DTGI 8-K/A
Digerati Technologies, Inc. (DTGI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 17, 2020
Digerati Technologies, Inc.
(Exact Name of Registrant as Specified in its Charter)
Nevada
(State or Other Jurisdiction of Incorporation)
| 001-15687 | 74-2849995 | |
| (Commission File Number) |
(IRS Employer Identification No.) |
| 825 W. Bitters, Suite 104, San Antonio, TX | 78216 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(210) 614-7240
(Registrant’s Telephone Number, Including Area Code)
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Explanatory Note
On November 23, 2020, Digerati Technologies, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Initial Form 8-K”) reporting under Item 2.01 the completion of the acquisition of ActiveServe, Inc., a Florida corporation (the “Seller”) by our indirect, wholly owned subsidiary, T3 Communications, Inc., a Florida corporation, via an Asset Purchase Agreement (the “Purchase Agreement”). This Amendment No. 1 to the Initial Form 8-K amends and supplements the Initial Form 8-K to include financial statements and pro forma financial information permitted to be filed by amendment.
1
Item 9.01 Financial Statements and Exhibits
| (a) | Financial statements of businesses acquired |
The audited balance sheet of the Seller as of July 31, 2020, the related audited statement of operations, changes in shareholders’ equity, and cash flows of the Seller for the year ended July 31, 2020, the notes related thereto and the Report of Independent Registered Public Accounting Firm, are attached hereto as Exhibit 99.1, and incorporated herein by reference.
The unaudited balance sheet of the Seller as of October 31, 2020, the related unaudited statement of operations, changes in shareholders’ equity, and cash flows of the Seller for the Three Months ended October 31, 2020, and 2019, the notes related thereto, are attached hereto as Exhibit 99.2, and incorporated herein by reference.
| (b) | Pro forma financial information |
The unaudited pro forma combined consolidated balance sheet of the Company as of October 31, 2020, the unaudited pro forma consolidated statement of operations of the Company for the Three Months ended October 31, 2020, and for the Year Ended July 31, 2020, and the notes to the unaudited pro forma consolidated financial statements, all giving effect to the acquisition by the Company of ActiveServe’s assets, are attached hereto as Exhibit 99.3 and incorporated herein by reference.
| (c) | Exhibits. |
2
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.
| Dated: July 16, 2021 | Digerati Technologies, Inc. | |
| By: | /s/ Antonio Estrada Jr. | |
| Antonio Estrada Jr., | ||
| Chief Financial Officer | ||
3
Exhibit 99.1
Financial Statements and Supplementary Data.
ACTIVESERVE, INC.
Index to Financial Statements
July 31, 2020
| Page 2 | Report of Independent Registered Public Accounting Firm | |
| Page 3 | Balance Sheet as of July 31, 2020 | |
| Page 4 | Statement of Operations for the year ended July 31, 2020 | |
| Page 5 | Statement of Stockholders’ Equity for the year ended July 31, 2020 | |
| Page 6 | Statement of Cash Flows for the year ended July 31, 2020 | |
| Page 7-10 | Notes to Financial Statements for the year ended July 31, 2020 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
ActiveServe, Inc.
Miami, Florida
Opinion on the Financial Statements
We have audited the accompanying balance sheet of ActiveServe, Inc. (the “Company”) as of July 31, 2020, and the related statement of operations, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company’s auditor since 2020.
Houston, Texas
July 16, 2021
2
ACTIVESERVE, INC.
BALANCE SHEET
(In thousands)
| July 31, | ||||
| 2020 | ||||
| ASSETS | ||||
| CURRENT ASSETS: | ||||
| Cash and cash equivalents | $ | 424 | ||
| Accounts receivable, net | 57 | |||
| Prepaid and other current assets | 27 | |||
| Total current assets | 508 | |||
| LONG-TERM ASSETS: | ||||
| Intangible assets, net | 11 | |||
| Property and equipment, net | 4 | |||
| Total assets | $ | 523 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
| CURRENT LIABILITIES: | ||||
| Accounts payable | $ | 3 | ||
| Accrued liabilities | 219 | |||
| Note payable, current | 1 | |||
| Total current liabilities | 223 | |||
| LONG-TERM LIABILITIES: | ||||
| Note payable | 157 | |||
| Total long-term liabilities | 157 | |||
| Total liabilities | 380 | |||
| Commitments and contingencies | - | |||
| STOCKHOLDERS’ EQUITY: | ||||
| Common stock, $0.01, 10,000 shares authorized, 2,000 | ||||
| issued and outstanding | - | |||
| Additional paid in capital | 10 | |||
| Retained earnings | 133 | |||
| Total stockholders’ equity | 143 | |||
| Total liabilities and stockholders’ equity | $ | 523 | ||
See accompanying notes to financial statements
3
ACTIVESERVE, INC.
STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
| For the Year Ended | ||||
| July 31, 2020 | ||||
| OPERATING REVENUES: | ||||
| Cloud software and service revenue | $ | 1,949 | ||
| Total operating revenues | 1,949 | |||
| OPERATING EXPENSES: | ||||
| Cost of services (exclusive of depreciation and amortization) | 557 | |||
| Selling, general and administrative expense | 1,110 | |||
| Bad debt | 12 | |||
| Depreciation and amortization expense | 1 | |||
| Total operating expenses | 1,680 | |||
| OPERATING INCOME | 269 | |||
| OTHER INCOME (EXPENSE): | ||||
| Income tax benefit (expense) | 1 | |||
| Interest expense | (1 | ) | ||
| Total other income (expense) | - | |||
| NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | 269 | ||
See accompanying notes to financial statements
4
ACTIVESERVE, INC.
STATEMENT OF STOCKHOLDERS’ EQUITY
YEAR ENDED JULY 31, 2020
(In thousands, except for share amounts)
| Common | Additional | Retained | Total stockholders’ | |||||||||||||||||
| Shares | Par | paid in capital | earnings | equity | ||||||||||||||||
| BALANCE, July 31, 2019 | 2,000 | $ | - | $ | 10 | $ | 13 | $ | 23 | |||||||||||
| Cash dividends paid | - | - | - | (149 | ) | (149 | ) | |||||||||||||
| Net income | - | - | - | 269 | 269 | |||||||||||||||
| BALANCE, July 31, 2020 | 2,000 | $ | - | $ | 10 | $ | 133 | $ | 143 | |||||||||||
See accompanying notes to financial statements
5
ACTIVESERVE, INC.
STATEMENT OF CASH FLOWS
(In thousands)
| For the Year Ended | ||||
| July 31, 2020 | ||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
| Net income | $ | 269 | ||
| Adjustments to reconcile net loss to cash used in by operating activities: | ||||
| Depreciation and amortization | 1 | |||
| Bad debt expense | 12 | |||
| Changes in operating assets and liabilities: | ||||
| Accounts receivable | 17 | |||
| Prepaid expenses and other current assets | 1 | |||
| Accounts payable | (46 | ) | ||
| Accrued expenses | 65 | |||
| Net cash provided by operating activities | 319 | |||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||
| Cash paid in acquisition of equipment | (5 | ) | ||
| Net cash used in investing activities | (5 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
| Borrowings from third party promissory notes, net | 145 | |||
| Payments for dividends | (149 | ) | ||
| Principal payment on debt | (15 | ) | ||
| Net cash used in financing activities | (19 | ) | ||
| INCREASE IN CASH AND CASH EQUIVALENTS | 295 | |||
| CASH AND CASH EQUIVALENTS, beginning of period | 129 | |||
| CASH AND CASH EQUIVALENTS, end of period | $ | 424 | ||
| SUPPLEMENTAL DISCLOSURES: | ||||
| Cash paid for interest | $ | 1 | ||
| Income tax paid | $ | - | ||
See accompanying notes to financial statements
6
ACTIVESERVE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED JULY 31, 2020
NOTE 1 – DESCRIPTION OF BUSINESS
ActiveServe, Inc., (“we”, “our”, “Company” or “ActiveServe”) was incorporated in the state of Florida on September 18, 2002. We provide cloud services specializing in Unified Communications as a Service (“UCaaS”) solutions for the business market. Our product line includes a portfolio of Internet-based telephony products and services delivered through our cloud application platform and session-based communication network and network services including mobile broadband. Our services are designed to provide enterprise-class, carrier-grade services to the small-to-medium-sized business (“SMB”) at cost-effective monthly rates. Our UCaaS or cloud communication services include fully hosted IP/PBX, mobile applications, Voice over Internet Protocol (“VoIP”) transport, SIP trunking, hosting services and customized VoIP services.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. In preparing financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheet and revenue and expenses in the statement of operations. Actual results could differ from those estimates.
Basis of Presentation. These financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries which are directly or indirectly owned by the Company.
Cash and cash equivalents. The Company considers all bank deposits and highly liquid investments with original maturities of three months or less to be cash and cash equivalents.
Concentration of Credit Risk. Financial instruments that potentially subject ActiveServe to concentration of credit risk consist primarily of trade receivables. In the normal course of business, ActiveServe provides credit terms to its customers. Accordingly, ActiveServe performs ongoing credit evaluations of its customers. ActiveServe maintains cash in bank deposit accounts, which, at times, may exceed federally insured limits. ActiveServe has not experienced any losses in such accounts and ActiveServe does not believe it is exposed to any significant credit risk on cash and cash equivalents.
During the year ended July 31, 2020, the Company derived 11% of the total revenue from one customer. As of the year ended July 31, 2020, the company derived 26% of the total accounts receivable balance from one customer.
Capitalization of Fixed Assets. The Company capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater than one year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended, regardless of cost. Acquisitions of new assets, additions, replacements, and improvements costing less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are expensed as incurred.
Revenue Recognition. On August 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of August 1, 2018. Results for reporting periods beginning after August 1, 2018, are presented under Topic 606. There was no impact to the opening balance of accumulated deficit or revenues for the year ended July 31, 2019, as a result of applying Topic 606.
Sources of revenue:
Cloud-based hosted Services. The Company recognizes cloud-based hosted services revenue, mainly from subscription services for its cloud telephony applications that includes hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice, and web conferencing, call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized applications. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster recovery services. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
7
Service Revenue
Service revenue from subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription services being rendered are recorded as a deferred revenue. Usage fees, either bundled or not bundled, are recognized when the Company has a right to invoice. Professional services for configuration, system integration, optimization, customer training and/or education are primarily billed on a fixed-fee basis and are performed by the Company directly. Alternatively, customers may choose to perform these services themselves or engage their own third-party service providers. Professional services revenue is recognized over time, generally as services are activated for the customer.
Product Revenue
The Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is generally upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical experience.
Disaggregation of Cloud software and service revenue
Summary of disaggregated revenue is as follows (in thousands):
| For the Year Ended | ||||
| July 31, 2020 | ||||
| Cloud software and service revenue | $ | 1,930 | ||
| Product revenue | 19 | |||
| Total operating revenue | $ | 1,949 | ||
Related parties. The Company accounts for related party transactions in accordance with ASC 850 (“Related Party Disclosures”). A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party. There were no related party transactions as of July 31, 2020.
Dividends. During the year ended July 31, 2020, the Company paid cash dividends of $148,577 to its founding shareholders.
Recently issued accounting pronouncements. Recent accounting pronouncements, other than below, issued by the Financial Accounting Standards Board (“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 February 2016, the FASB issued ASU No. 2016-02, “Leases.” ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest period presented in the financial statements. The Company evaluated the impact that the application of the new standard has on its financial statements and related disclosure and determined that it has no material impact.
8
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or in management’s opinion will not have a material impact on the Company’s present or future financial statements.
NOTE 3 – PROPERTY AND EQUIPMENT
As of July 31, 2020, the Company’s fixed assets consisted of the following (in thousands):
| July 31, 2020 | ||||
| Vehicles | $ | 27 | ||
| Office Equipment | 7 | |||
| Network Equipment | 29 | |||
| Computers | 4 | |||
| Servers | 178 | |||
| Software Licenses | 14 | |||
| Total property and equipment | $ | 259 | ||
| Less: Accumulated depreciation | (255 | ) | ||
| Property and equipment, net | $ | 4 | ||
The depreciation expense incurred for the year ended July 31, 2020, was $562.
NOTE 4 – NOTES PAYABLE
On July 18, 2014, the Company entered into a financing agreement with Bank of America, N.A., for $50,000, under a line of credit for working capital, with a maturity date of September 1, 2015. Subsequentially, on July 31, 2015, the Company entered into a loan modification agreement, were by the maturity date was extended until August 18, 2020. The interest rate under the loan agreement is equal to the Bank’s Prime Rate, plus 2.75%, per annum. The amended loan agreement is for 60 months, with the first payment due on September 18, 2015, and with a monthly principal payment of $833. The loan is secured by the Company’s equipment, inventory, and accounts receivable. During the year ended July 31, 2020, the Company made a total principal payment of $10,000. The total outstanding balance as of July 31, 2020, was $834. Subsequentially on August 18, 2020, the obligation was paid in full.
On February 1, 2017, the Company entered into a financing agreement with Ford Credit, for a principal amount of $26,637 and financing charges of $2,451. The financing is for a Company vehicle, with a maturity date of January 18, 2023, and interest rate under the financing agreement at 2.90%, per annum. The financing agreement is for 72 months, with the first payment due on March 18, 2017, and with a monthly principal and interest payment of $404. The financing agreement is secured by the vehicle acquired. During the year ended July 31, 2020, the Company made a total principal payment of $4,427. The total outstanding balance as of July 31, 2020, was $12,042. Subsequentially on January 13, 2021, the obligation was paid in full.
On May 1, 2020, the Company, entered into an unsecured promissory note (the “Note”) for $145,370 made to the Company under the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The Note to the Company was secured through Bank of America, National Association (the “Lender”).
9
The Note provided for an interest rate of 1.00% per annum and matures two years after the issuance date. Beginning on the seventh month following the date of the Note, the Company was required to make 18 monthly principal payments in the amount of $8,076 and accrued interest. The Note was used for payroll costs, costs related to certain group health care benefits and insurance premiums. The Note contained events of default and other conditions customary for a Note of this type.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all, or a portion of loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. The terms of any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt. The total outstanding balance as of July 31, 2020, was $145,370. Subsequently, on March 9, 2021, the SBA informed the Company that the total outstanding principal balance of $145,370 and accrued interest of $1,227 were forgiven. On March 9, 2021, the Company recognized a gain on settlement of debt of $145,370.
NOTE 5 – CAPITAL STOCK
As of July 31, 2020, the Company had 10,000 authorized common shares, of which 2,000 founder shares were issued, and outstanding, with a $0.01 par value per share.
NOTE 6 – SUBSEQUENT EVENTS
On November 17, 2020, T3 Communications, Inc., a Florida corporation (“T3 Florida”), a subsidiary of Digerati Technologies, Inc., executed and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation (“Seller”). Pursuant to the Purchase Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s telecommunications business known as ActivePBX (collectively, the “Purchased Assets”).
The aggregate purchase price for the Purchased Assets was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase Price”). $1,190,000 of the Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover part of potential future indemnification obligations of Seller to T3 Florida due to Seller’s breaches, if any, of any representations and warranties made to T3 Florida by Seller under the Purchase Agreement, and $40,000 of such amount being credited to T3 Florida against a payment in that amount made by T3 Florida to Seller pursuant to the Second Amendment to Letter of Intent between Seller and T3 Florida dated as of October 15, 2020.
Part of the Purchase Price is payable in 8 equal quarterly payments of $136,250, subject to T3 Florida achieving quarterly post-purchase recurring revenues under monthly contracts or subscriptions from the acquired customer base, excluding charges for taxes, regulatory fees, additional set-up fees, equipment purchases or lease, and consulting fees. To the extent that a quarterly revenue threshold is not reached, the amount of the corresponding quarterly payment shall be reduced on a proportional basis. T3 Florida’s $1,140,000 payment obligation is represented by a promissory note of T3 Florida in the form included as an exhibit to the Purchase Agreement. The note, in turn, is subject to the Subordination Agreement, included as an Exhibit to the Purchase Agreement, among Seller, the Company’s parent, T3 Nevada, and Post Road Administrative, LLC, in its capacity as administrative agent for the Post Road lenders. $275,000 of the Purchase Price (the “Customer Renewal Value”) represents an incentive earn-out to be paid with respect to Seller’s customer accounts which are transferred to T3 Florida at closing, that are renewed, expanded and/or revised with T3 Florida for a minimum term of twelve months with an auto-renewal for 12 months. During the period ended April 30, 2021, the Company made one of the quarterly principal payments of $136,250, and a payment of $11,000 towards the Holdback amount, the total principal outstanding on the notes as of April 30, 2021, was $1,267,750.
In connection with the Purchase Agreement, the Company entered with the Note Holders into Consulting Agreements and a Non-Compete Agreement with each of Alex Gonzalez and Jose Gonzalez, the Chief Executive Officer and Chief Technology Officer of ActivePBX. Under the Consulting Agreements, the Company will pay on an annual basis $90,000 to each the consultants.
10
Exhibit 99.2
ACTIVESERVE, INC.
Unaudited Financial Statements
For the Three Months Ended October 31, 2020
ACTIVESERVE, INC.
BALANCE SHEETS
(Unaudited)
(In thousands)
| October 31, | July 31, | |||||||
| 2020 | 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 325 | $ | 424 | ||||
| Accounts receivable, net | 26 | 57 | ||||||
| Prepaid and other current assets | 114 | 27 | ||||||
| Total current assets | 465 | 508 | ||||||
| LONG-TERM ASSETS: | ||||||||
| Intangible assets, net | 11 | 11 | ||||||
| Property and equipment, net | 4 | 4 | ||||||
| Total assets | $ | 480 | $ | 523 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 25 | $ | 3 | ||||
| Accrued liabilities | 228 | 219 | ||||||
| Note payable, current | - | 1 | ||||||
| Total current liabilities | 253 | 223 | ||||||
| LONG-TERM LIABILITIES: | ||||||||
| Note payable | 156 | 157 | ||||||
| Total long-term liabilities | 156 | 157 | ||||||
| Total liabilities | 409 | 380 | ||||||
| Commitments and contingencies | - | - | ||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Common stock, $0.01, 10,000 shares authorized, 2,000 | ||||||||
| issued and outstanding | - | - | ||||||
| Additional paid in capital | 10 | 10 | ||||||
| Retained earnings | 61 | 133 | ||||||
| Total stockholders' equity | 71 | 143 | ||||||
| Total liabilities and stockholders' equity | $ | 480 | $ | 523 | ||||
See accompanying notes to the unaudited financial statements
ACTIVESERVE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
| Three Months Ended October 31, | ||||||||
| 2020 | 2019 | |||||||
| OPERATING REVENUES: | ||||||||
| Cloud software and service revenue | $ | 463 | $ | 522 | ||||
| Total operating revenues | 463 | 522 | ||||||
| OPERATING EXPENSES: | ||||||||
| Cost of services (exclusive of depreciation and amortization) | 138 | 142 | ||||||
| Selling, general and administrative expense | 273 | 265 | ||||||
| Total operating expenses | 411 | 407 | ||||||
| OPERATING INCOME | 52 | 115 | ||||||
| OTHER INCOME (EXPENSE): | ||||||||
| Income tax expense | (7 | ) | (7 | ) | ||||
| Total other expense | (7 | ) | (7 | ) | ||||
| NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | 45 | $ | 108 | ||||
See accompanying notes to the unaudited financial statements
2
ACTIVESERVE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED OCTOBER 31, 2020
(Unaudited)
(In thousands, except for share amounts)
| Common | Additional | Retained | Total stockholders' | |||||||||||||||||
| Shares | Par | paid in capital | earnings | equity | ||||||||||||||||
| BALANCE, July 31, 2020 | 2,000 | $ | - | $ | 10 | $ | 133 | $ | 143 | |||||||||||
| Cash dividends paid | - | - | - | (117 | ) | (117 | ) | |||||||||||||
| Net income | - | - | - | 45 | 45 | |||||||||||||||
| BALANCE, October 31, 2020 | 2,000 | $ | - | $ | 10 | $ | 61 | $ | 71 | |||||||||||
See accompanying notes to the unaudited financial statements
3
ACTIVESERVE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Three Months Ended October 31, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 45 | $ | 108 | ||||
| Adjustments to reconcile net loss to cash used in by operating activities: | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 31 | 10 | ||||||
| Prepaid expenses and other current assets | (87 | ) | (6 | ) | ||||
| Accounts payable | 22 | (22 | ) | |||||
| Accrued expenses | 9 | 27 | ||||||
| Net cash provided by operating activities | 20 | 117 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments for dividends | (117 | ) | (41 | ) | ||||
| Principal payment on debt | (2 | ) | (4 | ) | ||||
| Net cash used in financing activities | (119 | ) | (45 | ) | ||||
| INCREASE IN CASH AND CASH EQUIVALENTS | (99 | ) | 72 | |||||
| CASH AND CASH EQUIVALENTS, beginning of period | 424 | 129 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 325 | $ | 201 | ||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | - | $ | - | ||||
| Income tax paid | $ | - | $ | - | ||||
See accompanying notes to unaudited financial statements
4
ACTIVESERVE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2020
| NOTE 1. | BASIS OF PRESENTATION |
The accompanying unaudited financial statements have been prepared in connection with ActiveServe, Inc.’s, business combination with T3 Communications, Inc., a Florida corporation (“T3 Florida”), a subsidiary of Digerati Technologies, Inc.(“Digerati”), and to comply with the rules and regulations of the Securities and Exchange Commission ("SEC") for inclusion by Digerati in its current report on Form 8-K/A.
The accompanying unaudited interim financial statements of ActiveServe, Inc. (“Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended July 31, 2020, included elsewhere in this Form 8-K/A. In the opinion of management, 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 have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the interim financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the year ended July 31, 2020, included elsewhere in this Form 8-K/A have been omitted.
NOTE 2 – NOTES PAYABLE
On July 18, 2014, the Company entered into a financing agreement with Bank of America, N.A., for $50,000, under a line of credit for working capital, with a maturity date of September 1, 2015. Subsequentially, on July 31, 2015, the Company entered into a loan modification agreement, were by the maturity date was extended until August 18, 2020. The interest rate under the loan agreement is equal to the Bank’s Prime Rate, plus 2.75%, per annum. The amended loan agreement is for 60 months, with the first payment due on September 18, 2015, and with a monthly principal payment of $833. The loan is secured by the Company’s equipment, inventory, and accounts receivable. On August 18, 2020, the obligation was paid in full. During the three months ended October 31, 2020, the Company made a total principal payment of $834. The total outstanding balance as of October 31, 2020, and July 31, 2020, were $0 and $834, respectively.
On February 1, 2017, the Company entered into a financing agreement with Ford Credit, for a principal amount of $26,637 and financing charges of $2,451. The financing is for a Company vehicle, with a maturity date of January 18, 2023, and interest rate under the financing agreement at 2.90%, per annum. The financing agreement is for 72 months, with the first payment due on March 18, 2017, and with a monthly principal and interest payment of $404. The financing agreement is secured by the vehicle acquired. During the three months ended October 31, 2020, the Company made a total principal payment of $1,127. The total outstanding balance as of October 31, 2020, and July 31, 2020, were $10,915 and $12,042, respectively. Subsequentially on January 13, 2021, the obligation was paid in full.
On May 1, 2020, the Company, entered into an unsecured promissory note (the “Note”) for $145,370 made to the Company under the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The Note to the Company was secured through Bank of America, National Association (the “Lender”).
The Note provided for an interest rate of 1.00% per annum and matures two years after the issuance date. Beginning on the seventh month following the date of the Note, the Company was required to make 18 monthly principal payments in the amount of $8,076 and accrued interest. The Note was used for payroll costs, costs related to certain group health care benefits and insurance premiums. The Note contained events of default and other conditions customary for a Note of this type.
5
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all, or a portion of loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. The terms of any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt. The total outstanding balance as of October 31, 2020, and July 31, 2020, was $145,370. Subsequently, on March 9, 2021, the SBA informed the Company that the total outstanding principal balance of $145,370 and accrued interest of $1,227 were forgiven. On March 9, 2021, the Company recognized a gain on settlement of debt of $145,370.
NOTE 4 – CAPITAL STOCK
As of October 31, 2020, the Company had 10,000 authorized common shares, of which 2,000 founder shares were issued,
and outstanding, with a $0.01 par value per share.
NOTE 5 – SUBSEQUENT EVENTS
On November 17, 2020, T3 Communications, Inc., a Florida corporation (“T3 Florida”), a subsidiary of Digerati Technologies, Inc., executed and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation (“Seller”). Pursuant to the Purchase Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s telecommunications business known as ActivePBX (collectively, the “Purchased Assets”).
The aggregate purchase price for the Purchased Assets was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase Price”). $1,190,000 of the Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover part of potential future indemnification obligations of Seller to T3 Florida due to Seller’s breaches, if any, of any representations and warranties made to T3 Florida by Seller under the Purchase Agreement, and $40,000 of such amount being credited to T3 Florida against a payment in that amount made by T3 Florida to Seller pursuant to the Second Amendment to Letter of Intent between Seller and T3 Florida dated as of October 15, 2020.
Part of the Purchase Price is payable in 8 equal quarterly payments of $136,250, subject to T3 Florida achieving quarterly post-purchase recurring revenues under monthly contracts or subscriptions from the acquired customer base, excluding charges for taxes, regulatory fees, additional set-up fees, equipment purchases or lease, and consulting fees. To the extent that a quarterly revenue threshold is not reached, the amount of the corresponding quarterly payment shall be reduced on a proportional basis. T3 Florida’s $1,140,000 payment obligation is represented by a promissory note of T3 Florida in the form included as an exhibit to the Purchase Agreement. The note, in turn, is subject to the Subordination Agreement, included as an Exhibit to the Purchase Agreement, among Seller, the Company’s parent, T3 Nevada, and Post Road Administrative, LLC, in its capacity as administrative agent for the Post Road lenders. $275,000 of the Purchase Price (the “Customer Renewal Value”) represents an incentive earn-out to be paid with respect to Seller’s customer accounts which are transferred to T3 Florida at closing, that are renewed, expanded and/or revised with T3 Florida for a minimum term of twelve months with an auto-renewal for 12 months. During the period ended April 30, 2021, the Company made one of the quarterly principal payments of $136,250, and a payment of $11,000 towards the Holdback amount, the total principal outstanding on the notes as of April 30, 2021, was $1,267,750.
In connection with the Purchase Agreement, the Company entered with the Note Holders into Consulting Agreements and a Non-Compete Agreement with each of Alex Gonzalez and Jose Gonzalez, the Chief Executive Officer and Chief Technology Officer of ActivePBX. Under the Consulting Agreements, the Company will pay on an annual basis $90,000 to each the consultants.
6
Exhibit 99.3
DIGERATI TECHNOLOGIES, INC. AND ACTIVESERVE, INC.
Unaudited Pro Forma Consolidated Balance Sheet
and
Unaudited Pro Forma Consolidated Statements of Operations
On November 17, 2020, Digerati Technologies, Inc. (the “Company”), through its subsidiary, T3 Communications, Inc., a Florida corporation (“T3 Florida”), executed and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation (“Seller”). Pursuant to the Purchase Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s telecommunications business known as ActivePBX (collectively, the “Purchased Assets”).
The aggregate purchase price for the Purchased Assets was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase Price”). $1,190,000 of the Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover part of potential future indemnification obligations of Seller to T3 Florida due to Seller’s breaches, if any, of any representations and warranties made to T3 Florida by Seller under the Purchase Agreement, and $40,000 of such amount being credited to T3 Florida against a payment in that amount made by T3 Florida to Seller pursuant to the Second Amendment to Letter of Intent between Seller and T3 Florida dated as of October 15, 2020.
Part of the Purchase Price is payable in 8 equal quarterly payments of $136,250, subject to T3 Florida achieving quarterly post-purchase recurring revenues under monthly contracts or subscriptions from the acquired customer base, excluding charges for taxes, regulatory fees, additional set-up fees, equipment purchases or lease, and consulting fees. To the extent that a quarterly revenue threshold is not reached, the amount of the corresponding quarterly payment shall be reduced on a proportional basis. T3 Florida’s $1,140,000 payment obligation is represented by a promissory note of T3 Florida in the form included as an exhibit to the Purchase Agreement. The note, in turn, is subject to the Subordination Agreement, included as an Exhibit to the Purchase Agreement, among Seller, the Company’s parent, T3 Nevada, and Post Road Administrative, LLC, in its capacity as administrative agent for the Post Road lenders. $275,000 of the Purchase Price (the “Customer Renewal Value”) represents an incentive earn-out to be paid with respect to Seller’s customer accounts which are transferred to T3 Florida at closing, that are renewed, expanded and/or revised with T3 Florida for a minimum term of twelve months with an auto-renewal for 12 months.
The unaudited pro forma condensed consolidated combined financial information presented below has been prepared on the basis set forth in the notes below and have been presented to illustrate the estimated effects of the ActiveServe Asset Acquisition. The ActiveServe Asset Acquisition is being accounted for as a business combination using the acquisition method with the Company as the accounting acquirer in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 805, Business Combinations.
The historical financial information of the Company has been derived from the unaudited consolidated financial statements of the Company as of October 31, 2020, as found in Form 10Q which was filed with the Securities and Exchange Commissions on December 14, 2020.
The historical financial information of ActiveServe has been derived from the unaudited financial statements of the Seller Parties as of and for the three months ended October 31, 2020, included in Exhibit 99.2 to the Company’s Form 8-K/A filed with the SEC on July 16, 2021.
The historical financial information of the Company has been derived from the audited consolidated financial statements of the Company as of July 31, 2020, as found in Form 10K which was filed with the Securities and Exchange Commissions on October 29, 2020.
The historical financial information of ActiveServe has been derived from the audited financial statements of the Seller Parties for the year ended July 31, 2020, included in Exhibit 99.1 to the Company’s Form 8-K/A filed with the SEC on July 16, 2021
The following unaudited pro forma consolidated balance sheet as of October 31, 2020, and the unaudited pro forma consolidated statement of operations for the three months ended October 31, 2020, and twelve months ended July 31, 2020 (collectively, the “Pro Forma Statements”) have been prepared in compliance with the requirements of SEC Regulation S-X Article 11 using accounting policies in accordance with U.S. GAAP.
The pro forma adjustments presented below are based on preliminary estimates and currently available information and assumptions that management believes are reasonable and appropriate under the circumstances and are factually supported based on information currently available. The notes to the unaudited pro forma condensed consolidated combined financial information provide a discussion of how such adjustments were derived and presented in the Pro Forma Statements. Changes in facts and circumstances or discovery of new information may result in revised estimates. As a result, there may be material adjustments to the Pro Forma Statements. Certain historical financial statement caption amounts for ActiveServe have been reclassified or combined to conform to presentation and the disclosure requirements of the combined company.
| 1 |
DIGERATI TECHNOLOGIES, INC. AND ACTIVESERVE, INC.
Unaudited Pro Forma Consolidated Balance Sheet
As of October 31, 2020
| Historical (unaudited) | Pro Forma | Pro Forma | ||||||||||||||||
| Digerati | ActiveServe | Adjustments | Note 3 | Consolidated | ||||||||||||||
| ASSETS | ||||||||||||||||||
| CURRENT ASSETS: | ||||||||||||||||||
| Cash and cash equivalents | $ | 446 | $ | 325 | $ | (325 | ) | (a) | $ | 446 | ||||||||
| Accounts receivable, net | 116 | 26 | 52 | (e) | 194 | |||||||||||||
| Prepaid and other current assets | 732 | 114 | (112 | ) | (e) | 734 | ||||||||||||
| Total current assets | 1,294 | 465 | (385 | ) | 1,374 | |||||||||||||
| LONG-TERM ASSETS: | ||||||||||||||||||
| Intangible assets, net | 1,357 | 11 | 1,959 | (b) | 3,327 | |||||||||||||
| Goodwill, net | 810 | - | 585 | (c) | 1,395 | |||||||||||||
| Property and equipment, net | 482 | 4 | (4 | ) | (d) | 482 | ||||||||||||
| Other assets | 43 | - | - | 43 | ||||||||||||||
| Investment in Itellum | 185 | - | - | 185 | ||||||||||||||
| Right-of-use asset | 139 | - | - | 139 | ||||||||||||||
| Total assets | $ | 4,310 | $ | 480 | $ | 2,155 | $ | 6,945 | ||||||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||||||||||||
| CURRENT LIABILITIES: | ||||||||||||||||||
| Accounts payable | $ | 1,821 | $ | 25 | $ | (25 | ) | (e) | $ | 1,821 | ||||||||
| Accrued liabilities | 1,887 | 228 | (148 | ) | (e) | 1,967 | ||||||||||||
| Equipment financing | 62 | - | - | 62 | ||||||||||||||
| Convertible note payable, current, net $296 | 647 | - | - | 647 | ||||||||||||||
| Note payable, current, related party, net $0 | 138 | - | 870 | (a) | 1,008 | |||||||||||||
| Note payable, current, net $0 | 1,616 | - | - | - | ||||||||||||||
| Deferred income | 138 | - | - | 138 | ||||||||||||||
| Derivative liability | 223 | - | - | 223 | ||||||||||||||
| Operating lease liability, current | 74 | - | - | 74 | ||||||||||||||
| Total current liabilities | 6,606 | 253 | 697 | 7,556 | ||||||||||||||
| LONG-TERM LIABILITIES: | ||||||||||||||||||
| Notes payable, related party, net $0 | - | - | 545 | (a) | 545 | |||||||||||||
| Note payable, net $0 | 133 | 156 | 984 | (f) | 1,273 | |||||||||||||
| Equipment financing | 20 | - | - | 20 | ||||||||||||||
| Operating lease liability | 64 | - | - | 64 | ||||||||||||||
| Total long-term liabilities | 217 | 156 | 1,529 | 1,902 | ||||||||||||||
| Total liabilities | 6,823 | 409 | 2,226 | 9,458 | ||||||||||||||
| Commitments and contingencies | ||||||||||||||||||
| STOCKHOLDERS' DEFICIT: | ||||||||||||||||||
| Preferred stock, $0.001, 50,000,000 shares authorized | ||||||||||||||||||
| Convertible Series A Preferred stock, $0.001, 1,500,000 shares designated, 225,000 issued and outstanding | - | - | - | - | ||||||||||||||
| Convertible Series B Preferred stock, $0.001, 1,000,000 shares designated, 407,477 issued and outstanding | - | - | - | - | ||||||||||||||
| Convertible Series C Preferred stock, $0.001, 1,000,000 shares designated, 0 issued and outstanding | - | - | - | - | ||||||||||||||
| Series F Super Voting Preferred stock, $0.001, 100 shares designated, 100 issued and outstanding | - | - | - | - | ||||||||||||||
| Common stock, $0.001, 150,000,000 shares authorized, 122,182,410 issued and outstanding (15,000,000 reserved in Treasury) | 122 | - | - | 122 | ||||||||||||||
| Additional paid in capital | 87,199 | 10 | (10 | ) | (g) | 87,199 | ||||||||||||
| (Accumulated deficit) Retained earnings | (89,418 | ) | 61 | (61 | ) | (g) | (89,418 | ) | ||||||||||
| Other comprehensive income | 1 | - | - | 1 | ||||||||||||||
| Total Digerati's stockholders' deficit | (2,096 | ) | 71 | (71 | ) | (2,096 | ) | |||||||||||
| Noncontrolling interest | (417 | ) | - | (417 | ) | |||||||||||||
| Total stockholders' deficit | (2,513 | ) | 71 | (71 | ) | (2,513 | ) | |||||||||||
| Total liabilities and stockholders' deficit | $ | 4,310 | $ | 480 | $ | 2,155 | $ | 6,945 | ||||||||||
See accompanying notes to unaudited pro forma consolidated financial statements
| 2 |
DIGERATI TECHNOLOGIES, INC. AND ACTIVESERVE, INC.
Unaudited Pro Forma Consolidated Statement of Operations
(In thousands, except per share amounts)
For the Three Months Ended October 31, 2020
| Historical (unaudited) | Pro Forma | Pro Forma | ||||||||||||||||
| Digerati | ActiveServe | Adjustments | Note 3 | Consolidated | ||||||||||||||
| OPERATING REVENUES: | ||||||||||||||||||
| Cloud software and service revenue | $ | 1,552 | $ | 463 | $ | - | $ | 2,015 | ||||||||||
| Total operating revenues | 1,552 | 463 | - | 2,015 | ||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||
| Cost of services (exclusive of depreciation and amortization) | 748 | 138 | - | 886 | ||||||||||||||
| Selling, general and administrative expense | 1,011 | 273 | - | 1,284 | ||||||||||||||
| Legal and professional fees | 258 | - | - | 258 | ||||||||||||||
| Depreciation and amortization expense | 161 | - | 75 | (h) | 236 | |||||||||||||
| Total operating expenses | 2,178 | 411 | 75 | 2,664 | ||||||||||||||
| OPERATING LOSS | (626 | ) | 52 | (75 | ) | (649 | ) | |||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||||
| Gain on derivative instruments | 178 | - | - | 178 | ||||||||||||||
| Income tax expense | (8 | ) | (7 | ) | - | (15 | ) | |||||||||||
| Interest expense | (300 | ) | - | - | (300 | ) | ||||||||||||
| Total other expense | (130 | ) | (7 | ) | - | (137 | ) | |||||||||||
| NET LOSS INCLUDING NONCONTROLLING INTEREST | (756 | ) | 45 | (75 | ) | (786 | ) | |||||||||||
| Less: Net loss attributable to the noncontrolling interests | 35 | - | 6 | (i) | 41 | |||||||||||||
| NET LOSS ATTRIBUTABLE TO DIGERATI'S SHAREHOLDERS | (721 | ) | 45 | (69 | ) | (745 | ) | |||||||||||
| Deemed dividend on Series A Convertible preferred stock | (5 | ) | - | - | (5 | ) | ||||||||||||
| NET LOSS ATTRIBUTABLE TO DIGERATI'S COMMON SHAREHOLDERS | $ | (726 | ) | $ | 45 | $ | (69 | ) | $ | (750 | ) | |||||||
| LOSS PER COMMON SHARE - BASIC | $ | (0.01 | ) | $ | (0.01 | ) | ||||||||||||
| LOSS PER COMMON SHARE - DILUTED | $ | (0.01 | ) | $ | (0.01 | ) | ||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | 119,914,246 | 119,914,246 | ||||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED | 119,914,246 | 119,914,246 | ||||||||||||||||
See accompanying notes to unaudited pro forma consolidated financial statements
| 3 |
DIGERATI TECHNOLOGIES, INC. AND ACTIVESERVE, INC.
Unaudited Pro Forma Consolidated Statement of Operations
(In thousands, except share amounts)
For the Year Ended July 31, 2020
| Historical | Pro forma | Pro Forma | ||||||||||||||||
| Digerati | ActiveServe | Adjustments | Note 3 | Consolidated | ||||||||||||||
| OPERATING REVENUES: | ||||||||||||||||||
| Cloud software and service revenue | $ | 6,279 | $ | 1,949 | $ | - | $ | 8,228 | ||||||||||
| Total operating revenues | 6,279 | 1,949 | - | 8,228 | ||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||
| Cost of services (exclusive of depreciation and amortization) | 3,035 | 557 | - | 3,592 | ||||||||||||||
| Selling, general and administrative expense | 4,106 | 1,110 | - | 5,216 | ||||||||||||||
| Legal and professional fees | 642 | - | - | 642 | ||||||||||||||
| Bad debt | (5 | ) | 12 | - | 7 | |||||||||||||
| Depreciation and amortization expense | 613 | 1 | 299 | (h) | 913 | |||||||||||||
| Total operating expenses | 8,391 | 1,680 | 299 | 10,370 | ||||||||||||||
| OPERATING LOSS | (2,112 | ) | 269 | (299 | ) | (2,142 | ) | |||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||||
| Gain on derivative instruments | 263 | - | - | 263 | ||||||||||||||
| Gain on settlement of debt | 129 | - | - | 129 | ||||||||||||||
| Income tax benefit | 33 | 1 | - | 34 | ||||||||||||||
| Other income | 116 | - | - | 116 | ||||||||||||||
| Interest expense | (1,853 | ) | (1 | ) | - | (1,854 | ) | |||||||||||
| Total other expense | (1,312 | ) | - | - | (1,312 | ) | ||||||||||||
| NET LOSS INCLUDING NONCONTROLLING INTEREST | (3,424 | ) | 269 | (299 | ) | (3,454 | ) | |||||||||||
| Less: Net loss attributable to the noncontrolling interests | 47 | - | 6 | (i) | 53 | |||||||||||||
| NET LOSS ATTRIBUTABLE TO DIGERATI'S SHAREHOLDERS | (3,377 | ) | 269 | (293 | ) | (3,401 | ) | |||||||||||
| Deemed dividend on Series A Convertible preferred stock | (19 | ) | - | - | (19 | ) | ||||||||||||
| NET LOSS ATTRIBUTABLE TO DIGERATI'S COMMON SHAREHOLDERS | $ | (3,396 | ) | $ | 269 | $ | (293 | ) | $ | (3,420 | ) | |||||||
| LOSS PER COMMON SHARE - BASIC | $ | (0.06 | ) | $ | (0.06 | ) | ||||||||||||
| LOSS PER COMMON SHARE - DILUTED | $ | (0.06 | ) | $ | (0.06 | ) | ||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | 53,883,966 | 53,883,966 | ||||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED | 53,883,966 | 53,883,966 | ||||||||||||||||
See accompanying notes to unaudited pro forma consolidated financial statements
| 4 |
Notes to the Unaudited Pro Forma Consolidated Financial Statements
Note 1 — Basis of Presentation and Description of Transactions
The unaudited pro forma consolidated financial statements were prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of SEC Regulation S-X and presents the pro forma financial position and results of operations of the combined companies based upon the historical data of the Company and ActiveServe.
Description of Transaction
On November 17, 2020, Digerati Technologies, Inc. (the “Company”), through its subsidiary, T3 Communications, Inc., a Florida corporation (“T3 Florida”), executed and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation (“Seller”). Pursuant to the Purchase Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s telecommunications business known as ActivePBX (collectively, the “Purchased Assets”).
The aggregate purchase price for the Purchased Assets was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase Price”). $1,190,000 of the Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover part of potential future indemnification obligations of Seller to T3 Florida due to Seller’s breaches, if any, of any representations and warranties made to T3 Florida by Seller under the Purchase Agreement.
Basis of Presentation
The historical financial information of the Company has been derived from the unaudited consolidated financial statements of the Company as of October 31, 2020, as found in Form 10Q which was filed with the Securities and Exchange Commissions on December 14, 2020.
The historical financial information of ActiveServe has been derived from the unaudited financial statements of the Seller Parties as of and for the three months ended October 31, 2020, included in Exhibit 99.2 to the Company’s Form 8-K/A filed with the SEC on July 16, 2021.
The historical financial information of the Company has been derived from the audited consolidated financial statements of the Company as of July 31, 2020, as found in Form 10K which was filed with the Securities and Exchange Commissions on October 29, 2020.
The historical financial information of ActiveServe has been derived from the audited financial statements of the Seller Parties for the year ended July 31, 2020, included in Exhibit 99.1 to the Company’s Form 8-K/A filed with the SEC on July 16, 2021.
The historical consolidated financial statements have been adjusted in the pro forma consolidated financial statements to give effect to pro forma events that are (1) directly attributable to the ActiveServe Asset Acquisition, (2) factually supportable and (3) with respect to the pro forma consolidated statement of operations, expected to have a continuing impact on the combined results of the Company following the ActiveServe Asset Acquisition.
The ActiveServe Asset Acquisition is being accounted for as a business combination using the acquisition method with the Company as the accounting acquirer in accordance with ASC Topic 805, Business Combinations. As the accounting acquirer, the Company has estimated the fair value of ActiveServe assets acquired and liabilities assumed and conformed the accounting policies of ActiveServe to its own accounting policies.
The pro forma consolidated financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
| 5 |
Note 2— Preliminary purchase price allocation
On November 17, 2020, Digerati Technologies, Inc. (the “Company”), through its subsidiary, T3 Communications, Inc., a Florida corporation (“T3 Florida”), executed and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with ActiveServe, Inc., a Florida corporation (“Seller”). Pursuant to the Purchase Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s telecommunications business known as ActivePBX (collectively, the “Purchased Assets”).
The aggregate purchase price for the Purchased Assets was $2,555,000 in cash, subject to adjustment as provided therein (the “Purchase Price”). $1,190,000 of the Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover part of potential future indemnification obligations of Seller to T3 Florida due to Seller’s breaches, if any, of any representations and warranties made to T3 Florida by Seller under the Purchase Agreement.
The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the ActiveServe Asset Acquisition:
| ActivePBX | ||||
| (In thousands) | ||||
| Accounts receivables | $ | 78 | ||
| Intangible Assets and Goodwill | 2,555 | |||
| Other Assets | 2 | |||
| Total identifiable assets | $ | 2,635 | ||
| Less: liabilities assumed | 80 | |||
| Total Purchase price | $ | 2,555 | ||
The following table summarizes the cost of intangible assets related to the acquisition:
| ActivePBX | Useful life | |||||||
| (In thousands) | (years) | |||||||
| Customer Relationships | $ | 1,610 | 7 | |||||
| Trade Names & Trademarks | 270 | 7 | ||||||
| Non-compete Agreement | 90 | 2-3 | ||||||
| Goodwill | 585 | - | ||||||
| $ | 2,555 | |||||||
| 6 |
Note 3— Pro forma adjustments
The pro forma adjustments are based on preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma consolidated financial statements:
| a) | Adjustment to reflect the consideration transferred by the Company, which includes: |
| ● | Cash paid at the closing of the ActiveServe Asset Acquisition of $1.14 million and the cash retained by the seller of $424,000; |
| ● | Elimination of $325,000 for the net cash not retained by the Company; |
| ● | Deferred consideration of $1.09 million, of which $545,000 is due on the one-year anniversary of the ActiveServe Asset Acquisition and included in the Current Note payable, related party in the pro forma balance sheet, and $545,000 is due on the two-year anniversary of the ActiveServe Asset Acquisition and included in Long term Note Payable, related party, net of current portion in the pro forma balance sheet; and $50,000 indemnification holdback due on the one-year anniversary and $275,000 in earn-out associated with the Customer Renewal Value due on the one-year anniversary, both included in the Current Note Payable, related party in the pro forma balance sheet; |
| b) | Represents the preliminary purchase price allocated to the intangible assets based on the estimated fair values as follows: |
Customer relationships: The fair value of the customer relationships was determined using an income approach based upon management’s assessment of prospective financial information and a discount rate based upon the Company’s weighted average cost of capital.
Non-compete provisions: The fair value of the non-compete provisions, was determined using an income approach based upon management’s assessment of prospective financial information, including an estimated impact of competition, and a discount rate based upon the Company’s weighted average cost of capital.
Trade Names and Trademarks: The fair value of the Trade names and trademarks were determined using an income approach based upon management’s assessment of prospective revenues, a royalty rate selected from a range of comparable licensing transactions and a discount rate based upon the Company’s weighted average cost of capital.
| c) | Represents the preliminary purchase price allocated to goodwill in the ActiveServe Asset Acquisition. Goodwill represents the excess of the consideration transferred over the preliminary fair value of the net tangible and intangible assets acquired. Goodwill will not be amortized, but instead will be tested for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment. In the event management determines that the value of goodwill has become impaired, the combined company will incur an accounting charge for the amount of the impairment during the period in which the determination is made. |
| d) | Adjustment to eliminate the Property and equipment, which was not acquired by the Company in the ActiveServe Asset Acquisition. |
| e) | Adjustment to eliminate certain Accounts receivables, Prepaid and other current assets, Accounts payable, Accrued liabilities and Note payable, which were not transferred to the Company in the ActiveServe Asset Acquisition. |
| f) | Represents cash secured by the Company $1.14 million for the initial cash payment made at closing for the ActiveServe Asset Acquisition and included in the Long Term Note payable in the pro forma balance sheet. The financing is part of the Credit Agreement and Notes secured from Post Road and previously disclosed. (filed as Exhibits 4.1 and 4.2 to Form 8-K filed with the SEC on November 23, 2020.) |
| g) | Adjustment to eliminate ActiveServe’s historical additional paid-in capital and retained earnings. |
| h) | Represents the future annual amortization of the intangible assets based upon their estimated useful lives. The estimated useful lives were determined based on a review of the time period over which the economic benefit of each intangible asset is estimated to be generated. |
| i) | Adjustment to allocate T3 Communications, Inc., Digerati's operating subsidiary, net (loss) to redeemable noncontrolling interest holders, this is reflected in Digerati's consolidated financial statements. The net (loss) allocated to noncontrolling interest is computed by applying the 19.99% ownership interest in T3 Communications, Inc. |
7