
aggregate principal amount of $93,500 and a maturity date of May 30, 2020. After payment of transaction-related expenses of $8,500,
net proceeds to the Company from the Note totaled $85,000. The Company recorded these discounts and cost of $8,500 as a discount
to the Note and fully amortized as interest expense during the period.
The
Company analyzed the Note for derivative accounting consideration and determined that the embedded conversion option qualified
as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized
derivative liability for the convertible note of $100,978, of which $85,000 was recorded as debt discount and will be amortized
during the term of the Note, and $15,978 was recorded as day 1 derivative loss.
Other
Terms to the Convertible Promissory Note and Note Assignment - August 2019
Notes
shall bear interest at a rate of eight percent (8%) per annum (the “Interest Rate”), which interest shall be paid
by the Company to each Investor in shares of Common Stock at any time an Investor sends a notice of conversion to the Company.
Each of the Investors is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid
interest of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common
Stock equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations
Bureau OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day
period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock
during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice
of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection
with the terms of the Notes.
Each
of the Notes may be prepaid until 180 days from the issuance date with the following penalties: (i) if a Note is prepaid within
one hundred and twenty (120) days of the issuance date, then the prepayment premium shall be 125% of the outstanding principal
amount plus any accrued and unpaid interest; (ii) if a Note is prepaid during the period beginning on the date which is one hundred
and twenty-one (121) days following the issuance date, and ending on the date which is one hundred eighty (180) days following
the issuance date, then the prepayment premium shall be 130% of the outstanding principal amount plus any accrued and unpaid interest.
Such prepayment redemptions must be closed and funded within three days of giving notice of prepayment or the right to prepay
shall be forfeited.
The
Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved
Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the each
of the Notes. Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from
time to time, increases the Reserved Amount in accordance with the Company’s obligations under each of the Notes.
Pursuant
to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note
(the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock.
The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to
the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales
of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion
Shares.
Convertible
Promissory Notes - October 2019
In
October 2019, the Company entered into two Securities Purchase Agreements (the “SPA”) with multiple investors (the
“Investors”) the Investors purchased two 8% unsecured convertible promissory notes (the “Notes”) from
the Company. The notes are in the aggregate principal amount of $71,500 and a maturity date of July 18, 2020. After payment of
transaction-related expenses of $6,500, net proceeds to the Company from the Note totaled $65,000. The Company recorded these
discounts and cost of $6,500 as a discount to the Note and fully amortized as interest expense during the period.
The
Company analyzed the Notes for derivative accounting consideration and determined that the embedded conversion option qualified
as a derivative instrument, due to the variable conversion price. As a result, at the time of issuance, the Company recognized
derivative liability for the convertible note of $82,462 of which $65,000 was recorded as debt discount and will be amortized
during the term of the Note, and $17,462 was recorded as day 1 derivative loss.
Other
Terms to the Convertible Promissory Notes - October 2019
Notes
shall bear interest at a rate of eight percent (8%) per annum (the “Interest Rate”), which interest shall be paid
by the Company to each Investor in shares of Common Stock at any time an Investor sends a notice of conversion to the Company.
Each of the Investors is entitled to, at its option, convert all or any amount of the principal amount and any accrued but unpaid
interest of the Note into shares of the Company’s Common Stock, at any time, at a conversion price for each share of Common
Stock equal to (i) the lowest trading price of the Common Stock (as defined in the Note) as reported on the National Quotations
Bureau OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day
period immediately preceding the issuance date of each Note; or (ii) 60% multiplied by the lowest traded price of the Common Stock
during the twenty (20) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice
of conversion (the “Variable Conversion Price”). The Variable Conversion Price may further be adjusted in connection
with the terms of the Notes.
Each
of the Notes may be prepaid until 180 days from the issuance date with the following penalties: (i) if a Note is prepaid within
one hundred and twenty (120) days of the issuance date, then the prepayment premium shall be 125% of the outstanding principal
amount plus any accrued and unpaid interest; (ii) if a Note is prepaid during the period beginning on the date which is one hundred
and twenty-one (121) days following the issuance date, and ending on the date which is one hundred eighty (180) days following
the issuance date, then the prepayment premium shall be 130% of the outstanding principal amount plus any accrued and unpaid interest.
Such prepayment redemptions must be closed and funded within three days of giving notice of prepayment or the right to prepay
shall be forfeited.
The
Company shall at all times reserve a minimum of six (6) times the number of its authorized and unissued common stock (the “Reserved
Amounts”), free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the each
of the Notes. Upon full conversion of each Note, any shares remaining in such reserve shall be cancelled. The Company will, from
time to time, increases the Reserved Amount in accordance with the Company’s obligations under each of the Notes.
Pursuant
to the terms of the SPAs, for so long as any of the Investors owns any shares of Common Stock issued upon conversion of a Note
(the “Conversion Shares”), the Company covenants to secure and maintain the listing of such shares of Common Stock.
The Company is also subject to certain customary negative covenants under the Notes and the SPAs, including but not limited to
the requirement to maintain its corporate existence and assets, subject to certain exceptions, and not to make any offers or sales
of any security under circumstances that would require registration of or stockholder approval for the Notes or the Conversion
Shares.
6,324,142
Shares of Common Stock
Digerati Technologies, Inc.
The date of this prospectus is November
29, 2019