DTGI 10-Q
Digerati Technologies, Inc. (DTGI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from ____________ to ___________
Commission
File Number
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting Company | ||
| Emerging growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
| Number of Shares | Class: | As of: | ||
| Common Stock $0.001 par value | June 15, 2023 |
DIGERATI TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2023
INDEX
| PART I — FINANCIAL INFORMATION | ||
| Item 1. | Consolidated Financial Statements (Unaudited) | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 34 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 45 |
| Item 4. | Controls and Procedures | 45 |
| PART II — OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 46 |
| Item 1A. | Risk Factors | 46 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 46 |
| Item 3. | Defaults Upon Senior Securities | 46 |
| Item 4. | Mine Safety Disclosures | 46 |
| Item 5. | Other Information | 46 |
| Item 6. | Exhibits | 47 |
| SIGNATURES | 49 | |
i
DIGERATI TECHNOLOGIES, INC.
CONTENTS
ii
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
| April 30, | July 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| LONG-TERM ASSETS: | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Property and equipment, net | ||||||||
| Other assets | ||||||||
| Investment in Itellum | ||||||||
| Right-of-use assets - financing | ||||||||
| Right-of-use assets - operating | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Equipment financing | ||||||||
| Convertible note payable, current, net of discount of $ | ||||||||
| Note payable, current, related party, net of discount of $ | ||||||||
| Note payable, current, net of discount of $ | ||||||||
| Acquisition payable | ||||||||
| Deferred income | ||||||||
| Derivative liability | ||||||||
| Operating lease liability, current | ||||||||
| Total current liabilities | ||||||||
| LONG-TERM LIABILITIES: | ||||||||
| Note payable, net of discount $ | ||||||||
| Convertible note payable | ||||||||
| Equipment financing | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock, $ | ||||||||
| Convertible Series A Preferred stock, $ | ||||||||
| Convertible Series B Preferred stock, $ | ||||||||
| Convertible Series C Preferred stock, $ | ||||||||
| Series F Super Voting Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Other comprehensive income | ||||||||
| Total Digerati’s stockholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements
1
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| OPERATING REVENUES: | ||||||||||||||||
| Cloud software and service revenue | $ | $ | $ | $ | ||||||||||||
| Total operating revenues | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Cost of services (exclusive of depreciation and amortization) | ||||||||||||||||
| Selling, general and administrative expense | ||||||||||||||||
| Legal and professional fees | ||||||||||||||||
| Bad debt expense | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| OPERATING LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Gain (loss) on derivative instruments | ||||||||||||||||
| Gain (loss) on extinguishment of debt | ( | ) | ||||||||||||||
| Other income (expense) | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST | ( | ) | ( | ) | ( | ) | ||||||||||
| Less: Net loss attributable to the noncontrolling interests | ||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI'S SHAREHOLDERS | ( | ) | ( | ) | ( | ) | ||||||||||
| Deemed dividend on Series A Convertible preferred stock | ( | ) | ( | ) | ( | ) | ||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI'S COMMON SHAREHOLDERS | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| INCOME (LOSS) PER COMMON SHARE - BASIC | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| LOSS PER COMMON SHARE - DILUTED | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | ||||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED | ||||||||||||||||
See accompanying notes to unaudited consolidated financial statements
2
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Nine Months Ended April 30, 2023
(In thousands, except for share amounts, unaudited)
| Equity Digerati's Shareholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Common | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Shares | Par | Series B Shares | Par | Series C Shares | Par | Series F Shares | Par | Shares | Par | Paid-in Capital | Accumulated Deficit | Comprehensive Income | Stockholders Equity | Noncontrolling Interest | Totals | |||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, July 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Convertible Series A Preferred stock | ( | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for exercise of warrants | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt extension | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends accrued | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, October 31, 2022 | $ | $ | ( | ) | $ | | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Convertible Series A Preferred stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for exercise of warrants | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt extension | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion and settlement | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends accrued | - | - | - | - | - | ( | ) | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrant issued with debt - debt discount | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature on convertible debt - debt discount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, January 31, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued to employees | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt extension | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion and settlement | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrant issued with debt - debt discount | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature on convertible debt - debt discount | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, April 30, 2023 | - | - | - | - | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements
3
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Nine Months Ended April 30, 2022
(In thousands, except for share amounts, unaudited)
| Equity Digerati's Shareholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Common | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Shares | Par | Series B Shares | Par | Series C Shares | Par | Series F Shares | Par | Shares | Par | Paid-in Capital | Accumulated Deficit | Comprehensive Income | Stockholders Equity | Noncontrolling Interest | Totals | |||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, July 31, 2021 | $ | $ | $ | ( | ) | $ | | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends accrued | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, October 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends accrued | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, January 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt extension | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative liability resolved to APIC due to note conversion | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends accrued | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, April 30, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements
4
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
| Nine Months April 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash (used in)/provided by operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Stock compensation and warrant expense | ||||||||
| Bad debt expense | ||||||||
| Amortization of Right-of-Use Assets | ||||||||
| Amortization of debt discount | ||||||||
| (Gain) loss on derivative liabilities | ( | ) | ( | ) | ||||
| (Gain) loss on extinguishment of debt | ( | ) | ||||||
| (Gain) on settlement of conversion premium on Notes | ( | ) | ||||||
| Accrued interest added to principal | ||||||||
| Debt extension fee charged to interest expense | ||||||||
| Common stock issued for debt extension charged to interest expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Inventory | ||||||||
| Other assets | ( | ) | ||||||
| Right of use operating lease liability | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Deferred income | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Cash paid in acquisition of equipment | ( | ) | ( | ) | ||||
| Proceeds from Nexogy | ||||||||
| Acquisition of VoIP assets, net of cash received | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Borrowings from convertible debt, net of original issuance cost and discounts | ||||||||
| Borrowings from debt, net of original issuance cost and discounts | ||||||||
| Proceeds from the exercise of warrants | ||||||||
| Borrowings from related party notes, net of original issuance cost and discounts | ||||||||
| Principal payments on debt, net | ( | ) | ||||||
| Principal payments on convertible debt, net | ( | ) | ( | ) | ||||
| Principal payments on related party notes, net | ( | ) | ( | ) | ||||
| Principal payment on equipment financing | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS, beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Accrued interest rolled into principal | $ | $ | ||||||
| Incentive earnout adjustment on Active PBX acquisition | $ | $ | ||||||
| Debt discount from common stock issued with debt | $ | $ | ||||||
| Derivative liability resolved to APIC | $ | $ | ||||||
| Debt discount from derivative liabilities | $ | $ | ||||||
| Debt discount from warrants issued with debt | $ | $ | ||||||
| Beneficial conversion feature on convertible note | $ | $ | ||||||
| Common stock issued for debt conversion and settlement | $ | $ | ||||||
| Common Stock issued for the conversion of Preferred Stock Series A | $ | $ | ||||||
| Dividends accrued | $ | $ | ||||||
| Day 1 (one) recognition of Right-of-use Assets | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements
5
DIGERATI TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
Description of Business
Unless otherwise indicated or the context otherwise requires, references in this subsection to “we,” “us,”, “our,” “the Company,” and other similar terms refer to Digerati and its subsidiaries.
Digerati Technologies, Inc., a Nevada corporation, through its operating subsidiaries in Texas, Florida, and California provides cloud services specializing in Unified Communications as a Service (“UCaaS”) and broadband connectivity solutions for the business market. Digerati’s product line includes a portfolio of Internet-based telephony products and services delivered through its cloud application platform and session-based communication network and network services including Internet broadband, fiber, mobile broadband, and cloud WAN solutions (SD WAN).
Digerati Technologies, Inc. currently has four (4) operating subsidiaries: (i) Verve Cloud, Inc., a Texas entity (this entity was formerly known as Shift8 Networks, Inc.); (ii) T3 Communications, Inc., a Florida entity; (iii) Nexogy, Inc., a Florida entity; and (iv) NextLevel Internet, Inc., a California entity. Each of these entities is a subsidiary of Verve Cloud, Inc., a Nevada entity (this entity was formerly known as T3 Communications, Inc.) formed on March 27, 2023. We expect the completion to be consolidated under one single entity during the quarter ending June 30, 2023.
Digerati provides enterprise-class, carrier-grade services to the small-to-medium-sized business (“SMB”) at cost-effective monthly rates. Digerati’s UCaaS or cloud communication services include fully hosted IP/PBX, video conferencing, mobile applications, Voice over Internet Protocol (“VoIP”) transport, SIP trunking, and customized VoIP services all delivered Only in the Cloud™. Digerati’s broadband connectivity solutions for the delivery of digital oxygen are designed for reliability, business continuity and to optimize bandwidth for businesses using Digerati’s cloud communication services and other cloud-based applications.
Basis of presentation and consolidation
The accompanying unaudited interim consolidated financial statements of Digerati Technologies, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the United States Securities and Exchange Commission. In the opinion of management, these interim financial statements contain all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of financial position and the results of operations for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosure contained in the audited consolidated financial statements for the year ended July 31, 2022, contained in the Company’s Form 10-K filed on October 31, 2022, have been omitted.
Reclassification
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations or net assets of the Company.
Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share is computed by dividing loss attributable to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. Basic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of shares of Common Stock outstanding during the respective period presented in the Company’s accompanying condensed consolidated financial statements. Fully-diluted earnings (loss) per share is computed similarly to basic income (loss) per share except that the denominator is increased to include the number of dilutive Common Stock equivalents using the treasury stock method for options and warrants and the if-converted method for convertible debt.
6
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||
| (in thousands, except per share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| NUMERATOR: | ||||||||||||||||
| NET INCOME (LOSS) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| DENOMINATOR: | ||||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | ||||||||||||||||
| LOSS PER COMMON SHARE - BASIC | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||
| (in thousands, except per share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| NUMERATOR: | ||||||||||||||||
| NET INCOME (LOSS) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Less: adjustments to net income | $ | $ | ( | ) | $ | $ | ||||||||||
| NET INCOME (LOSS) - DILUTED SHARES OUTSTANDING CALCULATION | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| DENOMINATOR: | ||||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | ||||||||||||||||
| Warrants and Options to purchase common stock | ||||||||||||||||
| Convertible Debt | ||||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED | ||||||||||||||||
| LOSS PER COMMON SHARE - DILUTED | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The Company excluded the following securities from the calculation of basic and diluted net loss per share as the effect would have been antidilutive
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Convertible Preferred Shares | ||||||||||||||||
| Convertible Debt | ||||||||||||||||
| Total | ||||||||||||||||
Treasury Shares
Customers and Suppliers
We rely on various suppliers to provide services in connection with our VOIP and UCaaS offerings. Our customers include businesses in various industries including Healthcare, Banking, Financial Services, Legal, Real Estate, and Construction. We are not dependent upon any single supplier or customer.
During
the nine months ended April 30, 2023 and 2022, the Company did not derive revenues of
As
of April 30, 2023 and July 31, 2022, the Company did not have outstanding accounts receivable of
7
Sources of revenue:
The Company recognizes cloud-based hosted services revenue, mainly from subscription services for its cloud telephony applications that includes hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice, and web conferencing, call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized applications. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN (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: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
Service Revenue
Service revenue from subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription services being rendered are recorded as deferred revenue. Usage fees, either bundled or not bundled, are recognized when the Company has a right to invoice. Professional services for configuration, system integration, optimization, customer training and/or education are primarily billed on a fixed-fee basis and are performed by the Company directly. Alternatively, customers may choose to perform these services themselves or engage their own third-party service providers. Professional services revenue is recognized over time, generally as services are activated for the customer.
Product Revenue
The Company recognizes product revenue for telephony equipment at a point-in-time, when transfer of control has occurred, which is generally upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical data.
Disaggregation of Cloud-based hosted revenues.
Summary of disaggregated revenue is as follows (in thousands):
| For the Three Months Ended April 30, | For the Nine Months Ended April 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cloud software and service revenue | $ | $ | $ | $ | ||||||||||||
| Product revenue | ||||||||||||||||
| Total operating revenues | $ | $ | $ | $ | ||||||||||||
Contract Assets
Contract
assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations are completed.
The revenue is recognized when the customer receives services or equipment for a reduced consideration at the onset of an arrangement;
for example, when the initial month’s services or equipment are discounted. Contract assets are included in prepaid and other current
assets in the consolidated balance sheets, depending on if their reduction is recognized during the succeeding 12-month period or beyond.
Contract assets as of April 30, 2023 and July 31, 2022 was $
8
Deferred Income
Deferred income represents billings or payment
received in advance of revenue recognition and is recognized upon transfer of control. Balances consist primarily of annual plan subscription
services, for services not yet provided as of the balance sheet date. Deferred revenues that will be recognized during the succeeding
12-month period are recorded as current deferred revenues in the consolidated balance sheets, with the remainder recorded as other noncurrent
liabilities in the consolidated balance sheets. Deferred income as of April 30, 2023 and July 31, 2022 was $
Customer deposits
The
Company in some instances requires customers to make deposits for the last month of services, equipment, installation charges and training.
As equipment is installed and training takes place, the deposits are then applied to revenue. The deposit for the last month of services
is applied to any outstanding balances if services are cancelled. If the customer’s account is paid in full, the Company will refund
the full deposit in the month following service termination. As of April 30, 2023 and July 31, 2022, Digerati’s customer deposits
balance was $
Costs to Obtain a Customer Contract
Direct incremental costs of obtaining a contract
consisting of sales commissions are deferred and amortized over the estimated life of the customer, which currently averages
Direct Costs - Cloud software and service
We incur bandwidth and colocation charges in connection with our UCaaS or cloud communication services. The bandwidth charges are incurred as part of the connectivity between our customers to allow them access to our various services. We also incur costs from underlying providers for fiber, internet broadband, and telecommunication circuits in connection with our data and connectivity solutions.
Derivative financial instruments.
Digerati does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, Digerati evaluates its convertible instruments and free-standing instruments such as warrants for derivative liability accounting.
For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date. Any changes in fair value are recorded as non-operating, non-cash income or expense for each reporting period. For derivative notes payable conversion options and warrants Digerati uses the Black-Scholes option-pricing model to value the derivative instruments.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is probable within the next 12 months from the balance sheet date.
9
Fair Value of Financial Instruments.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is used which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy based on the three levels of inputs that may be used to measure fair value are as follows:
| Level 1 – | Quoted prices in active markets for identical assets or liabilities. |
| Level 2 – | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3 – | Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. |
For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the short maturity of these instruments. The carrying value of our long-term debt approximates its fair value based on the quoted market prices for the same or similar issues or the current rates offered to us for debt of the same remaining maturities.
Our derivative liabilities as of April 30, 2023
and July 31, 2022 were $
The following table provides the fair value of the derivative financial instruments measured at fair value using significant unobservable inputs:
| Fair value measurements at reporting date using. | ||||||||||||||||
| Quoted prices in active markets for identical liabilities | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||
| Description | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Derivative liability at July 31, 2022 | $ | $ | ||||||||||||||
| Derivative liability at April 30, 2023 | $ | $ | ||||||||||||||
The fair market value of all derivatives during the year ended July 31, 2022 was determined using the Black-Scholes option pricing model which used the following assumptions:
| Expected dividend yield | % | |||
| Expected stock price volatility | % | |||
| Risk-free interest rate | % | |||
| Expected term |
The fair market value of all derivatives during the nine months ended April 30, 2023 was determined using the Black-Scholes option pricing model which used the following assumptions:
| Expected dividend yield | |
| Expected stock price volatility | |
| Risk-free interest rate | |
| Expected term |
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, 2022 | $ | |||
| Derivative from new convertible promissory notes recorded as debt discount | ||||
| Derivative gain | ( | ) | ||
| Balance at April 30, 2023 | $ |
10
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.
For
the nine months ended April 30, 2023 and 2022, the Company accounted for a noncontrolling interest of approximately $
Recently issued accounting pronouncements.
Recent accounting pronouncements, other than below, issued by the FASB (including its Emerging Issues Task Force), the AICPA and the SEC did not, or are not, believed by management to have a material effect on the Company’s present or future financial statements.
In August 2020, the FASB issued “ASU 2020-06, Debt with Conversion and Other Options (Subtopic 47020) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)” which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of this ASU on its financial statements.
In June 2016, the FASB issued “ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The standard's main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope. Update No. 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of this ASU on its financial statements.
11
NOTE 2 – GOING CONCERN
Financial Condition
The Company’s consolidated financial statements
for the nine months ending April 30, 2023 have been prepared on a going concern basis, which contemplates the realization of assets and
the settlement of liabilities in the normal course of business. Since the Company’s inception in 1993, the Company has incurred
net losses and accumulated a deficit of approximately $
Management Plans to Continue as a Going Concern
Management believes that available resources as of April 30, 2023 will not be sufficient to fund the Company’s operations and corporate expenses over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off its obligations, if and when they come due.
We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During fiscal 2023 certain members of our management team will continue to receive a portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from or recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams; and we have also secured numerous agent agreements through our recent acquisitions that we anticipate will accelerate revenue growth. In addition, we will continue to focus on selling a greater number of comprehensive services to our existing customer base. Further, in an effort to increase our revenues, we will continue to evaluate the acquisition of various assets with emphasis in VoIP Services and Cloud Communication Services. As a result, during the due diligence process we anticipate incurring significant legal and professional fees.
We require cash to meet our interest payments to Post Road (as defined below), capital expenditure needs, and operational cash flow needs. The Company anticipates issuing additional equity or entering into additional Convertible Notes to secure the funding required to meet these cash needs. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, the Company may not be able to meet its interest payments, capital expenditures, and operational needs. As a result, the Company will be required to negotiate with its lender the terms of the current financing agreements, in addition to postponing the timing of deployment of its capital expenditures and extending the timing of the operational cash needs.
In November 2020, the Company and Verve Cloud, Inc. (a Nevada entity) (“Verve Cloud”) and Verve Cloud’s subsidiaries (Verve Cloud and its subsidiaries, collectively, “the Verve Cloud Nevada Parties”) entered into a credit agreement (the “Credit Agreement”) with Post Road Administrative LLC and its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post Road”). The Company is a party to certain sections of the Credit Agreement. Next Level Internet, Inc. became a Verve Cloud Nevada Party in February 2022.
12
The Credit Agreement contains customary representations, warranties, and indemnification provisions. The Credit Agreement also contains affirmative and negative covenants with respect to the operation of the business and properties of the loan parties as well as financial performance. Below are key financial covenant requirements (measured quarterly) for the fiscal quarter ended April 30, 2023:
| ● | Minimum Allowed - EBITDA of $ (on an annualized basis) 4,565,009 |
| ● | Minimum Allowed - Liquidity of $2,000,000 |
| ● | Minimum Allowed - Interest Coverage of 1.00 to 1.00 |
As of April 30, 2023, the Company was not in compliance with our financial covenants with Post Road, and as a result, the Notes were classified as current. The Company has requested that Post Road agree to forbear from exercising its remedies in connection with, among other things, the financial covenants that were not complied with during the quarter ended April 30, 2023. There can be no assurance that we will be able to restructure our financial covenants with Post Road. If the Company is not able to reach an agreement to restructure our financial covenants requirements and Post Road declares an event of default, it would have a material adverse effect on our business and financial condition, including the possibility of Post Road foreclosing on some or all of our assets.
On December 15, 2022, the lender agreed to forbear from exercising its remedies in connection with the financial covenants that were not complied with during the quarter ended October 31, 2022, as well as certain other specified defaults, until December 23, 2022.
On February 3, 2023,
the Company, the Verve Cloud Nevada Parties, and Post Road entered into a Consent, Limited Waiver and Fourth Amendment to Credit Agreement
and Amendment to Notes (the “Fourth Amendment”). The Fourth Amendment is effective as of December 23, 2022. Among other things,
the Fourth Amendment conditionally revises each of the six financial covenants set forth in Section 11.12 of the Credit Agreement (related
to maximum leverage, minimum liquidity, minimum EBITDA, maximum capital expenditures, minimum interest coverage (a provision that replaces
the minimum fixed charge coverage ratio provision), and maximum churn). In addition, pursuant to the Fourth Amendment, none of the financial
covenants contained in Section 11.12 of the Credit Agreement, as amended by the Fourth Amendment, were to be tested as of the January
31, 2023 fiscal quarter end date so long as no events of default had occurred, other than minimum liquidity of $
Pursuant to the Fourth Amendment, Post Road agreed to conditionally waive each and all of the Specified Defaults (as defined in the Fourth Amendment). Post Road’s waiver of the Specified Defaults are contingent on the Merger closing on or before the Merger Outside Closing Date in accordance with the Business Combination Agreement (as defined in Note 12) and no events of default (other than the Specified Defaults) or any condition or event that, with the giving of notice or the lapse of time or both, would constitute an event of default, existing under the Credit Agreement on the Merger closing date.
The Fourth Amendment amends the Credit Agreement and the Notes to modify the interest rate payable by Verve Cloud.
On March 13, 2023, the Company, the Verve Cloud Nevada Parties, and Post Road entered into the Fifth Amendment to Credit Agreement, with an effective date of February 28, 2023, which specifically revises the Merger Outside Closing Date, replacing the “February 28, 2023” date with “April 28, 2023,” without amending, supplementing or otherwise modifying any other terms, or any of the conditions, set forth in the Credit Agreement.
13
On April 3, 2023, the
Company, the Verve Cloud Nevada Parties, and Post Road entered into a Sixth Amendment to its Credit Agreement (the “Sixth Amendment”).
Pursuant to the Sixth Amendment, Post Road agreed to increase the aggregate net unpaid principal amount (i.e., less original issue discounts
and transaction costs paid in cash by Company upon the closing thereof and disclosed in writing to Post Road) the Company is allowed to
borrow in the form of convertible loans to $
Pursuant to the Sixth Amendment, Post Road agreed to defer the cash interest otherwise due and payable on April 1, 2023 to the May 1, 2023 payment date.
On May 1, 2023, the Company, the Verve Cloud Nevada Parties, and Post Road entered into a Seventh Amendment to Credit Agreement (the “Seventh Amendment”). The Seventh Amendment is dated as of May 1, 2023, with an effective date of April 28, 2023. Pursuant to the Seventh Amendment, the Merger Outside Closing Date was amended to May 31, 2023, or such later date as agreed to in writing by Post Road in its sole discretion.
The Seventh Amendment also modified the negative covenants set forth in the Credit Agreement to add a new section on material nonpublic information (“MNPI”). The Seventh Amendment’s modifications to the Credit Agreement provide that if Post Road elects not to receive MNPI from the Company during any period during which the Company is obligated to deliver a notice to Post Road which notice would include MNPI, the Company will inform Post Road of its obligation to deliver the notice, and Post Road will inform the Company whether it elects to receive such notice. If Post Road elects to receive the notice of MNPI, the Company shall deliver such notice in accordance with the Credit Agreement, and if Post Road elects not to receive such notice, the Company shall not deliver the notice and Post Road shall have waived its rights to receive delivery of the notice. Any election by Post Road to waive their right to receive delivery of any notice of MNPI applies only with respect to the specific notice and not to any subsequent notice.
Pursuant to the Seventh Amendment, Post Road agreed to defer the cash interest otherwise due and payable on April 3, 2023 and May 1, 2023 to the June 1, 2023 payment date.
While Digerati, the parent company of Verve Cloud, is not subject to these financial covenants, it had, and will continue to have, a material impact on Verve Cloud’s expenditures and ability to raise funds.
In addition, our Term Loan C Note payable to Post Road with a maturity
date of
Verve Cloud’s obligations under the Credit
Agreement are secured, in part, by a first-priority security interest in all of the assets of the Verve Cloud Nevada Parties and are guaranteed
by Verve Cloud’s other subsidiaries pursuant to the Guaranty and Collateral Agreement, dated November 17, 2020, subsequently amended
on December 31, 2021, February 4, 2022, December 15, 2022, and February 3, 2023 by and among Verve Cloud, the Company’s other subsidiaries,
and Post Road Administrative LLC (the “Guaranty and Collateral Agreement”). In addition, Verve Cloud’s obligations under
the Credit Agreement are, pursuant to a Pledge Agreement (the “Pledge Agreement”), secured by a pledge of a first priority
security interest in Verve Cloud’s
We have been successful in raising debt and equity capital in the past and as described in Notes 6, 7, 8, and 12. Although we have successfully completed financings and reduced expenses in the past, we cannot assure you that our plans to address these matters in the future will be successful.
14
The current Credit Agreement with Post Road will allow the Company to continue acquiring UCaaS service providers that meet the Company’s acquisition criteria. Management anticipates that future acquisitions will provide additional operating revenues to the Company as it continues to execute on its consolidation strategy. There can be no guarantee that the planned acquisitions will close or that they will produce the anticipated revenues on the schedule anticipated by management.
The Company will continue to work with various funding sources to secure additional debt and equity financing. However, Digerati cannot offer any assurance that it will be successful in executing the aforementioned plans to continue as a going concern.
As
described elsewhere herein, we are not generating sufficient cash from operations to pay for our corporate and ongoing operating expenses,
or to pay our current liabilities. As of April 30, 2023, our total liabilities were approximately $
The Company’s consolidated financial statements as of April 30, 2023 do not include any adjustments that might result from the inability to implement or execute the Company’s plans to improve our ability to continue as a going concern.
NOTE 3 – INTANGIBLE ASSETS
Below are summarized changes in intangible assets at April 30, 2023 and July 31, 2022:
| Gross Carrying | Accumulated | Net Carrying | ||||||||||
| April 30, 2023 | Value | Amortization | Amount | |||||||||
| NetSapiens - license, 10 years | $ | $ | ( | ) | $ | |||||||
| Customer relationships, 5 years | ( | ) | ||||||||||
| Customer relationships, 7 years | ( | ) | ||||||||||
| Trademarks, 7 & 10 years | ( | ) | ||||||||||
| Non-compete, 2 & 3 years | ( | ) | ||||||||||
| Marketing & Non-compete, 5 years | ( | ) | ||||||||||
| Total Definite-lived Intangible Assets | ( | ) | ||||||||||
| Goodwill | ||||||||||||
| Balance, April 30, 2023 | $ | $ | ( | ) | $ | |||||||
| Gross Carrying | Accumulated | Net Carrying | ||||||||||
| July 31, 2022 | Value | Amortization | Amount | |||||||||
| NetSapiens - license, 10 years | $ | $ | ( | ) | $ | |||||||
| Customer relationships, 5 years | ( | ) | ||||||||||
| Customer relationships, 7 years | ( | ) | ||||||||||
| Trademarks, 7 & 10 years | ( | ) | ||||||||||
| Non-compete, 2 & 3 years | ( | ) | ||||||||||
| Marketing & Non-compete, 5 years | ( | ) | ||||||||||
| Total Definite-lived Intangible Assets | ( | ) | ||||||||||
| Goodwill | ||||||||||||
| Balance, July 31, 2022 | $ | $ | ( | ) | $ | |||||||
Total amortization expense for the nine months
ended April 30, 2023 and 2022 was $
15
NOTE 4 – STOCK-BASED COMPENSATION
In November 2015, the Company adopted the Digerati
Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan authorizes the grant of up to
During the nine months ended April 30, 2023 and 2022, the Company did not issue any new stock options.
The Company recognized approximately $
A summary of the stock options outstanding as of April 30, 2023 and July 31, 2022, and the changes during the nine months ended April 30, 2023 are presented below:
| Weighted average exercise | Weighted average remaining contractual | |||||||||||
| Options | price | term (years) | ||||||||||
| Outstanding at July 31, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited and cancelled | ( | ) | ||||||||||
| Outstanding on April 30, 2023 | $ | |||||||||||
| Exercisable on April 30, 2023 | $ | |||||||||||
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
The aggregate intrinsic value of
NOTE 5 – WARRANTS
During the nine months ended April 30, 2023, the
Company issued
The Company did not issue any warrants during the nine months ended April 30, 2022.
16
A summary of the warrants outstanding as of April 30, 2023 and July 31, 2022, and the changes during the nine months April 30, 2023, are presented below:
| Warrants | Weighted average exercise price | Weighted average remaining contractual term (years) | ||||||||||
| Outstanding at July 31, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | $ | |||||||||
| Forfeited and cancelled | ( | ) | $ | |||||||||
| Outstanding on April 30, 2023 | $ | |||||||||||
| Exercisable on April 30, 2023 | $ | |||||||||||
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
The
aggregate intrinsic value of
NOTE 6 – NOTES PAYABLE NON-CONVERTIBLE
On October 22, 2018, the Company issued a secured
promissory note for $
Credit Agreement and Notes
Pursuant to the Credit Agreement (as defined in Note 2), Post Road
provided Verve Cloud with a secured loan of up to $
During the nine months ended April 30, 2023, the
total debt discount for the Term Loan A Note and the Term Loan B Note was fully amortized. The total debt discount outstanding on the
notes as of April 30, 2023 and July 31, 2022 was $
17
On December 20, 2021, Verve Cloud and Post Road
entered into an amendment to the Credit Agreement (the “First Amendment”) in connection with which Verve Cloud issued an Amended
and Restated Term Loan A Note (the “A&R Term Loan A Note”) in replacement of the Term Loan A Note. Under the First Amendment,
the $
Pursuant to the First Amendment, the additional
proceeds of $
The
A&R Term Loan A Note has a maturity date of November 17, 2024, and an interest rate of Term SOFR (with a minimum rate of
On
February 4, 2022, Verve Cloud and Post Road entered into a Joinder and Second Amendment to Credit Agreement (the “Joinder and
Second Amendment”) in connection with which Verve Cloud issued a Term Loan C Note. Pursuant to the Joinder and Second
Amendment, Post Road provided Verve Cloud with a secured loan of $
For further details regarding the Credit Agreement, as amended through May 1, 2023, please see the section of Note 2 titled “Management Plans to Continue as a Going Concern.”
Promissory Notes – Next Level Internet Acquisition
On February 4, 2022, as per the acquisition of
Next Level, the Company entered into two unsecured promissory notes (the “Unsecured Adjustable Promissory Notes”) for $
18
On February 28, 2023, the Company extended the
payment date for the September 4, 2022 installment to be due by April 30, 2023 (forbearance amendment no. 2) in exchange for a $
On March 7, 2023, the Company extended the payment
date for the March 7, 2023 installment to be due by April 30, 2023 in exchange for a $
On May 1, 2023, the Company extended the payment
date for the September 4, 2022 installment to be due by May 31, 2023 (forbearance amendment no. 3) in exchange for payment of accrued
interest between March 15, 2023 and April 30, 2023 of $
On May 1, 2023, the Company extended the payment
date for the March 7, 2023 installment to be due by May 31, 2023 (forbearance amendment no. 1) in exchange for payment of accrued interest
between March 15, 2023 and April 30, 2023 of $
On June 1, 2023, the Company and the Noteholders agreed to extend the due date for the principal payment along with accrued interest due on May 31, 2023 to June 30, 2023.
NOTE 7 – RELATED PARTY TRANSACTIONS
On December 29, 2022, the Company entered into
a $
On October 4, 2022, the Company entered into a
$
During the nine months ended April 30, 2023 and
2022, the Company provided VoIP Hosted and fiber services to a Company owned by one of the Board members of Verve Cloud (the Nevada entity)
for $
On November 17, 2020, as a result of the of the acquisition
of the assets of ActiveServe, Inc. (“ActiveServe”), the two sellers became related parties as they continued to be involved
as consultants to manage the customer relationship, the Company paid on an annual basis $
On December 31, 2021, as a result of the of the acquisition
of Skynet’s assets, the two sellers became related parties as they continued to be involved as consultants for 12 months to manage
the customer relationship. The Company will pay $
19
Acquisition Payable – Skynet
As
part of the acquisition of Skynet’s assets, the Company will pay to the seller a $
NOTE 8 – CONVERTIBLE NOTES PAYABLE
At April 30, 2023 and July 31, 2022, convertible notes payable consisted of the following:
| April 30, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | 2023 | 2022 | ||||||
| On October 13, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $330,000, an annual interest rate of 8%, and an original maturity date of October 13, 2021. In connection with the execution of the Note, the Company issued 1,000,000 shares of our Common Stock to the Noteholder, and recognized $211,426 of debt discount related to the original issue discount, relative fair market value of shares, and the intrinsic value of the conversion feature of the Note, which was amortized over the term of the Note. The maturity date was extended multiple times and during the current quarter, the lender agreed to extend the maturity until July 31, 2023. (See below variable conversion terms No.1) (1) (2) (3) | $ | $ | ||||||
| On January 27, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, an annual interest rate of 8%, and a maturity date of January 27, 2022. In connection with the execution of the Note, the Company issued 500,000 shares of our Common Stock to the Noteholder, and at the time of issuance, the Company recognized the relative fair market value of the shares of $24,368 as debt discount and $44,368 as debt discount for the intrinsic value of the conversion feature, which both were amortized to interest expense during the term of the Note. The Noteholder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The conversion price shall be the greater of $0.05 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Noteholder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing. The maturity date was extended multiple times. Most recently, on February 1, 2023, the lender agreed to extend the maturity until July 30, 2023. As consideration for the extension on the Note, the Company agreed to add $50,000 to the principal amount outstanding and issued 300,000 shares of Common Stock with a market value of $26,460, both of which, were charged to interest expense. The Company analyzed the Note and determined that it does not require to be accounted as a derivative instrument. (1) (2) (3) | ||||||||
20
| On April 14, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, an annual interest rate of 8%, and a maturity date of April 14, 2022. In connection with the execution of the Note, the Company issued 500,000 shares of our Common Stock to the Noteholder, at the time of issuance, the Company recognized the relative fair market value of the shares of $63,433 as debt discount, and it will be amortized to interest expense during the term of the Note. Additionally, the Company recognized $96,766 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the Note. The Noteholder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The maturity date has been extended multiple times. Most recently, on April 14, 2023, the lender agreed to extend the maturity until October 14, 2023. As consideration for the extension on the Note, the Company agreed to add $50,000 to the principal amount outstanding and issued 300,000 shares of Common Stock with a market value of $23,670, both of which, were charged to interest expense. (1) (2) (3) | ||||||||
| On August 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, an annual interest rate of 8% (and a default interest rate of 20%), and a maturity date of August 31, 2022. In connection with the execution of the Note, the Company issued 150,000 shares of our Common Stock to the Noteholder, and at the time of issuance, the Company recognized the relative fair market value of the shares of $13,635 as debt discount, which will be amortized to interest expense during the term of the promissory note. The Noteholder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Noteholder may elect to convert up to 100% of the principal plus accrued interest into the Common Stock into a qualified uplist financing at a 25% discount. The maturity date has been extended multiple times. Most recently, on February 28, 2023, the lender agreed to extend the maturity until August 31, 2023. As consideration for the extension on the Note, the Company agreed to add $18,000 to the principal amount outstanding and issued 100,000 shares of Common Stock with a market value of $8,200, both of which, were charged to interest expense. (1) (2) (3) | ||||||||
| On September 29, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, an annual interest rate of 8%, a default interest rate of 20%, and a maturity date of September 29, 2022. In connection with the execution of the Note, the Company issued 150,000 shares of our Common Stock to the Noteholder, at the time of issuance, the Company recognized the relative fair market value of the shares of $10,788 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Noteholder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Noteholder may elect to convert up to 100% of the principal plus accrued interest into the Common Stock into a qualified uplist financing at a 25% discount. The maturity date has been extended multiple times. Most recently, on March 29, 2023, the lender agreed to extend the maturity until September 29, 2023. As consideration for the extension on the Note, the Company agreed to add $18,000 to the principal amount outstanding and issued 100,000 shares of Common Stock with a market value of $7,970, both of which, were charged to interest expense. (1) (2) (3) |
21
| On October 22, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $150,000, an annual interest rate of 8% (and a default interest rate of 20%), and a maturity date of October 22, 2022. In connection with the execution of the Note, the Company issued 300,000 shares of our Common Stock to the note holder, and at the time of issuance, the Company recognized the relative fair market value of the shares of $13,965 as debt discount, which will be amortized to interest expense during the term of the promissory note. The Noteholder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Noteholder may elect to convert up to 100% of the principal plus accrued interest into the Common Stock into a qualified uplist financing at a 25% discount. The maturity date has been extended multiple times. Most recently, on April 29, 2023, the lender agreed to extend the maturity until October 29, 2023. As consideration for the extension on the Note, the Company agreed to add $30,000 to the principal amount outstanding and issued 180,000 shares of Common Stock with a market value of $12,582, both of which, were charged to interest expense. (1) (2) (3) | ||||||||
| On February 4, 2022, as part the acquisition of NLI, the Company entered into two unsecured convertible promissory notes (the “Unsecured Convertible Promissory Notes”) for $1,800,000 and $200,000, respectively. The Notes are payable in eight equal quarterly installments in the aggregate amount of $250,000 with the first payment commencing on April 30, 2022, through and including January 31, 2024. The Notes have a base annual interest rate of 10% and a default annual interest rate of 18%. The lenders have a one-time right to convert all or a portion of the Convertible Notes commencing on the six-month anniversary of the notes being issued and ending 30 days after such six-month anniversary. The conversion price means an amount equal to the volume weighted average price per share of Stock on the Nasdaq Stock Market for the ten (10) consecutive trading days on which the conversion notice is received by the Company. However, if the stock is not then listed for trading on the Nasdaq Stock Market, the Conversion Price shall be the volume weighted average transaction price per share reported by the OTC Reporting Facility for the ten (10) consecutive trading days immediately preceding the date on which such Conversion Notice is received by the Company. At inception of the Notes, the Company recognized the fair market value of the conversion on the notes of $2,382,736, and recognized $117,264 in debt discount, which was amortized over the conversion period. As of the nine months ended April 30, 2023, the conversion option on the Notes ended, and the Company recognized $466,086 as other income for the settlement of the conversion option. During the nine months ended April 30, 2023, the Company made two principal payments totaling of $500,000. Most recently, on May 1, 2023, the lenders agreed to extend the principal payment of $250,000 originally due on April 30, 2023 to May 31, 2023. On June 1, 2023, the Company and the Noteholders agreed to extend the due date for the principal payment along with accrued interest due on May 31, 2023 to June 30, 2023. (3) | ||||||||
| On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, an annual interest rate of 8%, and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the Note. In connection with the execution of the Note, the Company issued 300,000 shares of our Common Stock to the Noteholder and recorded $30,446 as debt discount and amortized over the term of the Note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the Note. Upon the occurrence of an Event of Default, the outstanding balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The maturity date has been extended multiple times. Most recently, on January 30, 2023, the lender agreed to extend the maturity until May 30, 2023. In connection with the extension of the maturity date on the Note, the Company agreed to increase the principal balance by $30,000 and issued 300,000 shares of Common Stock with a fair market value of $26,910, both of which, were charged to interest expense. The Company is currently working with the lender to extend the maturity date beyond May 30, 2023. There can be no assurance that we will be able to extend the maturity date. (1) (2) (3) |
22
| On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, an annual interest rate of 8%, and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the note. In connection with the execution of the Note, the Company issued 300,000 shares of our Common Stock to the note holder and recorded $30,446 as debt discount and amortized over the term of the Note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the Note. The outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The maturity date has been extended multiple times. Most recently, on January 30, 2023, the lender agreed to extend the maturity until May 30, 2023. In connection with the extension of the maturity date on the Note, the Company agreed to increase the principal balance by $30,000 and issued 300,000 shares of Common Stock with a fair market value of $26,910, both of which, were charged to interest expense. The Company is currently working with the lender to extend the maturity date beyond May 30, 2023. There can be no assurance that we will be able to extend the maturity date. (1) (2) (3) | ||||||||
| On July 27, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $165,000, an annual interest rate of 8%, and a maturity date of April 27, 2023. After payment of transaction-related expenses and closing fees of $19,500, net proceeds to the Company from the Note totaled $145,500. Additionally, the Company issued 300,000 shares of our Common Stock to the Noteholder. The Company recorded the $19,500 and the relative fair market value of the shares of $22,093 as debt discount and amortized to interest expense over the term of the Note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid conversion amount into fully paid and nonassessable shares of Common Stock. The Note conversion price shall equal the greater of $0.10 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the Note. The maturity date has been extended multiple times. Most recently, on April 25, 2023, the lender agreed to extend the maturity until July 31, 2023. In connection with the extension of the maturity date on the Note, the Company agreed to increase the principal balance by $30,000 and issued 300,000 shares of Common Stock with a fair market value of $21,000, both of which, were charged to interest expense. (1) (2) (3) | ||||||||
| On September 12, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, an annual interest rate of 8%, and a maturity date of September 12, 2023. In connection with the execution of the Note, the Company issued 150,000 shares of our Common Stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $15,880 as debt discount, and it will be amortized to interest expense during the term of the promissory Note. The Noteholder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Noteholder may elect to convert up to 100% of the principal plus accrued interest into shares of Common Stock into a qualified uplist financing at a 25% discount. (1) (3) |
23
| On October 3, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $165,000, an annual interest rate of 8%, and a maturity date of July 3, 2023. After payment of transaction-related expenses and closing fees of $19,500, net proceeds to the Company from the Note totaled $145,500. Additionally, the Company issued 300,000 shares of our Common Stock to the Noteholder. The Company recorded the $19,500 and the relative fair market value of the shares of $32,143 as debt discount and amortized to interest expense over the term of the Note. The Company recognized $117,857 debt discount related to beneficial conversion feature and will be amortized to interest expense over the term of Note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid conversion amount into fully paid and nonassessable shares of Common Stock. The Note conversion price shall equal the greater of $0.10 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the Note. (1) (3) | ||||||||
| On October 27, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $38,500, an annual interest rate of 8%, and a maturity date of July 26, 2023. After payment of transaction-related expenses and closing fees of $3,500, net proceeds to the Company from the Note totaled $25,000. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid conversion amount into fully paid and nonassessable shares of Common Stock. The Note conversion price shall equal the greater of $0.10 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the Note. (1) (3) | ||||||||
| On October 27, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $71,500, an annual interest rate of 8%, and a maturity date of July 26, 2023. After payment of transaction-related expenses and closing fees of $6,500, net proceeds to the Company from the Note totaled $65,000. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid conversion amount into fully paid and nonassessable shares of Common Stock. The Note conversion price shall equal the greater of $0.10 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the Note. (1) (3) | ||||||||
| On October 31, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $350,000, an annual interest rate of 14%, and a maturity date of February 28, 2023. Net proceeds to the Company from the Note totaled $350,000. In the event that any payment is not made when due, either of principal or interest, and whether upon maturity or as a result of acceleration, interest shall thereafter accrue at the rate per annum equal to the lesser of (a) the maximum non-usurious rate of interest permitted by the laws of the State of Texas or the United States of America, whichever shall permit the higher rate or (b) twenty percent (20%) per annum, from such date until the entire balance of principal and accrued interest on this Note has been paid. At any time after sixty (60) days following the date hereof, Payee may elect to convert a percentage of the amount of principal and accrued interest outstanding on the Note into common stock of Debtor, in accordance with the following terms: (i) If prior to uplist to Nasdaq or NYSE, Payee may convert up to 50% of the amount outstanding on the Note into Common Stock. In such event, the price per share of Common Stock applicable to such conversion (the “Applicable Conversion Price”) shall be the greater of: (a) the Variable Conversion Price or (b) the Fixed Conversion Price. The “Variable Conversion Price” shall be equal to a 20% discount to the average closing price for Common Stock for the five (5) Trading Day period immediately preceding the Conversion Date. The Fixed Conversion Price shall equal $0.10; and (ii) If following the Uplist, Payee may convert up to 100% of the amount outstanding on the Note into shares of Common Stock. In such event, the Applicable Conversion Price shall be the greater of: (a) the post-Uplist Variable Conversion Price (i.e., if less than 5 days after the Uplist, then the average of the days available since the Uplist up to 5) or (b) the Fixed Conversion Price. On March 30, 2023, the maturity date was extended to May 30, 2023. In connection with the extension, the Company issued 2,500,000 warrant shares to the Noteholder and recognized the relative fair market value of the warrant shares of $107,006 as debt discount. Additionally, the Company recognized $77,710 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the promissory note. The Company is currently working with the lender to extend the maturity date beyond May 30, 2023. There can be no assurance that we will be able to extend the maturity date. (1) (3) |
24
| On November 22, 2022, the Company entered into a convertible promissory note with an aggregate principal amount of $1,670,000, an annual interest rate of 10%, and a maturity date of November 22, 2023. The Company recorded $90,975 in transaction-related expenses and closing fees and $250,500 of original issue discount to the Note. After payment of transaction-related expenses and closing fees and original issue discount, net proceeds to the Company from the Note totaled $1,328,525 In connection with the execution of the Note, the Company issued 2,100,000 shares of our Common Stock and 10,500,000 warrant shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the shares of Common Stock and warrant shares of $640,877 as debt discount. Additionally, the Company recognized $687,648 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the Note. As amended on March 24, 2023, the Noteholder shall have the right, on or before the earlier of (i) the closing of the Merger (as defined in Note 12) or (ii) May 31, 2023, to convert all or any portion of the Principal Amount and interest (including any Default Interest) into fully paid and non-assessable shares of Common Stock. The Note conversion price shall equal $0.0956 subject to adjustment as provided in the note. On April 24, 2023, the Noteholder agreed to extend the due date for the first principal payment to May 22, 2023. In connection with the extension of the due date of the first principal payment on the Note, the Company agreed to increase the principal balance by $20,000. (1) (3) | ||||||||
| On December 12, 2022, the Company entered into a convertible promissory note with an aggregate principal amount of $117,647, annual interest rate of 10% and a maturity date of December 12, 2023. The Company recorded $17,647 as original issue discount to the Note, which resulted in net proceeds of $100,000, and amortized to interest expense over the term of the note. In connection with the execution of the note, the Company issued 148,295 shares of our Common Stock and 741,475 warrant shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the Common Stock and warrant shares of $41,685 as debt discount, and it will be amortized to interest expense during the term of the Note. Additionally, the Company recognized $58,315 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the Note. The Noteholder shall have the right, on any calendar day, at any time on or following the earlier of (i) April 12, 2023 or (ii) sixty (60) calendar days after the closing date of the Merger (as defined in Note 12), to convert all or any portion of the Principal Amount and interest (including any Default Interest) into fully paid and non-assessable shares of Common Stock. The Note conversion price shall equal $0.0956, subject to adjustment as provided in the Note. On May 24, 2023, the lender agreed to extend the due date for the first principal payment to June 12, 2023, which was originally due on March 12, 2023, and later extended to May 12, 2023. (1) (3) | ||||||||
| On December 20, 2022, the Company entered into a convertible promissory note with an aggregate principal amount of $176,471, an annual interest rate of 10%, and a maturity date of December 20, 2023. The Company recorded $5,000 in deferred finance costs and $26,471 of original issue discount to the Note. After payment of transaction-related expenses, net proceeds to the Company from the Note totaled $145,500. In connection with the execution of the Note, the Company issued 221,909 shares of our Common Stock and 1,109,545 warrant shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the Common Stock and warrant shares of $59,374 as debt discount. Additionally, the Company recognized $79,014 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the Note. The Noteholder shall have the right, on any calendar day, at any time on or following the earlier of (i) April 12, 2023 or (ii) sixty (60) calendar days after the closing date of the Merger (as defined in Note 12), to convert all or any portion of the Principal Amount and interest (including any Default Interest) into fully paid and non-assessable shares of Common Stock. The Note conversion price shall equal $0.0956, subject to adjustment as provided in the Note. On March 17, 2023, the Noteholder agreed to extend the maturity date until May 20, 2023 or the closing of the Merger. (1) (3) |
25
| On December 22, 2022, the Company entered into a convertible promissory note with an aggregate principal amount of $188,235, annual interest rate of 10% and a maturity date of December 22, 2023. The Company recorded $10,000 in transaction-related expenses and closing fees and $28,235 of original issue discount to the Note. After payment of transaction-related expenses and closing fees and original issue discount, net proceeds to the Company from the Note totaled $150,000. In connection with the execution of the note, the Company issued 236,703 shares of our Common Stock and 1,183,515 warrant shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the Common Stock and warrant shares of $66,679 as debt discount. Additionally, the Company recognized $83,321 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the promissory note. The Noteholder shall have the right, on any calendar day, at any time on or following the earlier of (i) April 22, 2023 or (ii) sixty (60) calendar days after the closing date of the Merger (as defined in Note 12), to convert all or any portion of the Principal Amount and interest (including any Default Interest) into fully paid and non-assessable shares of Common Stock. The Note conversion price shall equal $0.0956, subject to adjustment as provided in the Note. On March 17, 2023, the Noteholder agreed to extend the maturity date until May 22, 2023 or the closing of the Merger. (1) (3) | ||||||||
| On January 13, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $110,000, an annual interest rate of 10%, and a maturity date of October 13, 2023. The Company recorded $10,000 in original issue discount to the Note. After payment of the original issue discount, net proceeds to the Company from the Note totaled $100,000. In connection with the execution of the Note, the Company issued 138,000 shares of our Common Stock shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the shares of Common Stock of $11,177 as debt discount. Additionally, the Company recognized $21,507 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the Note. The Noteholder shall have the right, on any calendar day, at any time on or following the earlier of (i) May 12, 2023 or (ii) sixty (60) calendar days after listing on Nasdaq or the New York Stock Exchange to convert any portion of the outstanding and unpaid Conversion into fully paid and nonassessable shares of Common Stock, at the Conversion Price. The Note conversion price shall equal $0.10, subject to adjustment as provided in the Note. (1) (3) | ||||||||
| On January 24, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $660,000, an annual interest rate of 10%, and a maturity date of May 24, 2023. The Company recorded $60,000 in original issue discount to the Note. After payment of the original issue discount, net proceeds to the Company from the Note totaled $600,000. In connection with the execution of the Note, the Company issued 660,000 shares of our Common Stock shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the shares of Common stock of $53,850 as debt discount. Additionally, the Company recognized $104,610 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the promissory note. The Payee may elect to convert up to 100% of the Principal Amount outstanding on the Note into Common Stock of Debtor or any shares of capital stock or other securities of the Debtor into which such Common Stock shall hereafter be changed or reclassified at any time on the earlier of (i) one hundred and twenty (120) calendar days following the funding of this Note or (ii) sixty (60) calendar days after the closing date of the Merger (as defined in Note 12). The Note conversion price shall equal $0.10, subject to adjustment as provided in the Note. On June 1, 2023, the Company amended its agreement with the Noteholder, which extends the maturity date from May 24, 2023, to the earlier of June 30, 2023 or the closing of the Business Combination with MEOA in exchange for 165,000 shares of Common Stock. (1) (3) |
26
| On January 24, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $660,000, an annual interest rate of 10%, and a maturity date of May 24, 2023. The Company recorded $60,000 in original issue discount to the Note. After payment of the original issue discount, net proceeds to the Company from the Note totaled $600,000. In connection with the execution of the Note, the Company issued 660,000 shares of our Common Stock shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the shares of Common stock of $53,850 as debt discount. Additionally, the Company recognized $104,610 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the promissory note. The Payee may elect to convert up to 100% of the Principal Amount outstanding on the Note into Common Stock of Debtor or any shares of capital stock or other securities of the Debtor into which such Common Stock shall hereafter be changed or reclassified at any time on the earlier of (i) one hundred and twenty (120) calendar days following the funding of this Note or (ii) sixty (60) calendar days after the closing date of the Merger (as defined in Note 12). The Note conversion price shall equal $0.10, subject to adjustment as provided in the Note. On June 1, 2023, the Company amended its agreement with the Noteholder, which extends the maturity date from May 24, 2023 to the earlier of June 30, 2023 or the closing of the Business Combination with MEOA in exchange for 165,000 shares of Common Stock. (1) (3) | ||||||||
| On March 7, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $110,000, annual interest rate of 10% and a maturity date of December 7, 2024. The Company recorded $10,000 of original issue discount to the Note. After payment of original issue discount, net proceeds to the Company from the Note totaled $100.000. In connection with the execution of the Note, the Company issued 300,000 shares of our Common Stock at the time of issuance. The Company recognized the relative fair market value $38,850 for shares of Common Stock to debt discount, which will be amortized to interest expense during the term of the Note. The Noteholder shall have the right, on any calendar day, at any time on or following the earlier of (i) July 7, 2023 or (ii) sixty (60) calendar days after listing on Nasdaq or the New York Stock Exchange to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock at the Conversion Price of $0.10, subject to adjustment as provided in the Note. (1) (3) | ||||||||
| On March 17, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $192,000, annual interest rate of 10% and a maturity date of March 17, 2024. The Company recorded $17,160 in transaction-related expenses and closing fees and $28,800 of original issue discount to the Note. After payment of transaction-related expenses and closing fees and original issue discount, net proceeds to the Company from the Note totaled $146,040. In connection with the execution of the note, the Company issued 241,500 shares of our Common Stock and 1,207,186 warrant shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value $8,140 for the common shares and $62,481 for the warrant shares, both of which, were considered to be debt discount. Additionally, the Company recognized $47,806 as debt discount for the intrinsic value of the conversion feature. All debt discount will be amortized to interest expense during the term of the promissory note. The Holder shall have the right, on any calendar day, at any time on or following the earlier of (i) July 17, 2023 or (ii) sixty (60) calendar days after the closing date of Merger (as defined in Note 12), to convert all or any portion of the then outstanding and unpaid Principal Amount and interest (including any Default Interest) into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date. The Note conversion price shall equal $0.0956, subject to adjustment as provided in the Note. (1) (3) | ||||||||
| On April 14, 2023, the Company entered into a convertible promissory note with an aggregate principal amount of $275,000, an annual interest rate of 10%, and a maturity date of October 11, 2023. The Company recorded $25,000 in original issue discount to the Note. After payment of the original issue discount, net proceeds to the Company from the Note totaled $250,000. In connection with the execution of the Note, the Company issued 358,000 shares of our Common Stock shares to the Noteholder at the time of issuance. The Company recognized the relative fair market value of the common shares of $28,354 as debt discount. All debt discount will be amortized to interest expense during the term of the promissory note. The Noteholder may elect to convert up to 50% of the principal amount outstanding and any accrued interest on the Note into Common Stock, on the date of the debtor’s up-list transaction on the NASDAQ. The Note conversion price shall equal $0.10 subject to adjustment as provided in the Note. (1) (3) | ||||||||
| Total convertible notes payables non-derivative: | $ | $ |
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| CONVERTIBLE NOTES PAYABLE - DERIVATIVE | ||||||||
| On July 27, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $275,000, an annual interest rate of 8%, and a maturity date of March 27, 2021. After payment of transaction-related expenses and closing fees of $35,000, net proceeds to the Company from the Note totaled $240,000. The Company recorded these discounts and cost of $35,000 as a discount to the Note and amortized over the term of the Note. In connection with the execution of the note, the Company issued 500,000 shares of our Common Stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $11,626 as debt discount, and it will be amortized to interest expense during the term of the promissory note. On January 17, 2023, the Note was amended so that the Noteholder shall be entitled, at any time, to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in this Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a) $0.05 or (b) 75% of the lowest traded price in the prior fifteen trading days immediately preceding the Notice of Conversion. The Company recognized $61,678 of derivative liability and directly amortized all associated debt discount of $61,678 as interest expense. The maturity date has been extended multiple times. Most recently, on March 30, 2023, the lender agreed to extend the maturity date until June 30, 2023. In connection with the extension of the maturity date on the Note, the Company agreed to increase the principal balance by $30,000, which was charged to interest expense, and issued 250,000 shares of Common Stock with a market value of $19,225. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. (2) (4) | ||||||||
| On January 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $80,235, annual interest rate of 8% and a maturity date of February 17, 2022. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) or seventy-five percent (75%) of the lowest daily volume weighted average price (“VWAP”) over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. As a result, the Company recognized derivative liability for the convertible note of $59,413. During the most recent quarter, the holder agreed to extend the maturity date until July 31, 2023. (2) (4) | ||||||||
| On April 15, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $113,000, an annual interest rate of 8%, and a maturity date of January 15, 2022. After payment of transaction-related expenses and closing fees of $13,000, net proceeds to the Company from the Note totaled $100,000. Additionally, the Company recorded $13,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the Note, the Company issued 100,000 shares of our Common Stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $14,138 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.15 or (b). seventy-five percent of the lowest traded price in the prior fifteen (15) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”). The outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company recognized derivative liability for the convertible note of $64,561, of which $42,822 was recorded as debt discount and amortized over the term of the Note. The maturity date has been extended multiple times. Most recently, the lender agreed to extend the maturity until June 30, 2023. In connection with the extension of the maturity date on the Note, the Company agreed to increase the principal balance by $25,000, which was charged to interest expense, and issued 150,000 shares of Common Stock with a market value of $11,995. (2) (4) | ||||||||
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| On October 10, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $275,000, annual interest rate of 8% and a maturity date of April 10, 2023. After payment of transaction-related expenses and closing fees of $25,000, net proceeds to the Company from the note totaled $250,000. The Company recorded the $25,000 as debt discount and amortized to interest expense over the term of the Note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Noteholder shall be entitled to convert any portion of the outstanding and unpaid conversion amount into fully paid and nonassessable shares of Common Stock. The note conversion price shall equal the greater of $0.15 or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American, subject to adjustment as provided in the note. Any Principal Amount or interest on this Note which is not paid when due shall bear interest at the rate the lesser of (a) twenty-four percent (24%) per annum from the due date thereof until the same is paid (“Default Interest”); or (b) the maximum rate allowed by law. During the most recent quarter, the holder agreed to extend the maturity date until July 31, 2023. (4) | ||||||||
| Total convertible notes payable - derivative: | $ | $ | ||||||
| Total convertible notes payable derivative and non-derivative | ||||||||
| Less: debt discount | ( | ) | ( | ) | ||||
| Total convertible notes payable, net of discount | ||||||||
| Less: current portion of convertible notes payable | ( | ) | ( | ) | ||||
| Long-term portion of convertible notes payable | $ | - | $ |
The total unamortized discount on the convertible
notes as of April 30, 2023 and July 31, 2022 was $
| (1) | The Company determines at each reporting period if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. |
| (2) | The Company evaluated the amendment(s) and accounted for these changes as an extinguishment of debt. |
| (3) | The Company analyzed the Note and determined that it does not require to be accounted as a derivative instrument. |
| (4) | The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. |
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NOTE 9 – LEASES
The leased properties have a remaining lease term of three to sixty months as of April 30, 2023. At the option of the Company, it can elect to extend the term of the leases. See table below:
| Location | Annual Rent | Lease Expiration Date | Business Use | Approx. Sq. Ft. | ||||||||
| 8023 Vantage Dr., Suite 660, San Antonio, Texas 78230 | $ | |||||||||||
| 10967 Via Frontera, San Diego, CA 92127 | $ | |||||||||||
| 1610 Royal Palm Avenue, Suite 300, Fort Myers, FL 33901 | $ | |||||||||||
| 2121 Ponce de Leon Blvd., Suite 200, Coral Gables FL 33134 | $ | |||||||||||
| 7218 McNeil Dr., FL-1, Austin, TX 78729 | $ | |||||||||||
| 9701 S. John Young Parkway, Orlando, FL 32819 | $ | |||||||||||
| 50 NE 9th St, Miami, FL 3313 | $ | |||||||||||
| 350 NW 215 St., Miami Gardens, FL 33169 | $ | |||||||||||
| 8333 NW 53rd St, Doral, FL 33166 | $ | |||||||||||
| 100 SE 2nd Street, Miami, FL 33131 | $ | |||||||||||
| 9055 SW 73rd Ct, Miami, FL 33156 | $ | |||||||||||
| 9517 Fontainebleau Blvd., Miami, FL 33172 | $ | |||||||||||
The Company has not entered into any sale and leaseback transactions during the nine months ended April 30, 2023.
On May 17, 2022, the Company extended the office
and wireless internet network leases in Coral Gables, Florida. The Company accounted for the extension as a lease modification. The Company
used the discount rate of
In February 2022, as part of the acquisition of
NLI, the Company secured an office lease, with a monthly base lease payment of $
In December 2021, as part of the acquisition of
Skynet Telecom LLC’s assets, the Company assumed an office lease in San Antonio, Texas.
Amounts recognized as of July 31, 2022 and April 30, 2023 for operating leases are as follows:
| ROU Asset | July 31, 2022 | $ | ||||
| Amortization | $ | ( |
) | |||
| Addition - Asset | $ | |||||
| ROU Asset | April 30, 2023 | $ | ||||
| Lease Liability | July 31, 2022 | $ | ||||
| Payments | $ | ( |
) | |||
| Addition - Liability | $ | |||||
| Lease Liability | April 30, 2023 | $ | ||||
| Lease Liability | Short term | $ | ||||
| Lease Liability | Long term | $ | ||||
| Lease Liability | Total: | $ | ||||
| Operating lease cost: | $ | |||||
| Cash paid for amounts included in the measurement of lease labilities: | ||||||
| Operating cashflow from operating leases: | $ | |||||
| Weighted-average remain lease term-operating lease: | ||||||
| Weighted-average discount rate | % |
30
The future minimum lease payment under the operating leases are as follows:
| Lease | ||||
| Period Ending July 31, | Payments | |||
| 2023 (three months remaining) | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total: | $ | |||
| Less: amounts representing interest | ||||
| Present value of net minimum operating lease payments | $ |
NOTE 10 – EQUIPMENT FINANCING
The
Company entered into various financing agreements for equipment purchased. Under the term of the agreements, assets with a cost of approximately
$
Amounts recognized as of July 31, 2022 and April 30, 2023 for equipment financing are as follows:
| ROU Asset | July 31, 2022 | $ | ||||
| Amortization | $ | ( |
) | |||
| Addition - Asset | $ | |||||
| ROU Asset | April 30, 2023 | $ | ||||
| Equipment Financing | July 31, 2022 | $ | ||||
| Payments | $ | ( |
) | |||
| Addition - Equipment Financing | $ | |||||
| Equipment Financing | April 30, 2023 | $ | ||||
| Equipment Financing | Short term | $ | ||||
| Equipment Financing | Long term | $ | ||||
| Equipment Financing | Total: | $ |
The future payments under the equipment financing agreements are as follows:
| Year | Amount | |||
| 2023 (three months remaining) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total future payments: | $ | |||
31
| Less: amounts representing interest | ||||
| Present value of net minimum equipment financing payments | $ | |||
| Lease cost: | ||||
| Amortization of ROU assets | $ | |||
| Interest on lease liabilities | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cashflow from equipment financing: | $ | |||
| Financing cashflow from equipment financing: | ||||
| Weighted-average remaining lease term - equipment financing: | ||||
| Weighted-average discount rate | % |
NOTE 11 – EQUITY
During
the nine months ended April 30, 2023, the Company issued
During the nine months ended April 30, 2023, the
Company issued
During the nine months ended April 30, 2023, the
Company issued
During the nine months ended April 30, 2023, the
Company issued
During the nine months ended April 30, 2023, the
Company issued
During the nine months ended April 30, 2023, the
Company issued
NOTE 12 – SUBSEQUENT EVENTS
Amendment to MEOA Business Combination
As previously disclosed, on August 30, 2022, the Company entered into a Business Combination Agreement (as it may be amended, supplemented or otherwise modified from time to time, the “Business Combination Agreement”), by and among the Company, MEOA, and MEOA Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of MEOA (“Merger Sub”).
The Business Combination Agreement provides, among other things, that Merger Sub will merge with and into Digerati, with Digerati as the surviving company in the merger and, after giving effect to such merger, Digerati shall be a wholly-owned subsidiary of MEOA (the “Merger”). Digerati after the Merger is referred to in this Note 12 as the “Surviving Company.”
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On May 1, 2023, the Company and MEOA amended the Business Combination Agreement (amendment no. 3), in which Section 7.1(d) of the Business Combination Agreement eliminates the date of “April 28, 2023” as the Termination Date and replaced it with “May 30, 2023” as the Termination Date.
On May 30, 2023, the Company and MEOA amended its Business Combination Agreement (amendment no. 4), in which Section 7.1(d) of the Business Combination Agreement eliminates the date of “May 30, 2023” as the Termination Date and replaced with “June 15, 2023” as the Termination Date.
Securities Purchase Agreement and Promissory Notes
On May 9, 2023, the Company entered into a securities purchase agreement (the “SPA”) with Lucas Ventures, LLC, (the “Investor”). Pursuant to the SPA, the Investor purchased, and the Company issued, an unsecured promissory note (the “Note”) in the aggregate principal amount totaling approximately $
On May 10, 2023, the Company amended its Asset
Purchase Agreement (amendment no. 4) with Skynet Telecom, LLC, Verve Cloud, Inc, a Texas entity (f/ka/ Shift8 Networks, Inc.); Digerati
Technologies, Inc.; and Paul Golibart and Jerry Ou. The amendment states that $
On May 17, 2023, the Company amended its agreement
(amendment no. 2) with Platinum Point Capital, LLC, which extends the maturity date from February 28, 2023 to July 31, 2023 in exchange
for $
On May 17, 2023, the Company amended its agreement
(amendment no. 1) with Platinum Point Capital, LLC, which extends the maturity date from April 10, 2023 to July 31, 2023 in exchange for
$
On May 17, 2023, the Company amended its agreement
(amendment no. 2) with Platinum Point Capital, LLC, which extends the maturity date from February 28, 2023 to July 31, 2023 in exchange
for $
On May 24, 2023, the Company amended its agreement
with ClearThink Capital Partners, LLC (“ClearThink”), which extends the due date of the principal payment balance to June
12, 2023 and adds $
On June 1, 2023, the Company amended its agreement
(amendment no. 1) with Graham A. Gardner, which extends the maturity date from May 24, 2023 to the earlier of June 23, 2023 or the closing
of the Merger in exchange for
On June 1, 2023, the Company amended its agreement (amendment no. 1)
with Blue Ocean Investments, LLC which extends the maturity date from May 24, 2023 to the earlier of June 24, 2023 or the closing of the
Merger in exchange for
Amendment to the 2015 Equity Compensation Plan (the “Plan”)
On
May 27, 2023, the Board of Directors of the Company approved the amendment to the Plan where it amends the following: to allow for the
grant of options to purchase up to
The Company granted
Issuance of Common Stock
On May 10, 2023, the Company issued
On May 19, the Company issued
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. “Forward-looking statements” are those statements that describe management’s beliefs and expectations about the future. We have identified forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” “plan,” and “intend.” Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties. Some of these risks include the availability and capacity of competitive data transmission networks and our ability to raise sufficient capital to continue operations. Additional risks are included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2022, filed with the Securities and Exchange Commission on October 31, 2022.
The following Is a discussion of the unaudited interim consolidated financial condition and results of operations of Digerati for the three months and nine months ended April 30, 2023 and 2022. 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, 2022, filed with the Securities and Exchange Commission on October 31, 2022. For purposes of the following discussion, fiscal 2023 or 2023 refers to the year that will end on July 31, 2023, and fiscal 2022 or 2022 refers to the year ended July 31, 2022.
Overview
Digerati Technologies, Inc., a Nevada corporation (including our subsidiaries, “we,” “us,” “Company” or “Digerati”), through its operating subsidiaries in Texas, Florida, and California provides cloud services specializing in Unified Communications as a Service (“uCaaS”) and broadband connectivity solutions for the business market. Our product line includes a portfolio of Internet-based telephony products and services delivered through our cloud application platform and session-based communication network and network services including Internet broadband, fiber, mobile broadband, and cloud WAN solutions (SD WAN).
Digerati Technologies, Inc. currently has four (4) operating subsidiaries: (i) Verve Cloud, Inc., a Texas entity (this entity was formerly known as Shift8 Networks, Inc.); (ii) T3 Communications, Inc., a Florida entity; (iii) Nexogy, Inc., a Florida entity; and (iv) NextLevel Internet, Inc., a California entity. Each of these entities is a subsidiary of Verve Cloud, Inc., a Nevada entity (this entity was formerly known as T3 Communications, Inc.).
We provide enterprise-class, carrier-grade services to the small-to-medium-sized business (“SMB”) at cost-effective monthly rates. Our uCaaS or cloud communication services include fully hosted IP/PBX, video conferencing, mobile applications, Voice over Internet Protocol (“VoIP”) transport, SIP trunking, and customized VoIP services all delivered Only in the Cloud™. Our broadband connectivity solutions for the delivery of digital oxygen are designed for reliability, business continuity and to optimize bandwidth for businesses using the Company’s cloud communication services and other cloud-based applications.
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.
34
The adoption of cloud communication services is being driven by the convergence of several market trends, including the increasing costs of maintaining installed legacy communications systems, the fragmentation resulting from use of multiple on-premise systems, and the proliferation of personal smartphones used in the workplace. Today, businesses are increasingly looking for an affordable path to modernizing their communications system to improve productivity, business performance and customer experience. Modernization has also led to businesses adopting other cloud-based business applications, including CRM, payroll, and accounting software, placing an even more important emphasis on reliable Internet connectivity.
Our cloud solutions offer the SMB reliable, robust, and full-featured services at affordable monthly rates that eliminates high-cost capital expenditures and provides for integration with other cloud-based systems. By providing a variety of comprehensive and scalable solutions, we can cater to businesses of different sizes on a monthly subscription basis, regardless of the stage of development for the business.
Recent Developments
MEOA Business Combination
On August 30, 2022, the Company entered into a Business Combination Agreement (as it may be amended, supplemented or otherwise modified from time to time, the “Business Combination Agreement”), by and among Digerati, Minority Equality Opportunities Acquisition Inc., a Delaware corporation (“MEOA”), and MEOA Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of MEOA (“Merger Sub”).
The Business Combination Agreement provides, among other things, that Merger Sub will merge with and into Digerati, with Digerati as the surviving company in the merger and, after giving effect to such merger, Digerati shall be a wholly-owned subsidiary of MEOA (the “Merger”). In addition, following the consummation of the Merger, MEOA will be renamed Verve Technologies Corporation. Digerati after the Merger is referred to as the “Surviving Company.”
As previously disclosed, in November and December 2022, Digerati issued the following securities to four (4) bridge lenders including Mast Hill Fund, L.P. (the “Bridge Lenders”): (a) unsecured promissory notes that are convertible into shares of Digerati’s common stock under certain circumstances; and (b) warrants to purchase shares of Digerati’s common stock. As used herein, “Bridge Loan Warrants” means those certain warrants to purchase up to 13,534,535 shares of Digerati’s common stock that Digerati issued to the Bridge Lenders. In March 2023, the Company issued other promissory notes with the some of the same lenders and, in connection with such notes, the Company issued certain warrants to purchase up to 3,707,186 shares of Digerati’s common stock.
As used herein, “New Digerati” refers to MEOA following the consummation of the Merger and “New Digerati Common Stock” means the common stock, par value $0.0001 per share, of New Digerati.
On February 14, 2023, the parties to the Business Combination Agreement amended the Business Combination Agreement (the “February Amendment”) to increase the implied equity value of Digerati from $68,680,807 to $71,080,810 to give effect to the issuance by Digerati to Maxim Group LLC (“Maxim”), immediately prior to the closing of the Merger, of such number of shares of Digerati’s common stock as would be exchanged for an aggregate of 240,000 shares of New Digerati Common Stock upon the closing of the Merger as partial compensation for financial advisory services that Maxim provided to Digerati in connection with the Business Combination. The February Amendment also clarified that the shares of Digerati common stock underlying the Bridge Loan Warrants would not be part of the calculation of the implied equity value of Digerati of $71,080,810, and it clarified that none of the shares underlying any of the convertible promissory notes of Digerati that are outstanding upon the closing of the Merger are part of the calculation of the implied equity value of Digerati of $71,080,810.
In connection with the Merger, MEOA has filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-4 containing the proxy statement/prospectus relating to the BCA (the “Registration Statement”), which the SEC has declared effective. On May 3, 2023, MEOA filed a definitive proxy statement/final prospectus relating to the Merger, and thereafter MEOA mailed that definitive proxy statement/final prospectus and other relevant documents to its stockholders. On May 12, 2023, Digerati filed a definitive proxy statement in connection with Digerati’s solicitation of proxies for its special meeting of stockholders to be held to approve the Merger (and related matters) and thereafter Digerati mailed that definitive proxy statement and other relevant documents to its stockholders. This communication is not a substitute for the Registration Statement, the definitive proxy statement/final prospectus, the definitive proxy statement or any other document that Digerati has sent to its stockholders in connection with the Merger.
35
On February 24, 2023, the Company and MEOA amended its Business Combination Agreement (amendment #2), among other things, amended the following:
| ● | Section 7.1(d) eliminates the date of “February 25, 2023” as the termination date and replaces it with a termination date of “April 28, 2023.” |
| ● | The Company waives the requirement set forth in Section 5.7 of the Business Combination Agreement that MEOA have filed the Registration Statement on Form S-4 no later than 45 days following the date of the Business Combination Agreement and acknowledges that the aforementioned Registration Statement was subsequently filed on November 30, 2022. |
| ● | MEOA waives the following: |
| ● | the requirement set forth in Section 5.17 of the Business Combination Agreement that the Company have delivered, by no later than September 15, 2022, certain audited and unaudited financial statements, and acknowledges that the aforementioned financial statements for its fiscal year ending July 31, 2022 were delivered on October 31, 2022 |
| ● |
the requirement set forth in Section 5.22 of the Business Combination Agreement that the Company shall have caused Post Road Administrative LLC and its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post Road”), on or prior to October 15, 2022, to enter into the PRG Resolution Agreement, and acknowledges delivery of the executed PRG Resolution Agreement on February 7, 2023. |
On May 1, 2023, the Company and MEOA amended its Business Combination Agreement (amendment #3), in which Section 7.1(d) of the Business Combination Agreement eliminates the date of “April 28, 2023” as the Termination Date and replaced with “May 30, 2023” as the Termination Date.
On May 30, 2023, the Company and MEOA amended its Business Combination Agreement (amendment #4) which extends the Termination Date from May 30, 2023 to June 15, 2023.
Key Performance indicators:
EBITDA from operations, as adjusted is a non-GAAP measure and should be considered in addition to, not as a substitute for, net income (loss), cash flow and other measures of financial performance reported in accordance with GAAP. In addition, this measure does not reflect cash available to fund requirements and excludes items, such as corporate expenses, transactional legal expenses, stock option expense, and depreciation and amortization, which are significant components in assessing the Company’s financial performance. The Company believes that the presentation of EBITDA from operations, as adjusted provides useful information regarding the Company’s operations and other factors that affect the Company’s reported results. Specifically, the Company believes that by excluding certain one-time or non-cash items such as transactional legal fees and depreciation and amortization, as well as potential distortions between periods caused by factors such as financing and capital structures, the Company provides users of its consolidated financial statements with insight into both its operations as well as the factors that affect reported results between periods but which the Company believes are not representative of its operations. As a result, users of the Company’s consolidated financial statements are better able to evaluate changes in the financial consolidated results of the Company across different periods.
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The following tables provide information regarding certain key performance indicators for Digerati for the three and nine months ended April 30, 2023 and 2022. Management utilizes these metrics to track and forecast revenue trends and expected results from operations:
Reconciliation of Net Loss to Adjusted EBITDA
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||||||||||||||||||
| 2023 | 2022 | Variances | % | 2023 | 2022 | Variances | % | |||||||||||||||||||||||||
| OPERATING REVENUES: | ||||||||||||||||||||||||||||||||
| Cloud-based hosted services | $ | 7,837 | $ | 8,163 | $ | (326 | ) | -4 | % | $ | 23,908 | $ | 15,959 | $ | 7,949 | 50 | % | |||||||||||||||
| Total operating revenues | 7,837 | 8,163 | (326 | ) | -4 | % | 23,908 | 15,959 | 7,949 | 50 | % | |||||||||||||||||||||
| Cost of services (exclusive of depreciation and amortization) | 2,879 | 3,161 | (282 | ) | -9 | % | 8,698 | 6,203 | 2,495 | 40 | % | |||||||||||||||||||||
| Selling, general and administrative expense | 4,299 | 4,268 | 31 | 1 | % | 12,852 | 8,136 | 4,716 | 58 | % | ||||||||||||||||||||||
| Stock compensation expense | 23 | 28 | (5 | ) | -18 | % | 69 | 75 | (6 | ) | -8 | % | ||||||||||||||||||||
| Legal and professional fees | 681 | 756 | (75 | ) | -10 | % | 2,311 | 2,505 | (194 | ) | -8 | % | ||||||||||||||||||||
| Bad debt | 37 | 36 | 1 | 3 | % | 106 | 51 | 55 | 108 | % | ||||||||||||||||||||||
| Depreciation and amortization expense | 993 | 1,540 | (547 | ) | -36 | % | 2,912 | 2,514 | 398 | 16 | % | |||||||||||||||||||||
| Total operating expenses | 8,912 | 9,789 | (877 | ) | -9 | % | 26,948 | 19,484 | 7,464 | 38 | % | |||||||||||||||||||||
| OPERATING LOSS | (1,075 | ) | (1,626 | ) | 551 | -34 | % | (3,040 | ) | (3,525 | ) | 485 | -14 | % | ||||||||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||||||||||||||||||
| Gain (loss) on derivative instruments | 2,120 | 6,827 | (4,707 | ) | -69 | % | 2,893 | 7,835 | (4,942 | ) | -63 | % | ||||||||||||||||||||
| Gain (loss) on extinguishment of debt | 55 | - | 55 | 100 | % | 55 | (5,480 | ) | 5,535 | -101 | % | |||||||||||||||||||||
| Other income (expense) | (1 | ) | 2 | (3 | ) | -150 | % | 455 | - | 455 | 100 | % | ||||||||||||||||||||
| Interest expense | (3,701 | ) | (1,676 | ) | (2,025 | ) | 121 | % | (8,137 | ) | (4,563 | ) | (3,574 | ) | 78 | % | ||||||||||||||||
| Income tax expense | (51 | ) | (167 | ) | 116 | -69 | % | (128 | ) | (285 | ) | 157 | -55 | % | ||||||||||||||||||
| Total other income (expense) | (1,578 | ) | 4,986 | (6,564 | ) | -132 | % | (4,862 | ) | (2,493 | ) | (2,369 | ) | 95 | % | |||||||||||||||||
| NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST | (2,653 | ) | 3,360 | (6,013 | ) | -179 | % | (7,902 | ) | (6,018 | ) | (1,884 | ) | 31 | % | |||||||||||||||||
| Less: Net loss attributable to the noncontrolling interests | 409 | 546 | (137 | ) | -25 | % | 898 | 1,306 | (408 | ) | -31 | % | ||||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI'S SHAREHOLDERS | $ | (2,244 | ) | $ | 3,906 | $ | (6,150 | ) | -157 | % | $ | (7,004 | ) | $ | (4,712 | ) | $ | (2,292 | ) | 49 | % | |||||||||||
| Deemed dividend on Series A Convertible preferred stock | - | (4 | ) | 4 | -100 | % | (8 | ) | (14 | ) | 6 | -43 | % | |||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI'S COMMON SHAREHOLDERS | $ | (2,244 | ) | $ | 3,902 | $ | (6,146 | ) | -158 | % | $ | (7,012 | ) | $ | (4,726 | ) | $ | (2,286 | ) | 48 | % | |||||||||||
| Reconciliation of Net Income (Loss) to Adjusted EBITDA - OPCO, Net of Non-Cash Expenses & Transactional Costs. | ||||||||||||||||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI'S SHAREHOLDERS, as reported | $ | (2,244 | ) | $ | 3,906 | $ | (6,150 | ) | -157 | % | $ | (7,004 | ) | $ | (4,712 | ) | $ | (2,292 | ) | 49 | % | |||||||||||
| EXCLUDING NON-CASH ITEMS TRANSACTIONAL COSTS & CORP EXP ADJUSTMENTS: | ||||||||||||||||||||||||||||||||
| Stock compensation & warrant expense | 23 | 28 | (5 | ) | -18 | % | 69 | 75 | (6 | ) | -8 | % | ||||||||||||||||||||
| Corp Expenses (Net of stock compensation, Legal fees & Transactional cost) | 378 | 255 | 123 | 48 | % | 1,043 | 657 | 386 | 59 | % | ||||||||||||||||||||||
| Legal, professional fees & transactional costs | 680 | 862 | (182 | ) | -21 | % | 2,308 | 2,730 | (422 | ) | -15 | % | ||||||||||||||||||||
| Depreciation and amortization expense | 993 | 1,540 | (547 | ) | -36 | % | 2,912 | 2,514 | 398 | 16 | % | |||||||||||||||||||||
| OTHER ADJUSTMENTS | ||||||||||||||||||||||||||||||||
| Gain (loss) on derivative instruments | (2,120 | ) | (6,827 | ) | 4,707 | -69 | % | (2,893 | ) | (7,835 | ) | 4,942 | -63 | % | ||||||||||||||||||
| Gain (loss) on extinguishment of debt | (55 | ) | - | (55 | ) | 100 | % | (55 | ) | 5,480 | (5,535 | ) | -101 | % | ||||||||||||||||||
| Other income (expense) | 1 | (2 | ) | 3 | -150 | % | (455 | ) | - | (455 | ) | 100 | % | |||||||||||||||||||
| Interest expense | 3,701 | 1,676 | 2,025 | 121 | % | 8,137 | 4,563 | 3,574 | 78 | % | ||||||||||||||||||||||
| Income tax expense | 51 | 167 | (116 | ) | -69 | % | 128 | 285 | (157 | ) | -55 | % | ||||||||||||||||||||
| Less: Net loss attributable to the noncontrolling interests | (409 | ) | (546 | ) | 137 | -25 | % | (898 | ) | (1,306 | ) | 408 | -31 | % | ||||||||||||||||||
| ADJUSTED EBITDA - OPCO | $ | 999 | $ | 1,059 | $ | (60 | ) | -6 | % | $ | 3,292 | $ | 2,451 | $ | 841 | 34 | % | |||||||||||||||
| ADD-BACKS Expenses | ||||||||||||||||||||||||||||||||
| Corp Expenses (Net of stock compensation & Transactional cost) | 378 | 255 | 123 | 48 | % | 1,043 | 657 | 386 | 59 | % | ||||||||||||||||||||||
| ADJUSTED EBITDA - INCOME | $ | 621 | $ | 804 | $ | (183 | ) | -23 | % | $ | 2,249 | $ | 1,794 | $ | 455 | 25 | % | |||||||||||||||
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||||||||||||||||||
| Other Key Metrics | 2023 | 2022 | Variances | % | 2023 | 2022 | Variances | % | ||||||||||||||||||||||||
| Total Customers | 4,446 | 3,963 | 483 | 12 | % | 4,446 | 3,963 | 483 | 12 | % | ||||||||||||||||||||||
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Three Months ended April 30, 2023 as Compared to the Three Months ended April 30, 2022.
Cloud software and service revenue decreased by $326,000, or 4%, from the three months ended April 30, 2022 as compared to the three months April 30, 2023. Our gross margin decreased by $44,000 from the three months ended April 30, 2022 as compared to the three months ended April 30, 2023.
EBITDA from operations, as adjusted, decreased from $1,059,000 from the three months ended April 30, 2022 to $999,000 for the three months ended April 30, 2023. See table above for the adjustments to Net Income (Loss) attributable to Digerati shareholders.
Nine months ended April 30, 2023 as Compared to the Nine months ended April 30, 2022.
Cloud software and service revenue increased by $7,949,000, or 50%, from the nine months ended April 30, 2022 as compared to the nine months April 30, 2023. In addition, our gross margin increased by $5,454,000, or 56%, from the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2023. The increase in revenue and gross margin between years is primarily attributed to the increase in total customers between periods due to the acquisitions of Skynet Telecom LLC (“Skynet”) and Next Level.
EBITDA from operations, as adjusted, increased from $2,451,000 from the nine months ended April 30, 2022 to $3,292,000 for the nine months ended April 30, 2023. See table above for the adjustments to Net Income (Loss) attributable to Digerati shareholders.
EBITDA from operations, as adjusted is not intended to represent cash flows for the periods presented, nor have they been presented as an alternative to operating income or as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Our total customers increased from 3,963 at April 30, 2022 as compared to 4,446 at April 30, 2023. The increase in customers is attributed to the acquisitions and consolidation of Skynet and NextLevel during fiscal year ended July 31, 2022. Going forward, absent further acquisitions, we expect a net increase in our number of customers of 1% to 5% each fiscal year.
Sources of revenue:
Cloud Software and Service Revenue: We provide UCaaS or cloud communication services and managed cloud-based solutions to small and medium size enterprise customers and to other resellers. Our Internet-based services include fully hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice and web conferencing, call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized IP/PBX features in a hosted or cloud environment. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, mobile broadband, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster recovery.
Direct Costs:
Cloud Software and Service: We incur bandwidth and colocation charges in connection with our UCaaS or cloud communication services. The bandwidth charges are incurred as part of the connectivity between our customers to allow them access to our various services. We also incur costs from underlying providers for fiber, Internet broadband, and telecommunication circuits in connection with our data and connectivity solutions.
Results of Operations
Three Months ended April 30, 2023 as Compared to the Three Months ended April 30, 2022.
Cloud Software and Service Revenue. Cloud software and service revenue decreased by $326,000, or 4%, from the three months ended April 30, 2022 as compared to the three months ended April 30, 2023. Although our revenue decreased, our total number of customers increased from 3,963 for the three months ended April 30, 2022 to 4,446 customers for the three months ended April 30, 2023. As part of the acquisitions, our primary emphasis is on integrating the secured customers base, consolidating products and services, retaining the monthly recuring revenue, and providing exceptional customer support.
Cost of Services (exclusive of depreciation and amortization). The cost of services decreased by $282,000, or 9%, from the three months ended April 30, 2022 as compared to the three months ended April 30, 2023, which is consistent with the decrease in revenue mentioned above. Although our cost of services decreased, our total number of customers increased from 3,963 for the three months ended April 30, 2022 to 4,446 customers for the three months ended April 30, 2023. Our consolidated gross margin remained flat at approximately $5.0 million for the quarters ended April 30, 2022 and 2023. We are not aware of any events that are reasonably likely to cause a material change in the relationship between our costs and our revenues.
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Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A expenses decreased by $26,000, or 1%, from the three months ended April 30, 2022 as compared to the three months ended April 30, 2023.
Stock Compensation expense. Stock compensation expense decreased by $5,000, or 18%, from the three months ended April 30, 2022 as compared to the three months ended April 30, 2023.
Legal and professional fees. Legal and professional fees decreased by $75,000, or 10%, from the three months ended April 30, 2022 as compared to the three months ended April 30, 2023, which include legal and professional fees that relate to due diligence, audits for the acquisitions, purchase price allocation, legal fees paid to counsel for Post Road Administrative LLC and its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post Road”), and investor relations.
Bad debt. Bad debt increased by $1,000, or 3%, from the three months ended April 30, 2022 as compared to the three months ended April 30, 2023. The increase is attributed to the recognition of $37,000 in bad debt for accounts deemed uncollectible three the nine months ended April 30, 2023. During the nine months ended April 30, 2022, the Company recognized $36,000 in bad debt.
Depreciation and amortization. Depreciation and amortization decreased by $547,000, or 36%, from the three months ended April 30, 2022 as compared to the three months ended April 30, 2023.
Operating loss. The Company reported an operating loss of $1,626,000 from the three months ended April 30, 2022 as compared to an operating loss of $1,075,000 for the three months ended April 30, 2023. The decrease in operating loss of $551,000 or 34%, between periods was primarily due to decreases of depreciation and amortization expense of $547,000, legal and professional fees of $75,000, and gross margin of $44,000, offset by increases to SG&A of $31,000 and $1,000 for bad debts.
Gain on derivative instruments. For the three months ended April 30, 2022, the gain on derivative instruments was $6,827,000 as compared to a gain of $2,120,000 for the three months April 30, 2023, resulting in a decrease in value of $4,707,000, or 69%. 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 gain or loss between periods.
Gain on extinguishment of debt. For the three months ended April 30, 2023, the gain on extinguishment of debt was $55,000. There was no gain (loss) for the extinguishment of debt for the three months April 30, 2022.
Other income (expense). Other expense was $1,000 for the three months April 30, 2023 as compared to other income of $2,000 for the three months ended April 30, 2022.
Income tax expense. During the three months ended April 30, 2023, the Company recognized an income tax expense of $51,000. During the three months ended April 30, 2022, the Company recognized an income tax expense of $167,000.
Interest Income (expense). Interest expense increased by $2,025,000, or 121%, from the three months ended April 30, 2022 as compared to the three months ended April 30, 2023. During the quarter ended April 30, 2023, the Company recognized amortization of debt discount of $1,254,000 related to the adjustment to the present value of various convertible notes and debt. Additionally, the Company recognized $1,051,000 in interest cash payments to Post Road, accrual of $179,000 for interest expense for various promissory notes and $131,000 fair value of shares issued as well as $1,088,000 added to the principal balance of various promissory notes, all charged to interest expense as consideration for extension of the maturity dates.
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Net income (loss) including noncontrolling interest. Net loss including noncontrolling interest for the three months ended April 30, 2023 was of $2,653,000 compared to the net income of $3,360,000 for the three months ending April 30, 2022. The net income (loss) including noncontrolling interest between periods is primarily due to the increases and decreases mentioned above.
Net income (loss) attributable to the noncontrolling interest. During the three months ended April 30, 2023 and 2022, the consolidated entity recognized a net income in noncontrolling interest of $409,000 and a net loss of $546,000, respectively. 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 for the three months ended April 30, 2023 was $2,244,000 as compared to a net income for the three months ended April 30, 2022 of $3,906,000.
Deemed dividend on Series A Convertible Preferred Stock. Dividend accrued on convertible preferred stock for the three months ended April 30, 2023 and 2022 was $0 and $4,000, respectively.
Net income (loss) attributable to Digerati’s common shareholders. Net income for the three months April 30, 2023 was $2,244,000 as compared to a net loss for the three months ended April 30, 2022 of $3,902,000.
Nine months ended April 30, 2023 as Compared to the Nine months ended April 30, 2022.
Cloud Software and Service Revenue. Cloud software and service revenue increased by $7,949,000, or 50%, from the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2023. The increase in revenue is primarily attributed to the increase in total customers between periods due to the acquisitions of Skynet in December 2021 and the acquisition of Next Level Internet in February 2022. Our total number of customers increased from 3,963 for the nine months ended April 30, 2022 to 4,446 customers for the nine months ended April 30, 2023. As part of the acquisitions, our primary emphasis is on integrating the secured customers base, consolidating products and services, retaining the monthly recuring revenue, and providing exceptional customer support.
Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $2,495,000, or 40%, from the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2023. The increase in cost of services is primarily attributed to the consolidation of various networks as part of the increase in total customers between periods due to the acquisition of Skynet in December 2021 and the acquisition of Next Level Internet in February 2022. Our total number of customers increased from 3,963 for the nine months ended April 30, 2022 to 4,446 customers for the nine months ended April 30, 2023. Our consolidated gross margin improved by $5,454,000, or 56%, from the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2023. We are not aware of any events that are reasonably likely to cause a material change in the relationship between our costs and our revenues.
Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A expenses increased by $4,710,000, or 57%, from the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2023. The increase in SG&A is attributed to the acquisition of Skynet in December 2021 and the acquisition of Next Level Internet in February 2022; the Company absorbed all of the employees responsible for service delivery for the customer base, technical support, sales, customer service, and administration.
Stock Compensation expense. Stock compensation expense decreased by $6,000 from the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2023.
Legal and professional fees. Legal and professional fees decreased by $194,000, or 8%, from the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2023, which include legal and professional fees that relate to due diligence, audits for the acquisitions, purchase price allocation, legal fees paid to counsel for Post Road Group, and investor relations.
Bad debt. Bad debt increased by $55,000, or 108%, from the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2023. The increase is attributed to the recognition of $106,000 in bad debt for accounts deemed uncollectible during the nine months ended April 30, 2023. During the nine months ended April 30, 2022, the Company recognized $51,000 in bad debt.
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Depreciation and amortization. Depreciation and amortization increased by $398,000, or 16%, from the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2023. The increase is primarily attributed to the acquisitions and related amortization for intangible assets and the additional depreciation related to the assets acquired from Skynet and NextLevel.
Operating loss. The Company reported an operating loss of $3,040,000 from the nine months ended April 30, 2023 as compared to an operating loss of $3,525,000 for the nine months ended April 30, 2022. The decrease in operating loss of $485,000, or 14%, between periods is primarily due to net increases in SG&A for $4,710,000, cost of services (exclusive of depreciation and amortization) for $2,495,000, $55,000 for bad debt, and $398,000 for depreciation and amortization expense, offset by the improvement in gross margin of $5,454,000 and the reduction in legal and professional fees of $194,000.
Gain on derivative instruments. The gain on derivative instruments decreased by $4,942,000 from the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2023. 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 gain or loss between periods.
Gain (loss) on extinguishment of debt. For the nine months ended April 30, 2023, the gain on extinguishment of debt was $55,000. For the nine months ended April 30, 2022, the loss on extinguishment of debt was $5,480,000. On December 20, 2021, Verve Cloud, Inc., a Nevada entity (“Verve Cloud”) and Post Road entered into an amendment to the Credit Agreement (the “Amendment”) in connection with which Verve Cloud issued an Amended and Restated Term Loan A Note (the “A&R Term Loan A Note”) in replacement of the Term Loan A Note. Under the First Amendment, the Term Loan B Note principal of $3,500,000, accrued interest of $187,442, and amendment fee of $1,418,744 were recapitalized under the revised A&R Term Loan A Note. Pursuant to the First Amendment, the additional proceeds of $6,000,000 were used to fund the acquisition of Skynet Telecom LLC’s assets and for general corporate and working capital purposes as well as professional fees and other fees and expenses with respect to the transactions contemplated by the Amendment. The Company evaluated the amendment and the recapitalization of the notes and accounted for these changes as an extinguishment of debt and recognized a loss on extinguishment of debt of $5,480,000, which is comprised of the full amortization debt discount of $4,061,000 and amendment fees of $1,419,000.
Other income (expense). Other income (expense) improved by $455,000 from the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2023. The improvement in other income is mostly due to the recognition of a gain on a settlement of conversion premium of $466,000 from a convertible note.
Interest expense. Interest expense increased by $3,574,000 from the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2023. During the nine months ended April 30, 2023, the Company recognized amortization of debt discount of $2,044,000 related to the adjustment to the present value of various convertible notes and debt. Additionally, the Company recognized $2,995,000 in interest cash payments to Post Road, accrual of $417,000 for interest expense for various promissory notes and $471,000 fair value of shares issued as well as $2,227,000 added to the principal balance of various promissory notes, all charged to interest expense as consideration for extension of the maturity dates.
Income tax benefit (expense). During the nine months ended April 30, 2023, the Company recognized an income tax expense of $128,000. During the nine months ended April 30, 2022 the Company recognized an income tax expense of $285,000.
Net loss including noncontrolling interest. Net loss including noncontrolling interest for the nine months ended April 30, 2022 was $6,018,000 as compared to the net loss of $7,902,000 for the nine months ended April 30, 2023. The net loss including noncontrolling interest between periods is primarily due to the increases and decreases mentioned above.
Net loss attributable to the noncontrolling interest. During the nine months ended April 30, 2023 and 2022, the consolidated entity recognized a net income in noncontrolling interest of $898,000 and a net loss of $1,306,000 respectively. The noncontrolling interest is presented as a separate line item in the Company’s stockholders equity section of the balance sheet.
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Net income (loss) attributable to Digerati’s shareholders. Net loss for the nine months ended April 30, 2023 was $7,004,000 as compared to a net loss for the nine months ended April 30, 2022 of $4,712,000.
Deemed dividend on Series A Convertible Preferred Stock. Dividend accrued on convertible preferred stock for the nine months ended April 30, 2023 and 2022 was $8,000 and $14,000, respectively.
Net income (loss) attributable to Digerati’s common shareholders. Net loss for the nine months ended April 30, 2023 was $7,012,000 compared to a net income for the nine months ended April 30, 2022 of $4,726,000.
Liquidity and Capital Resources
Cash Position: We had a consolidated cash balance of approximately $997,000 as of April 30, 2023. Net cash used in operating activities during the nine months ended April 30, 2023 was approximately $3,100,000. The net cash used by operating activities resulted primarily from the net loss incurred during the nine months ended April 30, 2023 as a result of operating expenses, that included $81,000 in stock compensation and warrant expense, bad debt expense of $106,000, amortization of right-of-use assets for $624,000, gain on settlement of conversion premium for $466,000, amortization of debt discount of $2,104,000, gain on derivative liability of $2,893,000, gain on extinguishment of debt of $55,000, depreciation and amortization expense of $2,912,000, debt extension fee charged to interest expense for $689,000, and common stock issued for debt extension charged to interest expense for $505,000. The change in operating assets and liabilities resulted in a net increase of $1,196,000.
Cash used in investing activities during the nine months ended April 30, 2023 was $467,000, which was used for the acquisition of equipment.
Cash provided by financing activities during the nine months ended April 30, 2023 was $3,055,000. The net increase in cash provided by financing was primarily due to the Company securing $4,491,000 from convertible notes, net of issuance costs and discounts and securing $250,000 from debt financing from a related party, net of issuance costs and discounts, proceeds from the exercise of warrants of $22,000, offset by principal payments of $520,000 on various convertible notes, principal payments of $548,000 on debt, principal payments on related party notes of $568,000, and $72,000 in principal payments on equipment financing.
Overall, our net operating, investing, and financing activities during the nine months ended April 30, 2023 resulted in a net decrease in cash and cash equivalents for $512,000.
Digerati’s consolidated financial statements for the nine months ended April 30, 2023 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 $120,397,000 and a working capital deficit of approximately $65,429,000 which raises doubt about Digerati’s ability to continue as a going concern.
We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During fiscal 2023 certain members of our management team will continue to receive a portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from or recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams; and we have also secured numerous agent agreements through our recent acquisitions that we anticipate will accelerate revenue growth. In addition, we will continue to focus on selling a greater number of comprehensive services to our existing customer base. Further, in an effort to increase our revenues, we will continue to evaluate the acquisition of various assets with emphasis in VoIP Services and Cloud Communication Services. As a result, during the due diligence process we anticipate incurring significant legal and professional fees.
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Our cash requirements to meet our interest payments to Post Road, capital expenditure needs, and operational cash flow needs over the next 18 months are estimated to be approximately $3,500,000. The Company anticipates issuing additional equity or entering into additional Convertible Notes to secure the funding required meet these cash needs. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, the Company may not be able to meet its interest payments, capital expenditures and operational needs. As a result, the Company will be required to negotiate with its lender the terms of the current financing agreements, in addition to postponing the timing of deployment of its capital expenditures and extending the timing of the operational cash needs.
The Credit Agreement contains customary representations, warranties, and indemnification provisions. The Credit Agreement also contains affirmative and negative covenants with respect to operation of the business and properties of the loan parties as well as financial performance. Below are key financial covenant requirements, (measured quarterly) for the fiscal quarter ended April 30, 2023:
| ● | Maximum–Allowed - Senior Leverage Ratio of 6.18 to 1.00 |
| ● | Minimum–Allowed – EBITDA (on an annualized basis) of $4,565,009 |
| ● | Minimum–Allowed - Liquidity of $2,000,000 |
| ● | Minimum–Allowed - Interest Coverage of 1.00 to 1.00 |
As of April 30, 2023, the Company was not in compliance with our financial covenants with Post Road, and as a result, the Notes were classified as current. The Company has requested that Post Road agree to forbear from exercising its remedies in connection with, among other things, the financial covenants that were not complied with during the quarter ended April 30, 2023. There can be no assurance that we will be able to restructure our financial covenants with Post Road. If the Company is not able to reach an agreement to restructure our financial covenants requirements and Post Road declares an event of default, it would have a material adverse effect on our business and financial condition, including the possibility of Post Road foreclosing on some or all of our assets.
On December 15, 2022, the lender agreed to forbear from exercising its remedies in connection with the financial covenants that were not complied with during the quarter ended October 31, 2022, as well as certain other specified defaults, until December 23, 2022.
On February 3, 2023, the Company, the Verve Cloud Nevada Parties (as defined in Note 2 to the financial statements), and Post Road entered into a Consent, Limited Waiver and Fourth Amendment to Credit Agreement and Amendment to the Notes (the “Fourth Amendment”). The Fourth Amendment is effective as of December 23, 2022. Among other things, the Fourth Amendment conditionally revises each of the six financial covenants set forth in Section 11.12 of the Credit Agreement (related to maximum leverage, minimum liquidity, minimum EBITDA, maximum capital expenditures, minimum interest coverage (a provision that replaces the minimum fixed charge coverage ratio provision), and maximum churn). In addition, pursuant to the Fourth Amendment, none of the financial covenants contained in Section 11.12 of the Credit Agreement, as amended by the Fourth Amendment, were to be tested as of the January 31, 2023 fiscal quarter end date so long as no events of default had occurred, other than minimum liquidity of $1,000,000, which was tested and met as of January 31, 2023. The Fourth Amendment provides that these revised financial covenants will be null and void if the Merger (as defined in Note 12) does not close by February 28, 2023 (the “Merger Outside Closing Date”), in which case the financial covenants in effect under Section 11.12 of the Credit Agreement shall automatically, and without notice to the Verve Cloud Nevada Parties, revert to those in effect immediately prior to the Fourth Amendment.
Pursuant to the Fourth Amendment, Post Road agreed to conditionally waive each and all of the Specified Defaults (as defined in the Fourth Amendment). Post Road’s waiver of the Specified Defaults are contingent on the Merger closing on or before the Merger Outside Closing Date in accordance with the Business Combination Agreement (as defined in Note 12) and no events of default (other than the Specified Defaults) or any condition or event that, with the giving of notice or the lapse of time or both, would constitute an event of default, existing under the Credit Agreement on the Merger closing date.
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The Fourth Amendment amends the Credit Agreement and the Notes to modify the interest rate payable by Verve Cloud.
On March 13, 2023, the Company, the Verve Cloud Nevada Parties, and Post Road entered into the Fifth Amendment to Credit Agreement, with an effective date of February 28, 2023, which specifically revises the Merger Outside Closing Date, replacing the “February 28, 2023” date with “April 28, 2023,” without amending, supplementing or otherwise modifying any other terms, or any of the conditions, set forth in the Credit Agreement.
On April 3, 2023, the Company, the Verve Cloud Nevada Parties, and Post Road entered into a Sixth Amendment to its Credit Agreement (the “Sixth Amendment”). Pursuant to the Sixth Amendment, Post Road agreed to increase the aggregate net unpaid principal amount (i.e., less original issue discounts and transaction costs paid in cash by Company upon the closing thereof and disclosed in writing to Post Road) the Company is allowed to borrow in the form of convertible loans to $3,500,000. This amount was increased from the $3,000,000 agreed to by Post Road pursuant to the Fourth Amendment.
Pursuant to the Sixth Amendment, Post Road agreed to defer the cash interest otherwise due and payable on April 1, 2023 to the May 1, 2023 payment date.
On May 1, 2023, the Company, the Verve Cloud Nevada Parties, and Post Road entered into a Seventh Amendment to Credit Agreement (the “Seventh Amendment”). The Seventh Amendment is dated as of May 1, 2023, with an effective date of April 28, 2023. Pursuant to the Seventh Amendment, the Merger Outside Closing Date was amended to May 31, 2023, or such later date as agreed to in writing by Post Road in its sole discretion.
The Seventh Amendment also modified the negative covenants set forth in the Credit Agreement to add a new section on material nonpublic information (“MNPI”). The Seventh Amendment’s modifications to the Credit Agreement provide that if Post Road elects not to receive MNPI from the Company during any period during which the Company is obligated to deliver a notice to Post Road which notice would include MNPI, the Company will inform Post Road of its obligation to deliver the notice, and Post Road will inform the Company whether it elects to receive such notice. If Post Road elects to receive the notice of MNPI, the Company shall deliver such notice in accordance with the Credit Agreement, and if Post Road elects not to receive such notice, the Company shall not deliver the notice and Post Road shall have waived its rights to receive delivery of the notice. Any election by Post Road to waive their right to receive delivery of any notice of MNPI applies only with respect to the specific notice and not to any subsequent notice.
Pursuant to the Seventh Amendment, Post Road agreed to defer the cash interest otherwise due and payable on April 1, 2023 and May 1, 2023 to the June 1, 2023 payment date.
While Digerati, the parent company of Verve Cloud, is not subject to these financial covenants, they have had and will continue to have a material impact on Verve Cloud’s expenditures and ability to raise funds.
In addition, our Term Loan C Note payable to Post Road with a maturity date of August 4, 2023, requires a full principal payment and accrued interest by the maturity date. We will work with our equity partners to secure additional financings to meet this obligation by the maturity date. In addition, we will work with our lender on the current terms to the Term Loan C Note, to extend the maturity date or restructure the terms of the note. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms to meet the cash payment requirements on the Term Loan C Note. In addition, there can be no assurance that we will be able to restructure the terms or extend the maturity date of the Term Loan C Note with Post Road. If the Company is not able to restructure the financing or repay the Term Loan C Note by the August 4th maturity date and Post Road declares an event of default, it would have a material adverse effect on our business and financial condition, including the possibility of Post Road foreclosing on some or all of our assets.
Verve Cloud’s obligations under the Credit Agreement are secured, in part, by a first-priority security interest in all of the assets of the Verve Cloud Nevada Parties and are guaranteed by Verve Cloud’s other subsidiaries pursuant to the Guaranty and Collateral Agreement, dated November 17, 2020, subsequently amended on December 31, 2021, February 4, 2022, December 15, 2022, and February 3, 2023 by and among Verve Cloud, the Company’s other subsidiaries, and Post Road Administrative LLC (the “Guaranty and Collateral Agreement”). In addition, Verve Cloud’s obligations under the Credit Agreement are, pursuant to a Pledge Agreement (the “Pledge Agreement”), secured by a pledge of a first priority security interest in Verve Cloud’s 100% equity ownership of each of Verve Cloud’s operating companies.
We have been successful in raising debt and equity capital in the past and as described in Notes 6, 7, 8, and 12. We have financing efforts in place to continue to raise cash through debt and equity offerings. Although we have successfully completed financings and reduced expenses in the past, we cannot assure you that our plans to address these matters in the future will be successful.
The current Credit Agreement with Post Road will allow the Company to continue acquiring UCaaS service providers that meet the Company’s acquisition criteria. Management anticipates that future acquisitions will provide additional operating revenues to the Company as it continues to execute on its consolidation strategy. There can be no guarantee that the planned acquisitions will close or that they will produce the anticipated revenues on the schedule anticipated by management.
The Company will continue to work with various funding sources to secure additional debt and equity financings. However, Digerati cannot offer any assurance that it will be successful in executing the aforementioned plans to continue as a going concern.
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Management believes that available resources as of April 30, 2023, will not be sufficient to fund the Company’s operations, debt service and corporate expenses over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off its obligations, if and when they come due.
Our current cash expenses are expected to be approximately $1,300,000 per month, including wages, rent, utilities, corporate expenses, and legal professional fees associated with potential acquisitions. As described elsewhere herein, we are not generating sufficient cash from operations to pay for our corporate and ongoing operating expenses, or to pay our current liabilities. As of April 30, 2023, our total liabilities were approximately $69,632,000, which included $7,759,000 in derivative liabilities. We will continue to use our available cash on hand to cover our deficiencies in operating expenses.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Not Applicable.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this quarterly report on Form 10-Q for the quarter ended April 30, 2023, our Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”) evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our PEO and PFO concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as there has been no implementation to date of processes and/or procedures to remedy internal control weaknesses and deficiencies.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On September 21, 2021, T3 Communications, Inc.(“T3”), a subsidiary of the Company, entered into a settlement agreement with Carolina Financial Securities, LLC (“CFS”). Under the settlement agreement the parties agreed to resolve all issues and claims related to the lawsuit. Pursuant to the settlement agreement, T3 agreed to pay CFS a total of $300,000, payable as follows: $100,000 by October 15, 2021, and $200,000 payable in 15 monthly installments of $13,333.33 beginning November 15, 2021. As of April 30, 2023 and July 31, 2022, the outstanding balances were $0 and $80,000, respectively.
Item 1A. Risk Factors.
Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of the Company’s equity securities during the quarter ended April 30, 2023 that were not previously reported in a Current Report on Form 8-K except as follows. The sales and issuances of the securities described below were made pursuant to the exemptions from registration contained into Section 4(a)(2) of the Securities Act and Regulation D under the Securities Act. Each purchaser represented that such purchaser’s intention to acquire the shares for investment only and not with a view toward distribution. We requested our stock transfer agent to affix appropriate legends to the stock certificate issued to each purchaser and the transfer agent affixed the appropriate legends. Each purchaser was given adequate access to sufficient information about us to make an informed investment decision. Except as described in this prospectus, none of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved.
During the three months ended April 30, 2023, the Company issued 899,500 shares of common stock in connection with new convertible promissory notes. At the time of issuance, the Company recognized the relative fair market value of the common shares of approximately $75,000 as debt discount, and it will be amortized to interest expense during the term of the promissory notes.
During the three months ended April 30, 2023, the Company issued 2,180,000 shares of common stock as consideration for the extension of maturity dates for the convertible promissory notes. The Company recognized the fair market value of the common shares of approximately $165,000 which was recognized as interest at the time of each extension.
During the three months ended April 30, 2023, the Company issued 1,500,000 shares of common stock in connection with the conversion of $75,000 of convertible promissory notes.
During the three months ended April 30, 2023, the Company issued 1,370,551 shares of common stock in conjunction with incentive plan accomplishments.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not Applicable
Item 5. Other Information.
None
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Item 6. Exhibits
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| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DIGERATI TECHNOLOGIES, INC. | ||
| Date: June 15, 2023 | By: | /s/ Arthur L. Smith |
| Name: | Arthur L. Smith | |
| Title: | President and | |
| Chief Executive Officer | ||
| (Duly Authorized Officer and Principal Executive Officer) | ||
| Date: June 15, 2023 | By: | /s/ Antonio Estrada Jr. |
| Name: | Antonio Estrada Jr. | |
| Title: | Chief Financial Officer | |
| (Duly Authorized Officer and Principal Financial Officer) |
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