UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period
ended January 31, 2015
or
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from ____________ to ___________
Commission File Number
001-15687
DIGERATI
TECHNOLOGIES, INC.
(Exact Name of Registrant
as Specified in Its Charter)
Nevada |
|
74-2849995 |
(State
or Other Jurisdiction of |
|
(I.R.S.
Employer |
Incorporation
or Organization) |
|
Identification
No.) |
3463
Magic Drive, Suite 355 |
|
|
San
Antonio, Texas |
|
78229 |
(Address
of Principal Executive Offices) |
|
(Zip
Code) |
Registrant’s
Telephone Number, Including Area Code: (210) 775-0888
Common Stock, Par
Value $0.001 Per Share
(Title of Class)
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes ☐ No ☒
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ☐ Accelerated
filer ☐
Non-accelerated filer ☐ Smaller
reporting Company ☒
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
Common Stock |
|
As
of |
|
5,113,030 |
|
$0.001
par value |
|
August
31, 2015 |
DIGERATI TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 2015
INDEX
|
|
PART I-- FINANCIAL INFORMATION |
|
|
|
Item 1. |
Financial Statements |
4 |
Item 2. |
Management’s Discussion and Analysis
of Financial Condition and Results of Operations |
12 |
Item 3. |
Quantitative and Qualitative Disclosures
About Market Risk |
15 |
Item 4. |
Control and Procedures |
15 |
|
|
|
PART II-- OTHER INFORMATION |
|
|
|
|
Item 1. |
Legal Proceedings |
16 |
Item 1A. |
Risk Factors |
16 |
Item 2. |
Unregistered Sales of Equity Securities
and Use of Proceeds |
16 |
Item 3. |
Defaults Upon Senior Securities |
|
Item 5. |
Other Information |
16 |
Item 6. |
Exhibits |
17 |
|
|
|
SIGNATURES |
18 |
DIGERATI TECHNOLOGIES, INC.
CONTENTS
PAGE 4 |
|
CONSOLIDATED
BALANCE SHEETS AS OF JANUARY 31, 2015 AND AS OF JULY 31, 2014 (UNAUDITED) |
|
|
|
PAGE 5 |
|
CONSOLIDATED STATEMENTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 2015 AND 2014 (UNAUDITED) |
|
|
|
PAGE 6 |
|
CONSOLIDATED STATEMENTS
OF CASH FLOWS FOR THE SIX MONTHS ENDED JANUARY 31, 2015 AND 2014 (UNAUDITED) |
|
|
|
PAGES 7-11 |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) |
PART
1. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In
thousands, unaudited)
| |
January 31, 2015 | | |
July 31, 2014 | |
ASSETS | |
| | |
| |
CURRENT ASSETS: | |
| | |
| |
Cash and cash equivalents | |
$ | 96 | | |
$ | 347 | |
Restricted cash | |
| - | | |
| 1,838 | |
Accounts receivable, net of allowance for doubtful accounts of $58 and $54, respectively | |
| 15 | | |
| 9 | |
Prepaid and other current assets | |
| 158 | | |
| 157 | |
Total current assets | |
| 269 | | |
| 2,351 | |
| |
| | | |
| | |
LONG-TERM ASSETS: | |
| | | |
| | |
Intangible assets, net of accumulated amortization of $99 and $91, respectively | |
| 51 | | |
| 59 | |
Property and equipment, net | |
| 4 | | |
| 1 | |
| |
| | | |
| | |
Total assets | |
$ | 324 | | |
$ | 2,411 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts payable | |
$ | 1,010 | | |
$ | 1,283 | |
Accounts payable - related parties | |
| 7 | | |
| - | |
Accrued liabilities | |
| 274 | | |
| 376 | |
10% Convertible debentures | |
| - | | |
| 50 | |
Current portion of long term debt | |
| 45 | | |
| 1,338 | |
Derivative liability | |
| - | | |
| 10 | |
Total current liabilities | |
| 1,336 | | |
| 3,057 | |
| |
| | | |
| | |
LONG-TERM LIABILITIES: | |
| | | |
| | |
Customer deposits | |
| 138 | | |
| 138 | |
Total long-term liabilities | |
| 138 | | |
| 138 | |
| |
| | | |
| | |
Total liabilities | |
| 1,474 | | |
| 3,195 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS' DEFICIT: | |
| | | |
| | |
Preferred stock, 50,000,000 shares authorized, none issued and outstanding | |
| - | | |
| - | |
Common stock, $0.001, 150,000,000 shares authorized, 5,113,030 and 1,977,626 issued and outstanding, respectively | |
| 5 | | |
| 2 | |
Additional paid in capital | |
| 75,634 | | |
| 75,161 | |
Subscription receivable | |
| (270 | ) | |
| - | |
Accumulated deficit | |
| (76,520 | ) | |
| (75,948 | ) |
Other comprehensive income | |
| 1 | | |
| 1 | |
Total stockholders' deficit | |
| (1,150 | ) | |
| (784 | ) |
Total liabilities and stockholders' deficit | |
$ | 324 | | |
$ | 2,411 | |
See
accompanying notes to consolidated financial statements
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts, unaudited)
| |
Three months ended January 31, | | |
Six months ended January 31, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
OPERATING REVENUES: | |
| | |
| | |
| | |
| |
Global VoIP services | |
$ | 18 | | |
$ | 37 | | |
$ | 33 | | |
$ | 130 | |
Cloud-based hosted services | |
| 56 | | |
| 59 | | |
| 115 | | |
| 117 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating revenues | |
| 74 | | |
| 96 | | |
| 148 | | |
| 247 | |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | | |
| | | |
| | |
Cost of services (exclusive of depreciation and amortization) | |
| 42 | | |
| 93 | | |
| 84 | | |
| 215 | |
Selling, general and administrative expense | |
| 233 | | |
| 143 | | |
| 439 | | |
| 379 | |
Legal and professional fees | |
| 55 | | |
| 773 | | |
| 137 | | |
| 1,297 | |
Bad debt | |
| 4 | | |
| - | | |
| 4 | | |
| - | |
Depreciation and amortization expense | |
| 4 | | |
| 5 | | |
| 8 | | |
| 9 | |
Total operating expenses | |
| 338 | | |
| 1,014 | | |
| 672 | | |
| 1,900 | |
| |
| | | |
| | | |
| | | |
| | |
OPERATING LOSS | |
| (264 | ) | |
| (918 | ) | |
| (524 | ) | |
| (1,653 | ) |
| |
| | | |
| | | |
| | | |
| | |
OTHER INCOME (EXPENSE): | |
| | | |
| | | |
| | | |
| | |
Gain (loss) derivative instruments and disposal of fixed assets | |
| - | | |
| (40 | ) | |
| (29 | ) | |
| (56 | ) |
Gain (loss) on debt extinguishment | |
| (7 | ) | |
| 246 | | |
| (7 | ) | |
| 246 | |
Interest expense | |
| (1 | ) | |
| (32 | ) | |
| (12 | ) | |
| (81 | ) |
Total other income (expense) | |
| (8 | ) | |
| 174 | | |
| (48 | ) | |
| 109 | |
| |
| | | |
| | | |
| | | |
| | |
LOSS FROM CONTINUING OPERATIONS, BEFORE TAX | |
| (272 | ) | |
| (744 | ) | |
| (572 | ) | |
| (1,544 | ) |
| |
| | | |
| | | |
| | | |
| | |
INCOME TAX BENEFIT (EXPENSE) FROM DISCONTINUED OPERATIONS | |
| - | | |
| (376 | ) | |
| - | | |
| 443 | |
LOSS FROM CONTINUING OPERATIONS | |
| (272 | ) | |
| (1,120 | ) | |
| (572 | ) | |
| (1,101 | ) |
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES | |
| - | | |
| (731 | ) | |
| - | | |
| 859 | |
NET LOSS ATTRIBUTED TO DIGERATI TECHNOLOGIES, INC. | |
$ | (272 | ) | |
$ | (1,851 | ) | |
$ | (572 | ) | |
$ | (242 | ) |
| |
| | | |
| | | |
| | | |
| | |
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED | |
| | | |
| | | |
| | | |
| | |
From continuing operations | |
$ | (0.11 | ) | |
$ | (0.57 | ) | |
$ | (0.25 | ) | |
$ | (0.56 | ) |
From discontinued operations | |
$ | - | | |
$ | (0.37 | ) | |
$ | - | | |
$ | 0.43 | |
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED ATTRIBUTED TO DIGERATI TECHNOLOGIES, INC. SHAREHOLDERS | |
$ | (0.11 | ) | |
$ | (0.94 | ) | |
$ | (0.25 | ) | |
$ | (0.12 | ) |
| |
| | | |
| | | |
| | | |
| | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED | |
| 2,565,353 | | |
| 1,977,626 | | |
| 2,269,884 | | |
| 1,977,626 | |
See
accompanying notes to consolidated financial statements
DIGERATI
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
| |
Six months ended January 31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
Net loss | |
$ | (572 | ) | |
$ | (242 | ) |
Adjustments to reconcile net loss to cash (used in) provided by operating activities: | |
| | | |
| | |
(Gain) loss on debt extinguishment | |
| 7 | | |
| (163 | ) |
(Gain) loss on derivative instruments and disposal of fixed assets | |
| (10 | ) | |
| 31 | |
Depreciation, amortization and accretion | |
| 8 | | |
| 3,966 | |
Impairment of goodwill | |
| - | | |
| 1,741 | |
Bad debt | |
| 4 | | |
| - | |
Stock compensation | |
| 118 | | |
| - | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (10 | ) | |
| 81 | |
Prepaid expenses and other current assets | |
| (1 | ) | |
| 159 | |
Accounts payable | |
| 86 | | |
| 1,721 | |
Accounts payable - related parties | |
| 7 | | |
| - | |
Accrued liabilities | |
| 35 | | |
| (173 | ) |
Net cash (used in ) provided by operating activities | |
| (328 | ) | |
| 7,121 | |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchases of property & equipment | |
| (3 | ) | |
| (6,646 | ) |
Net cash used in investing activities | |
| (3 | ) | |
| (6,646 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Issuance of common stock | |
| 40 | | |
| - | |
Payments on debt | |
| - | | |
| (2,479 | ) |
Proceeds from notes payable | |
| 40 | | |
| 2,661 | |
Net cash provided by financing activities | |
| 80 | | |
| 182 | |
| |
| | | |
| | |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | |
| (251 | ) | |
| 657 | |
CASH AND CASH EQUIVALENTS, beginning of period | |
| 347 | | |
| 6,543 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS, end of period | |
$ | 96 | | |
$ | 7,200 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURES: | |
| | | |
| | |
Cash paid for interest | |
$ | - | | |
$ | - | |
NON-CASH TRANSACTIONS: | |
| | | |
| | |
Notes payable repaid with common stock | |
$ | 40 | | |
$ | - | |
Repayment of liabilities with restricted cash | |
$ | 1,838 | | |
$ | - | |
See
accompanying notes to consolidated financial statements
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2015
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial
statements of Digerati Technologies, Inc. ("Digerati" or the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America and the rules of the United States Securities and Exchange
Commission. In the opinion of management, these interim financial statements contain all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation of financial position and the results of operations for the interim periods presented.
The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
Notes to the consolidated financial statements, which would substantially duplicate the disclosure contained in the audited financial
statements for the most recent Form 10-K as of and for the year ended July 31, 2014 filed on July 15, 2015 have been omitted.
Taxes
The effective tax rate was 0% for the six months ended January 31, 2015,
and an effective tax rate of 36% for the six months ended January 31, 2014.
NOTE 2 – GOING CONCERN
Financial Condition
Digerati’s unaudited interim consolidated financial
statements for the period ended January 31, 2015 have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities in the normal course of business. Digerati has incurred net losses and has accumulated
a deficit of approximately $76,520,000 and a working capital deficit of approximately $1,067,000 which raises substantial doubt
about Digerati’s ability to continue as a going concern.
Management Plans to Continue as a Going Concern
Management believes that current available resources
will not be sufficient to fund the Company’s operations over the next 12 months. The Company’s ability to continue
to meet its obligations and to achieve its business objectives is dependent upon, among other things, raising additional capital
or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will
seek to secure such additional funding from various possible sources, including the public equity market, private financings,
sales of assets, collaborative arrangements and debt. If the Company raises additional capital through the issuance of equity
securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights,
preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional
funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions.
If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required
to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional
funds, or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to
execute its business plan, the Company could be required to delay or reduce the scope of its operations, and the Company may not
be able to pay off its obligations, if and when they come due.
The Company will continue to work with various funding
sources to secure additional debt and equity financings. However, Digerati cannot offer any assurance that it will be successful
in executing the aforementioned plans to continue as a going concern.
Digerati’s unaudited interim consolidated financial
statements as of January 31, 2015 do not include any adjustments that might result from the inability to implement or execute
Digerati’s plans to improve our ability to continue as a going concern.
NOTE 3 – BANKRUPTCY
On May 30, 2013, Digerati Technologies, Inc., Debtor
in Possession (“Digerati”) filed a voluntary petition in the United States Bankruptcy Court for the Southern District
of Texas, Houston Division (the “Bankruptcy Court”), Case No. 13-33264 (the “Bankruptcy”), seeking relief
under the provisions of Chapter 11 of the United States Bankruptcy Code.
On April 4, 2014 (the “Confirmation
Date”), the Bankruptcy Court entered an Agreed Order Confirming Joint Plan of Reorganization Filed by Plan Proponents (“Agreed
Order”) confirming the Plan Proponents’ Joint Chapter 11 Plan of Reorganization as modified on the record on April
4, 2014 and/or as modified by the Agreed Order (the “Reorganization Plan”). As used herein, the term “Reorganized
Debtor” refers to Digerati Technologies, Inc., a Nevada corporation, after the Confirmation Date and as reorganized by the
Reorganization Plan.
On October 2, 2014 the Grantor Trust paid approximately
$1,838,000 of unsecured claims in accordance to the Chapter 11 Plan of Reorganization.
Summary of the Plan
This summary is not intended to be a complete description
of the Reorganization Plan, and it is qualified in its entirety by reference to the Agreed Order, Reorganization Plan, Plan Supplement
and Disclosure Statement. A copy of the Agreed Order and Reorganization Plan were filed as exhibits to Digerati’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on April 11, 2014.
| (a) | The
Agreed Order provided final approval of the Disclosure Statement, a copy of which was
filed as an exhibit to Digerati’s Current Report on Form 8-K dated January 23,
2014. |
| (b) | Upon
the Confirmation Date, the Reorganized Debtor had 1,977,626 shares of common stock outstanding.
All outstanding shares of Digerati’s preferred stock, warrants, options, conversion
rights and other rights to acquire shares of common stock and all “super voting”
shares were cancelled. |
| (c) | The
Reorganized Debtor’s Board of Directors consisted of Messrs. Arthur L. Smith, William
E. McIlwain and James J. Davis. The Reorganized Debtor’s officers, who served at
the discretion of the board of directors until the Stockholder Meeting, were: |
Arthur L. Smith
President and Chief Executive Officer
Antonio Estrada
Chief Financial Officer
Subsequently, on September 15, 2014, the
Company held its Annual Meeting of Shareholders, and at the discretion of the new directors, Mr. Smith and Mr. Estrada continued
to serve as officers of the Reorganized Debtor.
| (d) | The
Reorganized Debtor was required to hold a Stockholder Meeting to elect a new board of
directors after August 31, 2014, and before September 15, 2014. The Reorganized Debtor’s
officers and directors, as well as the parties to the BSA and a Rule 11 Mediated Settlement
Agreement dated January 14, 2014 (the “Rule 11 Agreement”), were not eligible
for election to the new board of directors at the Stockholder Meeting. Messrs. Smith
and Estrada were not permitted to solicit proxies in connection with the Stockholder
Meeting but were allowed to vote shares of common stock owned by them. Subsequently,
on September 15, 2014, the Company held its Annual Meeting of Shareholders, and new directors
were elected. |
| (e) | Under
the Reorganization Plan title to the issued and outstanding shares of Dishon Disposal,
Inc., a North Dakota corporation (“Dishon”), and Hurley Enterprises, Inc.,
a Montana corporation (“Hurley”), owned by Digerati were transferred to a
Grantor Trust subject to existing liens and the Rule 11 Agreement. The Dishon and Hurley
shares did not vest in the Reorganized Debtor and remained the property of Digerati’s
bankruptcy estate. Additionally, under the Reorganization Plan certain retained litigation
claims were transferred to the Grantor Trust. The beneficiary of the Grantor Trust is
the Reorganized Debtor. The trustee and Disbursing Agent of the Grantor Trust is Mr.
William R. Greendyke. All other assets of Digerati that are not transferred to the Grantor
Trust and/or retained by Digerati vested in the Reorganized Debtor as of the Confirmation
Date, including but not limited to the common stock of Shift8 Technologies, Inc., free
and clear of liens, claims and encumbrances. |
| (f) | All
of the issued and outstanding shares of Dishon and Hurley were sold by the Grantor Trust
and the proceeds from the sale were distributed by the trustee and Disbursing Agent to
discharge certain allowed claims. The claims distribution set forth in the Reorganization
Plan were as follows: |
| (i) | Allowed
priority claims were paid in full from cash on hand. |
| (ii) | Allowed
administrative claims will be paid from the proceeds of the sale of the Dishon and Hurley
shares except for those amounts paid pursuant to the budget attached to the Reorganization
Plan. The Company estimated the maximum potential amount of any federal income tax liability
on the gains derived from the sale of the Dishon and Hurley shares and deposited that
amount into a reserve account until determination of the actual taxes due. |
| (iii) | Proceeds
from the sale of the Dishon shares in excess of $1,250,000 plus one-half of Digerati’s
unpaid professional fees (the “Dishon Carve Out”) and amount reserved for
taxes were delivered to creditors holding $30,000,000 of Digerati’s indebtedness
secured by the Dishon shares, up to the principal of and accrued interest on such indebtedness.
In addition, the secured creditors maintain a right to seek a refund if the estimated
amount withheld for taxes on the sale of the Dishon shares exceeds the tax obligation.
|
| (iv) | Proceeds
from the sale of the Hurley shares in excess of $1,250,000 plus one-half of Digerati’s
unpaid professional fees (the “Hurley Carve Out”) and amount reserved for
taxes were delivered to creditors holding $30,000,000 of Digerati’s indebtedness
secured by the Hurley shares, up to the principal of and accrued interest on such indebtedness.
In addition, the secured creditors maintain a right to seek a refund if the estimated
amount withheld for taxes on the sale of the Hurley shares exceeds the tax obligation.
Principal of or interest on Digerati’s indebtedness secured by the Hurley shares
that is in excess of the net proceeds from the sale of Hurley shares has been waived. |
| (v) | Allowed
unsecured claims of $1,000 or less were paid in full from cash on hand. |
| (vi) | Allowed
unsecured claims greater than $1,000 were paid in full from the Dishon Carve Out and
the Hurley Carve Out. The excess from the combined $2,500,000 withheld from the sale
of the Dishon shares and Hurley shares will be applied to the unpaid professional fees. |
| (vii) | All
cure payments under assumed contracts were paid within 90 days of April 4, 2014. |
| (viii) | All
executory contracts of Digerati were rejected except as previously assumed by order in
the Bankruptcy Court or specifically listed as assumed in the Reorganization Plan. |
| (ix) | The
Reorganized Debtor released Messrs. Arthur L. Smith, Antonio Estrada, William E. McIlwain
and James J. Davis in their individual capacity and their respective capacities as officers
and/or directors, as applicable, of Digerati, Hurley or Dishon of all claims and causes
of action that arise on or before the Confirmation Date that could be asserted by Digerati,
the estate and/or on account of the Bankruptcy through the Stockholder Meeting. The Reorganized
Debtor also released Messrs. Arthur L. Smith, William McIlwain and James Davis to the
greatest extent provided by law from any claims. |
| (x) | The
Reorganization Plan became effective on December 31, 2014. |
NOTE 4 – NOTES PAYABLE
At January 31, 2015 and July 31, 2014, outstanding
debt consisted of the following: (In thousands)
Outstanding
debt consisted of the following: | |
January
31, | | |
July
31, | |
| |
2015 | | |
2014 | |
Note
payable to Alfonso Torres, payable upon maturity, bearing interest of 6.00% per annum, maturing July 31, 2012, unsecured.
(See details below) | |
$ | - | | |
$ | 560 | |
Note
payable to Vantage Bank payable in monthly installments, bearing interest at 8.00% per annum, maturing December 29, 2011,
collateralized by Digerati’s assets. (See details below) | |
| - | | |
| 13 | |
Note
payable to ATV Texas Ventures IV payable in monthly installments, bearing interest at 12.00% per annum, maturing October 10,
2012, collateralized by Digerati’s assets. (See details below) | |
| - | | |
| 122 | |
Note
payable to ATVF II payable in monthly installments, bearing interest at 12% for the first year and 18% during the second year,
maturing January 10, 2013, collateralized by Digerati’s assets. (See details below) | |
| - | | |
| 154 | |
Note
payable to ATVF II payable in monthly installments, bearing interest at 16% for the first year and 18% during the second year,
maturing May 10, 2013, collateralized by Digerati’s assets. (See details below) | |
| - | | |
| 186 | |
Note
payable to Thermo Credit, LLC., interest payment for the first twenty-three months with a balloon payment on the twenty-fourth
month, maturing August 2, 2012, collateralized by Digerati’s accounts receivable. Bearing an annual interest
rate equivalent to the lesser of the maximum rate and the greater of the prime rate plus 8.25% or 11.5%, a commitment fee
of 2% and weekly monitoring fee of .05%. Digerati is required to maintain the following financial covenants: 1) A consolidated
debt service coverage ratio, for the 12-month period, of not less than 1.0 as of the last day of each quarter and 2) A consolidated
operating income, for the 12-month period, of not less than zero as of the last day of each fiscal year. (See details below) | |
| - | | |
| 258 | |
Note
payable to Arthur L. Smith, bearing interest of 3.00% per annum, maturity October 31, 2015, unsecured. (See details below) | |
| 45 | | |
| 45 | |
Convertible
Debentures (See details below) | |
| - | | |
| 50 | |
Total
outstanding long-term debt | |
$ | 45 | | |
| 1,388 | |
Current
portion of long-term debt | |
| (45 | ) | |
| (1,388 | ) |
Long-term
debt, net of current portion | |
$ | - | | |
$ | - | |
On October 2, 2014, under
the Reorganization Plan, the appointed trustee of the Grantor Trust paid the principal balance outstanding on the Alfonso Torres
promissory note.
On October 2, 2014, under
the Reorganization Plan, the appointed trustee paid the principal balance outstanding on the Vantage Bank promissory note.
On October 2, 2014, under
the Reorganization Plan, the appointed trustee of the Grantor Trust paid the principal balance outstanding on the promissory notes
with ATV Texas Ventures IV & ATVF II.
On October 2, 2014, under
the Reorganization Plan, the appointed trustee of the Grantor Trust paid the principal balance outstanding on the promissory note
with Thermo Credit, LLC.
In November 2013, Shift8 Networks, Inc., an operating
subsidiary of Digerati, converted accounts payable into a note payable with Mr. Arthur L. Smith, in the amount of $46,755. The
note has an implied annual interest rate of 0% and a maturity date of February 28, 2014. Subsequently, Mr. Smith agreed to extend
the maturity date of the promissory note to November 30, 2014 and later agreed to extend the maturity date to April 30, 2015.
On January 31, 2015, Shift8 Networks and Mr. Smith agreed to renew and extend the maturity date on the promissory note to October
31, 2015. The renewed note has an implied annual interest rate of 3%. Balance as of January 31, 2015 was approximately $45,000.
On April 3, 2012, May 2, 2012, May 15, 2012 and June
21, 2012 Digerati entered into four Convertible Debentures totaling $75,000, the balance outstanding at January 31, 2015 and July
31, 2014 was $0 and $50,000, net of discount, respectively. On April 4, 2014, under the Reorganization
Plan, the warrants issued under the convertible debentures were cancelled. On October 2, 2014, under the Reorganization Plan,
the appointed trustee of the Grantor Trust paid the principal balance outstanding to the debenture holders
On October 31, 2014, November 7, 2014, November 14,
2014, and November 24, 2014 the Company executed four promissory notes payable to Flagship Oil and Gas Corp., for $10,000 each,
accruing 7% interest, due on January 5, 2015, and unsecured. On January 13, 2015, the Company issued 363,636 shares of Common
Stock for payment of the principal and accrued interest on the notes.
NOTE 5 – STOCK-BASED COMPENSATION
In September 2005, Digerati adopted its 2005 stock
compensation plan. This plan, as amended, authorizes the grant of up to 17.5 million warrants, stock options, restricted common
shares, non-restricted common shares and other awards to employees, directors, and certain other persons. The plan is intended
to permit Digerati to retain and attract qualified individuals who will contribute to the overall success of Digerati. Digerati’s
Board of Directors determines the terms of any grants under the plan. Exercise prices of all warrants, stock options and other
awards vary based on the market price of the shares of common stock as of the date of grant. The warrants, stock options, restricted
common stock, non-restricted common stock and other awards vest based on the terms of the individual grant.
As of January 31, 2015, Digerati did not have any
outstanding options. On April 4, 2014 under the Reorganization Plan all outstanding options were cancelled. Unamortized compensation
cost totaled $0 at January 31, 2015 and January 31, 2014.
During the six months ended January 31, 2015, the
Company issued 492,356 common shares to various employees as part of the Company’s profit sharing plan contribution. The
Company recognized stock-based compensation expense of $118,165 equivalent to the value of the shares calculated based on the
share’s closing price at the grant dates.
NOTE 6 – WARRANTS
A summary of the warrants as of January 31,
2015 and July 31, 2014 and the changes during periods are presented below:
| |
| | |
| | |
Weighted-average | |
| |
| | |
Weighted-average | | |
remaining contractual | |
| |
Warrants | | |
exercise price | | |
term (years) | |
Outstanding at July 31, 2014 | |
| - | | |
$ | - | | |
| - | |
Granted | |
| 300,000 | | |
| 0.136 | | |
| 5.0 | |
Exercised | |
| - | | |
| - | | |
| - | |
Cancelled | |
| - | | |
| - | | |
| - | |
Outstanding at January
31, 2015 | |
| 300,000 | | |
$ | 0.136 | | |
| 5.0 | |
Exercisable at January
31, 2015 | |
| 300,000 | | |
$ | 0.136 | | |
| 5.0 | |
During the six months ended January 31, 2015, the
Company executed a stock purchase agreement with Flagship Oil and Gas Corp. for the sale of 2,279,412 shares of Digerati Common
Stock, and warrants for the purchase of an additional 300,000 shares of Common Stock at $0.14 per share for five years.
In consideration for the shares and the warrants, the Company received a promissory note
in the original principal amount of $310,000 plus interest at the rate of 7.0% per annum, payable in installments of $40,000 plus
accrued interest on January 31, 2015; $60,000 plus accrued interest on February 13, 2015; and $210,000 plus accrued interest on
March 6, 2015. The Black-Scholes pricing model was used to estimate the relative fair value of the 300,000 warrants
issued during the period, using the assumptions of a risk free interest rate of 1.37%, dividend yield of 0%, volatility of 312%,
and an expected life of 5 years. The warrants have a relative fair value of approximately $34,627 and included in additional paid-in
capital. As of January 31, 2015 there is a subscription receivable amount of $270,000 for the remaining balance of the promissory
note receivable.
NOTE 7 – SIGNIFICANT CUSTOMERS
During the six months ended January 31, 2015, the Company derived a significant
amount of revenue from five customers, comprising 22, 19%, 15%, 12%, and 11% of the total revenue for the period, respectively, compared
to two customers, comprising 29% and 9% of the total revenue for the six months ended January 31, 2014.
During the six months ended January 31, 2015, the Company derived a significant
amount of accounts receivable from three customers, comprising 78%, 7% and 7% of the total accounts receivable for the period, compared
to one customer, comprising 93% of the total accounts receivable for the six months ended January 31, 2014.
NOTE 8 – RELATED PARTY
TRANSACTIONS
In November 2013, Shift8 Networks,
Inc., an operating subsidiary of Digerati, converted accounts payable into a note payable with Mr. Arthur L. Smith, in the amount
of $46,755. The note has an implied annual interest rate of 0% and a maturity date of February 28, 2014. Subsequently, Mr. Smith
agreed to extend the maturity date of the promissory note to November 30, 2014 and later agreed to extend the maturity date to
April 30, 2015. On January 31, 2015, Shift8 Networks and Mr. Smith agreed to renew and extend the maturity date on the $46,755
promissory note to October 31, 2015. The renewed note has an implied annual interest rate of 3%. Balance as of January 31, 2015
was approximately $45,000.
On October 31, 2014, November 7,
2014, November 14, 2014, and November 24, 2014 the Company executed four promissory notes payable to Flagship Oil and Gas Corp.,
for $10,000 each, accruing 7% interest, due on January 5, 2015, and unsecured. On January 13, 2015, the Company issued 363,636
shares of Common Stock for payment of the principal and accrued interest on the notes.
During the six months ended January
31, 2015, the Company executed a stock purchase agreement with Flagship Oil and Gas Corp.
for the sale of 2,279,412 shares of Digerati Common Stock, and warrants for the purchase of an additional 300,000 shares of Common
Stock at $0.14 per share for five years. In consideration for the shares and the
warrants, the Company received a promissory note in the original principal amount of $310,000 plus interest at the rate of 7.0%
per annum, payable in installments of $40,000 plus accrued interest on January 31, 2015; $60,000 plus accrued interest on February
13, 2015; and $210,000 plus accrued interest on March 6, 2015. The Black-Scholes pricing model was used to estimate the
relative fair value of the 300,000 warrants issued during the period, using the assumptions of a risk free interest rate of 1.37%,
dividend yield of 0%, volatility of 312%, and an expected life of 5 years. The warrants have a relative fair value of approximately
$34,627 and included in additional paid-in capital. As of January 31, 2015 there is a subscription receivable amount of $270,000
for the remaining balance of the promissory note receivable.
The Company incurred related party
accounts payable of $7,000 as of January 31, 2015.
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, 2014 filed with the Securities and Exchange Commission on July
15, 2015.
The following is a discussion of the unaudited
interim consolidated financial condition and results of operations of Digerati for the three and six months ended January 31,
2015 and 2014. 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, 2014 filed with the Securities and Exchange Commission on July 15, 2015. For
purposes of the following discussion, fiscal 2015 or 2015 refers to the year ended July 31, 2015 and fiscal 2014 or 2014 refers
to the year ended July 31, 2014.
History
Digerati Technologies, Inc., a Nevada corporation
(including our subsidiaries, “we”, “us”, or “Digerati”), was formed in 2004 as the successor
to a business originally commenced by Latcomm International, Inc., a Canadian company formed in 1994. We began providing communication
services in 1995 along the U.S.-Mexico corridor to capitalize on the opportunities created by the deregulation of the telecommunication
industries within Latin America. Our principal business has been providing transportation of voice traffic for other telecommunication
service providers, wireless carriers and regional Internet telephony providers using Voice over Internet Protocol (“VoIP”)
technologies. Our wholly owned subsidiary, Shift8 Technologies, Inc. (“Shift8”), offers a portfolio of Internet-based
telephony products and services through our cloud telephony application platform and session-based communication network that
is interconnected with numerous U.S. and foreign service providers.
Most recently,
Digerati owned a waste disposal facility focused on disposing of solid and liquid wastes from drilling sites and an oilfield services
business providing skid houses, telecommunication services, booster booths, portable restrooms, generators, potable water, and
mess halls to many of the major drilling contractors and oil companies in the Bakken region of Montana/North Dakota. Both
businesses were sold in July 2014.
Sources of Revenue
and Direct Cost
Sources of revenue:
Global
VoIP Services: We currently provide VoIP communication services to U.S. and foreign telecommunications companies
that lack transmission facilities, require additional capacity or do not have the regulatory licenses to terminate traffic in
Mexico, Asia, the Middle East and Latin America. Typically, these telecommunications companies offer
their services to the public for domestic and international long distance services
Cloud-based
hosted Services: We provide enhanced VoIP services to resellers and enterprise customers. The service include fully
hosted IP/PBX services, IP trunking, call center applications, prepaid services, interactive voice response auto attendant, call
recording, simultaneous calling, voicemail to email conversion, and multiple customized IP/PBX features in a hosted environment
for specialized applications.
Direct Costs:
Global VoIP Services: We
incur transmission and termination charges from our suppliers and the providers of the infrastructure and network. The cost is
based on rate per minute, volume of minutes transported and terminated through the network. Additionally, we incur fixed Internet
bandwidth charges and per minute billing charges. In some cases we incur installation charges from certain carriers. These installation
costs are passed on to our customers for the connection to our VoIP network.
Cloud-based hosted Services:
We incur bandwidth and co-location charges in connection with enhanced VoIP Services. The bandwidth charges are incurred as part
of the connection between our customers to allow them access to our services.
Results of Operations
Three Months ended January 31, 2015 Compared to Three Months ended
January 31, 2014
Global VoIP Services.
Global VoIP services revenue decreased by $19,000, or 51%, from the quarter ended January 31, 2014 to the quarter ended January
31, 2015. The decrease in revenue is attributed primarily to slowly dwindling Global VoIP services due in part to the constant
price pressure in the market.
Cloud-based
hosted Services. Cloud-based hosted services revenue decreased by $3,000, or 5%, from the quarter ended January 31, 2014 to
the quarter ended January 31, 2015. The decrease in revenue between periods is primarily attributed to the decrease in one key
customer that generated significant monthly recurring hosted services revenue. Hosted services include fully hosted IP/PBX services,
IP trunking, call center applications, prepaid services, interactive voice response auto attendant, call recording, simultaneous
calling, voicemail to email conversion, SIP trunking and multiple other IP/PBX features in a hosted environment.
Cost of Services (exclusive
of depreciation and amortization). The consolidated cost of services decreased by $51,000, or 55%, from the quarter ended
January 31, 2014 to the quarter ended January 31, 2015. The decrease in cost of services is a direct correlation to the decrease
in total revenue.
Selling,
General and Administrative (SG&A) Expenses (exclusive of legal and professional fees). SG&A expenses increased by
$90,000, or 63%, from the quarter ended January 31, 2014 to the quarter ended January 31, 2015. The increase is attributed to
the administrative expenses incurred to manage the bankruptcy for the period.
Legal and professional fees.
Legal and professional fees decreased by $718,000, or 93%, from the quarter ended January 31, 2014 to the quarter ended January
31, 2015. The decrease is attributable to the reduction in legal fees, during the period ending January 31, 2015; the Company
incurred a reduced amount in legal fees associated with the voluntary petition pursuant to Chapter 11 of the U.S. Bankruptcy Code.
The Join Chapter 11 Plan of Reorganization became effective as of December 31, 2014, thus reducing legal fees during the period.
Bad debt. The Company recognized
bad debt of $4,000 for the three months ended January 31, 2015 for accounts that were deemed uncollectable.
Depreciation and amortization.
Depreciation and amortization remained comparable between periods.
Operating loss. The Company
reported an operating loss of $264,000 for the three months ended January 31, 2015 compared to an operating loss of $918,000 for
the three months ended January 31, 2014. The decrease in operating loss between periods is primarily attributed to the decrease
in legal and professional fees of $718,000 and an increase in gross margin of approximately $29,000.
Other income (expense).
Other income (expense) decreased by $182,000, or 105%, from the quarter ended January 31, 2014 to the quarter ended January 31,
2015. The primary reason for the decrease in other income (expense) is attributed to the recognition of $246,000 in a gain from
debt extinguishment associated to certain debt forgiven as part of the Joint Chapter 11 Plan of Reorganization during the three
months ended January 31, 2014, the Company recognized $7,000 loss from debt extinguishment during the three months ended January
31, 2015.
Net loss from continuing operations,
before tax. Net loss from continuing operations, before tax improved by $472,000 or 63%, from the three months ended January
31, 2014 to the three months ended January 31, 2015. The improvement in net loss from continuing operations, before tax is primarily
attributed to the decrease in legal and professional fees of $718,000 and an increase in gross margin of approximately $29,000.
Income tax benefit (expense)
from discontinued operations. Income tax benefit (expense) from discontinued operations improved by $376,000 or 100%, from
the quarter ended January 31, 2014 to the quarter ended January 31, 2015.
Net income (loss) from discontinued
operations, net of taxes. Net income (loss) from discontinued operations, net of taxes improved by $731,000 or 100%, from
the quarter ended January 31, 2014 to the quarter ended January 31, 2015.
Net loss attributed to Digerati
Technologies, Inc. Net loss attributed to Digerati Technologies, Inc. improved by $1,579,000 or 85%, from the quarter ended
January 31, 2014 to the quarter ended January 31, 2015. The improvement in net loss attributed to Digerati Technologies; Inc.
is as a result of the decrease in net loss from discontinued operations between periods. During FY 2014 the Company sold its interest
in discontinued operations and as a result there was no income (loss) from discontinued operations during the period.
Six Months ended January 31, 2015 Compared to the Six Months ended
January 31, 2014
Global VoIP Services.
Global VoIP services revenue decreased by $97,000, or 75%, from the six months ended January 31, 2014 to the six months ended
January 31, 2015. The decrease in revenue is attributed primarily to slowly dwindling Global VoIP services due in part to the
constant price pressure in the market.
Cloud-based
hosted Services. Cloud-based hosted services revenue decreased by $2,000, or 2%, from the six months ended January 31, 2014
to the six months ended January 31, 2015. The decrease in revenue between periods is primarily attributed to the decrease in one
key customer that generated significant monthly recurring hosted services revenue. Hosted services include fully hosted IP/PBX
services, IP trunking, call center applications, prepaid services, interactive voice response auto attendant, call recording,
simultaneous calling, voicemail to email conversion, SIP trunking and multiple other IP/PBX features in a hosted environment.
Cost of Services (exclusive
of depreciation and amortization). The consolidated cost of services decreased by $131,000, or 61%, from the six months ended
January 31, 2014 to the six months ended January 31, 2015. The decrease in cost of services is a direct correlation to the decrease
in total revenue.
Selling,
General and Administrative (SG&A) Expenses (exclusive of legal and professional fees). SG&A expenses increased by
$60,000, or 16%, from the six months ended January 31, 2014 to the six months ended January 31, 2015. The increase is attributed
to the administrative expense associated to the Joint Chapter 11 Plan of Reorganization.
Legal and professional fees.
Legal and professional fees decreased by $1,160,000, or 89%, from the six months ended January 31, 2014 to the six months ended
January 31, 2015. The decrease is attributable to the reduction in legal fees, during the period ended January 31, 2015; the Company
incurred minimal legal fees associated with the voluntary petition pursuant to Chapter 11 of the U.S. Bankruptcy Code. The Join
Chapter 11 Plan of Reorganization became effective as of December 31, 2014, thus reducing legal fees during the period.
Bad debt. The Company recognized
bad debt of $4,000 for the six months ended January 31, 2015 for accounts that were deemed uncollectable.
Depreciation and amortization.
Depreciation and amortization decreased by $1,000, or 11%, from the six months ended January 31, 2014 to the six months ended
January 31, 2015. The decrease is due to most of our fixed assets reaching their fully depreciated value.
Operating loss. The Company
reported an operating loss of $524,000 for the six months ended January 31, 2015 compared to an operating loss of $1,653,000 for
the six months ended January 31, 2014. The improvement in operating loss between periods is primarily attributed to the decrease
in legal and professional fees of $1,160,000 and increase in gross margin between periods of $32,000.
Other income (expense).
Other income (loss) decreased by $157,000, or 144%, from the six months ended January 31, 2014 to the six months ended January
31, 2015. The primary reason for the decrease in other income (expense) is attributed to the recognition of $246,000 in a gain
from debt extinguishment associated to certain debt forgiven as part of the Joint Chapter 11 Plan of Reorganization during the
six months ended January 31, 2014, the Company recognized $7,000 loss from debt extinguishment during the six months ended January
31, 2015.
Net loss from continuing operations,
before tax. Net loss from continuing operations, before tax improved by $972,000 or 63%, from the six months ended January
31, 2014 to the six months ended January 31, 2015. The decrease in net loss from continuing operations, before tax is primarily
attributed to the decrease in legal and professional fees of $1,160,000 and increase in gross margin between periods of $32,000.
Income tax benefit from discontinued
operations. Income tax benefit from discontinued operations decreased by $443,000 or 100%, from the six months ended January
31, 2014 to the six months ended January 31, 2015.
Income (loss) from discontinued
operations, net of taxes. Income from discontinued operations, net of taxes decreased by $859,000 or 100%, from the six months
ended January 31, 2014 to the six months ended January 31, 2015.
Net income (loss) attributed
to Digerati Technologies, Inc. Net income (loss) attributed to Digerati Technologies, Inc. increased by $330,000 or 136%,
from the six months ended January 31, 2014 to the six months ended January 31, 2015. The increase in net income (loss) attributed
to Digerati Technologies; Inc. is as a result of the decrease in net income from discontinued operations between periods. During
FY 2014 the Company sold its interest in discontinued operations and as a result there was no income (loss) from discontinued
operations during the period.
Liquidity and Capital Resources
Cash Position: We had a consolidated cash balance
of $96,000 as of January 31, 2015. Net cash consumed by operating activities during the six months ended January 31, 2015 was
approximately $328,000. Cash used in investing activities during the six months ended January 31, 2015 was approximately $3,000.
Cash provided by financing activities during the six months ended January 31, 2015 was approximately $80,000. Overall, our net
operating, investing and financing activities during the six months ended January 31, 2015 consumed approximately $251,000 of
cash.
We are currently utilizing our available cash to fund
any deficiencies in our cash flows from operations. Our current cash expenses are expected to be approximately $75,000 per month,
including wages, rent, utilities and corporate professional fees. As described elsewhere herein, we
are not generating sufficient cash from operations to pay for our ongoing operating expenses, or to pay our current liabilities.
As of January 31, 2015 our total liabilities were approximately $1,474,000. As mentioned in Note 3 to the Financial Statements,
upon the sale of the shares of Dishon and Hurley and in accordance with the Reorganization Plan, the appointed trustee paid approximately
$1,838,000 of unsecured claims and intents to pay approximately $1,700,000 in professional fees. In addition, the trustee paid
approximately $41,500,000 in secured claims. There were no proceeds from the sale of Dishon and Hurley shares in excess of the
unsecured claims, professional fees and secured claims.
We estimate that we need
approximately $500,000 of additional working capital to fund our ongoing operations. Additionally, we have an accumulated
deficit in Stockholders’ Deficit of approximately $76,520,000, which raises substantial doubt about our ability to continue
as a going concern.
We will continue to work with various funding sources
to secure additional debt and equity financings. However, we cannot offer any assurance that we will be successful in executing
the aforementioned plans to continue as a going concern.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Smaller reporting companies are not required to provide
the information required by this item.
Item 4. Controls and Procedures.
Management’s Report on Internal Controls
Over Financial Reporting
Our management is responsible
for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting
is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed
by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the
Company’s Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America and includes those policies and procedures that:
|
● |
Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the assets of the company; |
|
● |
Provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and |
|
|
|
|
● |
Provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial statements. |
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect
to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk
that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However,
these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
As of January 31, 2015, management
assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control
over financial reporting established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, management
concluded that, during the period covered by this report; such internal controls and procedures were not effective based on the
COSO criteria. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting
that adversely affected our ability to prepare accurate and timely financial statements, which are considered to be material weaknesses.
As a public company with
listed equity securities, we need to comply with laws, regulations and requirements, certain corporate governance provisions of
the Sarbanes-Oxley Act or the Dodd-Frank Act, and related regulations of the SEC, which we would not be required to comply with
as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of time of
our board of directors and management and will significantly increase our costs and expenses.
Changes in internal controls over financial
reporting
Except as noted above, there
was no change in our internal controls over financial reporting that occurred during the period covered by this report, which
has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 1A. Risk Factors.
None
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
During the period covered by
this report, the Company issued 2,643,048 common shares for a payment of $350,000 for various promissory notes. The transaction
was privately negotiated between the Company and the holders of the Promissory Notes, with whom the Company has substantial prior
relationship. The shares were issued without registration pursuant to Section 4(2) of the Securities Act of 1933.
Item 5. Other Information.
Family Relationships
There are no family relationships between any of the Company’s
directors or officers.
Related Party Transactions
In November 2013, Shift8 Networks,
Inc., an operating subsidiary of Digerati, converted accounts payable into a note payable with Mr. Arthur L. Smith, in the amount
of $46,755. The note has an implied annual interest rate of 0% and a maturity date of February 28, 2014. Subsequently, Mr. Smith
agreed to extend the maturity date of the promissory note to November 30, 2014 and later agreed to extend the maturity date to
April 30, 2015. On January 31, 2015, Shift8 Networks and Mr. Smith agreed to renew and extend the maturity date on the $46,755
promissory note to October 31, 2015. The renewed note has an implied annual interest rate of 3%. On February 2, 2015, Shift8 Networks
made a principal payment of $2,000. Balance as of January 31, 2015 was approximately $45,000.
On October 30, 2014, November 7, 2014, November 14,
2014 and November 24, 2014 Digerati entered into four Promissory Notes for a total of $40,000 with Flagship Oil and Gas Corp.
Craig K. Clement, a Digerati director, is also the CEO and director of Flagship. The notes have an implied annual interest rate
of 7% and with maturity date for all notes of January 5, 2015. Digerati also entered into a preemptive rights agreement with Flagship,
under which the holder has the preemptive right, but not the obligation to purchase any equity securities that the Company may
propose to issue or sell. On January 13, 2015, the Company issued 363,636
shares of Digerati Common Stock for payment of the principal of and accrued interest on the $40,000 Flagship Notes.
On
January 13, 2015 the Company executed a stock purchase agreement with Flagship Oil and Gas Corp. for the sale of 2,279,412 shares
of Digerati Common Stock, and a warrant for the purchase of an additional 300,000 shares of Common Stock at $0.136 per share for
five years. In consideration for the shares and the warrant, the Company received a promissory note in the original principal
amount of $310,000 plus interest at the rate of 7.0% per annum, payable in installments of $40,000 plus accrued interest on January
31, 2015; $60,000 plus accrued interest on February 13, 2015; and $210,000 plus accrued interest on March 6, 2015. As of
January 31, 2015 there is a subscription receivable amount of $270,000 for the remaining balance of the promissory note receivable.
ITEM
6. EXHIBITS
Exhibit
Number |
|
Exhibit
Title |
|
|
|
3.1 |
|
Second Amended and
Restated Bylaws, effective as of January 13, 2015 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed
on January 21, 2015 (File No. 001-15687)). |
|
|
|
10.1 |
|
Promissory note payable
with Arthur L. Smith dated November 15, 2013 in the principal amount of $46,755 (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q filed on January 20, 2015 (File No. 001-15687)). |
|
|
|
10.2 |
|
Promissory Note dated
October 31, 2014 in the original principal amount of $10,000.00 plus interest at the rate of 7.0% per annum due January 5,
2015 (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 21, 2015 (File No. 001-15687)). |
|
|
|
10.3 |
|
Promissory Note dated
November 7, 2014 in the original principal amount of $10,000.00 plus interest at the rate of 7.0% per annum due January 5,
2015 (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on January 21, 2015 (File No. 001-15687)). |
|
|
|
10.4 |
|
Promissory Note dated
November 14, 2014 in the original principal amount of $10,000.00 plus interest at the rate of 7.0% per annum due January 5,
2015 (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K filed on January 21, 2015 (File No. 001-15687)). |
|
|
|
10.5 |
|
Promissory Note dated
November 24, 2014 in the original principal amount of $10,000.00 plus interest at the rate of 7.0% per annum due January 5,
2015 (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K filed on January 21, 2015 (File No. 001-15687)). |
|
|
|
10.6 |
|
Promissory Note dated
January 19, 2015 in the original principal amount of $310,000.00 plus interest at the rate of 7.0% per annum, payable in installments
(filed as Exhibit 10.5 to the Company's Current Report on Form 8-K filed on January 21, 2015 (File No. 001-15687)). |
|
|
|
10.7 |
|
Stock Purchase Agreement
dated January 13, 2015, by and among Digerati Technologies, Inc. and Flagship Oil and Gas Corp. (filed as Exhibit 10.6 to
the Company's Current Report on Form 8-K filed on January 21, 2015 (File No. 001-15687)). |
|
|
|
10.8 |
|
Form of stock award
agreement under the Company's 2005 Stock Compensation Plan for grants to qualifying employees' 401K Retirement Accounts (filed
as Exhibit 10.7 to the Company's Current Report on Form 8-K filed on January 21, 2015 (File No. 001-15687)). |
|
|
|
10.9 |
|
Renewal and Extension
Promissory Note payable with Arthur L. Smith dated January 31, 2015 in the principal amount of $46,755 plus interest at the
rate of 3.0% per annum due October 31, 2015. (filed as Exhibit 10.9 to the Company's Current Report on Form 10-Q filed on
February 20, 2015 (File No. 001-15687)). |
|
|
|
31.1 |
|
Certification of Principal
Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
|
Certification of Principal
Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 |
|
Certification of Principal
Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
|
Certification of Principal
Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
In accordance with SEC Release 33-8238, Exhibit 32.1
and 32.2 are being furnished and not filed.
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. |
|
(Registrant) |
|
|
Date:
August 31, 2015 |
By: |
/s/
Arthur L. Smith |
|
Name: |
Arthur
L. Smith |
|
Title: |
President and
Chief Executive Officer |
|
|
(Duly Authorized Officer
and
Principal Executive Officer) |
|
|
Date: August 31, 2015 |
By: |
/s/
Antonio Estrada Jr. |
|
Name: |
Antonio
Estrada Jr. |
|
Title: |
Chief Financial Officer
|
|
|
(Duly Authorized Officer
and
Principal Financial Officer) |
18
EXHIBIT 31.1
CERTIFICATION
I, Arthur L. Smith, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Digerati Technologies, Inc., a Nevada Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
August 31, 2015 |
/s/ Arthur L. Smith |
|
Arthur L. Smith |
|
President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, Antonio Estrada, Jr., certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Digerati Technologies, Inc., a Nevada Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
August 31, 2015 |
/s/ Antonio Estrada, Jr. |
|
Antonio Estrada, Jr. |
|
Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF PRESIDENT
AND CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. sECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report (the "Report")
of Digerati Technologies, Inc. (the "Company") on Form 10-Q for the period ending January 31, 2015, as filed with the
Securities and Exchange Commission on the date hereof, I, Arthur L. Smith, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,
| 1) | the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and |
| 2) | the information in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company. |
By |
/s/ Arthur L. Smith |
|
|
Arthur L. Smith |
|
|
President and Chief Executive Officer |
|
|
August 31, 2015 |
|
EXHIBIT 32.2
CERTIFICATION OF THE
chief FINANCIAL OFFICER PURSUANT TO
18 U.S.C. sECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report (the "Report")
of Digerati Technologies, Inc. (the "Company") on Form 10-Q for the period ending January 31, 2015, as filed with the
Securities and Exchange Commission on the date hereof, I, Antonio Estrada Jr., the Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
| 1) | the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and |
| 2) | the information in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company. |
By |
/s/ Antonio Estrada Jr. |
|
|
Antonio Estrada Jr. |
|
|
Chief Financial Officer |
|
|
August 31, 2015 |
|
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