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, 2020, filed with the Securities and Exchange Commission on October 29, 2020.

The following is a discussion of the unaudited interim consolidated financial condition and results of operations of Digerati for the three and nine months ended April 30, 2021, and 2020. 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, 2020, filed with the Securities and Exchange Commission on October 29, 2020. For purposes of the following discussion, fiscal 2021 or 2021 refers to the year that will end on July 31, 2021, and fiscal 2020 or 2020 refers to the year ended July 31, 2020.





Overview

Digerati Technologies, Inc., a Nevada corporation (including our subsidiaries, "we," "us," "Company" or "Digerati"), through its operating subsidiaries in Texas and Florida, Shift8 Networks, Inc., dba, T3 Communications ("T3") and T3 Communications, Inc. ("T3"), provides cloud services specializing in Unified Communications as a Service ("UCaaS") solutions for the business market. Our product line includes a portfolio of Internet-based telephony products and services delivered through our cloud application platform and session-based communication network and network services including Internet broadband, fiber, mobile broadband, and cloud WAN solutions (SD WAN). Our services are designed to provide enterprise-class, carrier-grade services to the small-to-medium-sized business ("SMB") at cost-effective monthly rates. Our UCaaS or cloud communication services include fully hosted IP/PBX, mobile applications, Voice over Internet Protocol ("VoIP") transport, SIP trunking, and customized VoIP services all delivered Only in the Cloud™.

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





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The adoption of cloud communication services is being driven by the convergence of several market trends, including the increasing costs of maintaining installed legacy communications systems, the fragmentation resulting from use of multiple on-premise systems, and the proliferation of personal smartphones used in the workplace. Today, businesses are increasingly looking for an affordable path to modernizing their communications system to improve productivity, business performance and customer experience.

Our cloud solutions offer the SMB reliable, robust, and full-featured services at affordable monthly rates that eliminates high-cost capital expenditures and provides for integration with other cloud-based systems.





Recent Activity



Acquisitions

On November 17, 2020, the Company closed on the acquisitions of Nexogy, Inc. ("Nexogy"), and ActivePBX ("ActivePBX"), leading providers of cloud communication, UCaaS, and broadband solutions tailored for businesses. As a combined business, Nexogy, ActivePBX, and our operating subsidiary, T3 Communications, Inc., will serve over 2,600 business customers and approximately 28,000 users. The business model of the combined entities is supported by strong and predictable recurring revenue with high gross margins under contracts with business customers in various industries including banking, healthcare, financial services, legal, insurance, hotels, real estate, staffing, municipalities, food services, and education. The contribution from the acquisitions is expected to have an immediate and positive impact on the consolidated EBITDA of the Company with additional improvements to be realized during FY2021 from the anticipated cost synergies and consolidation savings.





Sources of revenue:

Cloud Software and Service Revenue: We provide UCaaS or cloud communication services and managed cloud-based solutions to small and medium size enterprise customers and to other resellers. Our Internet-based services include fully hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice and web conferencing, call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized IP/PBX features in a hosted or cloud environment. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, mobile broadband, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster recovery.





Direct Costs:

Cloud Software and Service: We incur bandwidth and colocation charges in connection with our UCaaS or cloud communication services. The bandwidth charges are incurred as part of the connectivity between our customers to allow them access to our various services. We also incur costs from underlying providers for fiber, Internet broadband, and telecommunication circuits in connection with our data and connectivity solutions.





Results of Operations

Three Months ended April 30, 2021, Compared to Three Months ended April 30, 2020.

Cloud Software and Service Revenue. Cloud software and service revenue increased by $2,185,000, or 140% from the three months ended April 30, 2020, to the three months ended April 30, 2021. The increase in revenue is primarily attributed to the increase in total customers between periods due to the acquisitions of Nexogy and ActivePBX. Our total number of customers increased from 731 for the three months ended April 30, 2020, to 2,612 customers for the three months ended April 30, 2021.





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Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $762,000, or 100%, from the three months ended April 30, 2020, to the three months ended April 30, 2021. The increase in cost of services is primarily attributed to the consolidation of various networks as part of the increase in total customers between periods due to the acquisitions of Nexogy and ActivePBX. Our total number of customers increased from 731 for the three months ended April 30, 2020, to 2,612 customers for the three months ended April 30, 2021. However, our consolidated gross margin improved by $1,423,000 from the three months ended April 30, 2020, to the three months ended April 30, 2021.

Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A expenses increased by $1,061,000, or 141%, from the three months ended April 30, 2020, to the three months ended April 30, 2021. The increase in SG&A is attributed to acquisition of Nexogy and ActivePBX, as part of the consolidation, the Company absorbed all of the employees responsible for customer and technical support, sales, account management, and administration.

Stock Compensation expense. Stock compensation expense decreased by $115,000, from the three months ended April 30, 2020, to the three months ended April 30, 2021. The decrease between periods is attributed to the recognition of stock option expense of $63,000 recognized during the three months ended April 30, 2020, associated with the stock options awarded to various employees during FY2018, FY2019 and FY2020. The Company also recognized $233,633 in stock compensation for stock issued for the funding of our 401K profit sharing plan during the period ended April 30, 2020. During the period ended April 30, 2021, the Company only recognized $57,000 in stock options expense associated with stock options awarded to various employees and $125,000 in stock compensation for consulting services.

Legal and professional fees. Legal and professional fees increased by $106,000, from the three months ended April 30, 2020, to the three months ended April 30, 2021. The increase between periods is attributed to the recognition during FY 2021 of $115,000 in professional fees for the audits related to the acquisitions, investor relations fees, and professional services related to the purchase price allocation.

Bad debt. Bad debt increased by $24,000, from the three months ended April 30, 2020, to the three months ended April 30, 2021. The increase is attributed to the recognition of $5,000 in bad debt during the period ended April 30. 2021. During the period ended April 30, 2020, the Company recognized $19,000 in bad debt recovery, for accounts that were previously considered uncollectible.

Depreciation and amortization. Depreciation and amortization increased by $463,000, from the three months ended April 30, 2020, to the three months ended April 30, 2021. The increase is primarily attributed to the acquisitions and related amortization of $431,000 for intangible assets, in addition to the depreciation of the assets acquired from Nexogy and ActivePBX.

Operating loss. The Company reported an operating loss of $588,000 for the three months ended April 30, 2021, compared to an operating loss of $472,000 for the three months ended April 30, 2020. The increase in operating loss between periods is primarily due to the increase of $1,061,000 in SG&A, the increase in legal fees of $106,000, the increase in depreciation of $463,000, and the increase in bad debt of $24,000. These increases were slightly offset by the increase in margin of $1,423,000 and the decrease in stock compensation expense of $115,000.

Gain (loss) on derivative instruments. Gain (loss) on derivative instruments increased by $10,629,000 from the three months ended April 30, 2020, to the three months ended April 30, 2021. We are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re- measurement of all derivative instruments we recognized an increase between periods.

Gain (loss) on settlement of debt. Gain (loss) on settlement of debt improved by $16,000 from the three months ended April 30, 2020, to the three months ended April 30, 2021. During the period ended April 30, 2021, the Company recognized a gain on settlement of deb for that forgiveness by the U.S Small Business Administration of two promissory notes with a total principal of $148,500 and accrued interest of $1,443.





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Income tax benefit (expense). During the three months ended April 30, 2021, the Company recognized an income tax expense of $63,000. During the three months ended April 30, 2020, the Company recognized an income tax expense of $10,000.

Interest expense. Interest income (expense) increased by $1,066,000 from the three months ended April 30, 2020, to the three months ended April 30, 2021. During the quarter ended April 30, 2021, the Company recognized non-cash interest / accretion expense of $916,000 related to the adjustment to the present value of various convertible notes and debt. Additionally, the Company recognized $360,560 in interest expense for cash interest payments on various promissory notes, accrual of $185,000 for interest expense for various promissory notes, and interest income of $3,089.

Net income (loss) including noncontrolling interest. Net loss including noncontrolling interest for the three months ended April 30, 2021, was $12,956,000, an increase in net loss of $11,848,000 as compared to a net loss for the three months ended April 30, 2020, of $1,108,000. The increase in net loss including noncontrolling interest between periods is primarily due to the increase is of $1,061,000 in SG&A, the increase in legal fees of $106,000, the increase in depreciation of $463,000, the increase in loss on derivative instruments of $10,629,000 and the increase of $1,066,000 in interest expense. These increases were slightly offset by the improvements in margin of $1,423,000, the decrease in stock compensation expense of $115,000 and the improvement of $16,000 in gain of settlement of debt.

Net loss attributable to the noncontrolling interest. During the three months ended April 30, 2021, and 2020, the consolidated entity recognized net loss in noncontrolling interest of $158,000 and $1,000, respectively. The noncontrolling interest is presented as a separate line item in the Company's stockholders equity section of the balance sheet.

Net income (loss) attributable to Digerati's shareholders. Net loss for the quarter ended April 30, 2021, was $12,798,000 compared to a net loss for the quarter ended April 30, 2020, of $1,107,000.

Deemed dividend on Series A Convertible Preferred Stock. Dividend declared on convertible preferred stock for the quarter ended April 30, 2021, was $5,000 compared to a deemed dividend on convertible preferred stock for the quarter ended April 30, 2020, of $0.

Net income (loss) attributable to Digerati's common shareholders. Net loss for the three months ended April 30, 2021, was $12,803,000 compared to a net loss for the three months ended April 30, 2020, of $1,107,000.

Nine Months ended April 30, 2021, Compared to Nine Months ended April 30, 2020.

Cloud Software and Service Revenue. Cloud software and service revenue increased by $3,917,000, or 83% from the nine months ended April 30, 2020, to the nine months ended April 30, 2021. The increase in revenue is primarily attributed to the increase in total customers between periods due to the acquisitions of Nexogy and ActivePBX. Our total number of customers increased from 731 for the nine months ended April 30, 2020, to 2,612 customers for the nine months ended April 30, 2021.

Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $1,365,000, or 58%, from the nine months ended April 30, 2020, to the nine months ended April 30, 2021. The increase in cost of services is primarily attributed to the consolidation of various networks and key vendors as part of the increase in total customers between periods due to the acquisitions of Nexogy and ActivePBX. Our total number of customers increased from 731 for the nine months ended April 30, 2020, to 2,612 customers for the nine months ended April 30, 2021. However, our consolidated gross margin improved by $2,552,000 from the nine months ended April 30, 2020, to the nine months ended April 30, 2021.

Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A expenses increased by $2,171,000, or 97%, from the nine months ended April 30, 2020, to the nine months ended April 30, 2021. The increase in SG&A is attributed to acquisition of Nexogy and ActivePBX, as part of the consolidation, the Company absorbed all of the employees responsible for customer and technical support, sales, account management, and administration.





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Stock Compensation expense. Stock compensation expense decreased by $559,000, from the nine months ended April 30, 2020, to the nine months ended April 30, 2021. The decrease between periods is attributed to the recognition of stock option expense of $315,000 recognized during the nine months ended April 30, 2020, associated with the stock options awarded to various employees during FY2018, FY2019 and FY2020. The Company also recognized $568,000 in stock compensation for stock issued in lieu of cash payments to the Management team during the period ended April 30, 2020. During the period ended April 30, 2021, the Company only recognized $110,000 in stock options expense associated with stock options awarded to various employees, recognized $247,000 in stock compensation expense associated with the funding of the 401(K)-profit sharing plan, recognized $18,000 in stock compensation for stock issued in lieu of cash payments to a former employee, and recognized $183,000 in stock issued to consultants for professional services.

Legal and professional fees. Legal and professional fees increased by $309,000, from the nine months ended April 30, 2020, to the nine months ended April 30, 2021. The increase between periods is attributed to the recognition during the period ending April 30, 2021, of $333,000 in legal and professional fees related to the acquisitions for audits, purchase price allocation and investor relations.

Bad debt. Bad debt increased between the periods by $28,000. The increase is attributed to the recognition of $9,000 in bad debt during the nine months ended April 30. 2021. During the nine months ended April 30, 2020, the Company recognized $19,000 in bad debt recovery, for accounts that were previously considered uncollectible.

Depreciation and amortization. Depreciation and amortization increased by $739,000, from the nine months ended April 30, 2020, to the nine months ended April 30, 2021. The increase is primarily attributed to the acquisitions and related amortization of $678,000 for intangible assets, and the additional depreciation related to the depreciation for the assets acquired from Nexogy and ActivePBX.

Operating loss. The Company reported an operating loss of $1,978,000 for the nine months ended April 30, 2021, compared to an operating loss of $1,842,000 for the nine months ended April 30, 2020. The increase in operating loss between periods is primarily due to the increase of $2,171,000 in SG&A, the increase in legal fees of $309,000 and the increase in depreciation of $739,000. These increases were slightly offset by the increase in margin of $2,552,000 and the decrease in stock compensation expense of $559,000.

Gain (loss) on derivative instruments. Gain (loss) on derivative instruments increased by $10,929,000 from the nine months ended April 30, 2020, to the nine months ended April 30, 2021. We are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re-measurement of all derivative instruments we recognized an increase between periods.

Gain (loss) on settlement of debt. Gain (loss) on settlement of debt improved by $213,000 from the nine months ended April 30, 2020, to the nine months ended April 30, 2021. During the nine months ended April 30, 2021, the Company recognized a settlement of $197,000 for an obligation satisfied with our vendors, in addition, the Company recognized a gain on settlement of deb for that forgiveness by the U.S Small Business Administration of two promissory notes with a total principal of $148,500 and accrued interest of $1,443.

Income tax benefit (expense). During the nine months ended April 30, 2021, the Company recognized an income tax expense of $122,000. During the nine months ended April 30, 2020, the Company recognized an income tax benefit of $22,000.

Interest expense. Interest income (expense) increased by $1,566,000 from the nine months ended April 30, 2020, to the nine months ended April 30, 2021. During the period ended April 30, 2021, the Company recognized non-cash interest / accretion expense of $1,775,000 related to the adjustment to the present value of various convertible notes and debt, the amortization of debt discount of $6,000 in a related party note and the amortization to interest expense of $46,000 in debt discount related to the conversions of principal to common shares. Additionally, the Company recognized $753,000 in interest expense for cash interest payments on various promissory notes, accrual of $341,000 for interest expense for various promissory notes, and interest income of $18,300.





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Net income (loss) including noncontrolling interest. Net loss including noncontrolling interest for the nine months ended April 30, 2021, was $15,692,000, an increase in net loss of $12,562,000 as compared to a net loss for the nine months ended April 30, 2020, of $3,130,000. The increase in net loss including noncontrolling interest between periods is primarily due to the increase of $2,171,000 in SG&A, the increase in legal fees of $309,000, the increase in depreciation of $739,000, the increase in loss on derivative instruments of $10,929,000 and the increase of $1,566,000 in interest expense. These increases were slightly offset by the improvements in margin of $2,552,000, the decrease in stock compensation expense of $559,000 and the recognition of $347,000 in gain of settlement of debt during the period ending April 30, 2021.

Net loss attributable to the noncontrolling interest. During the nine months ended April 30, 2021, and 2020, the consolidated entity recognized net loss in noncontrolling interest of $223,000 and $58,000, respectively. The noncontrolling interest is presented as a separate line item in the Company's stockholders equity section of the balance sheet.

Net income (loss) attributable to Digerati's shareholders. Net loss for the nine months ended April 30, 2021, was $15,469,000 compared to a net loss for the period ended April 30, 2020, of $3,072,000.

Deemed dividend on Series A Convertible Preferred Stock. Dividend declared on convertible preferred stock for the period ended April 30, 2021, was $15,000 compared to a deemed dividend on convertible preferred stock for the period ended April 30, 2020, of $0.

Net income (loss) attributable to Digerati's common shareholders. Net loss for the period ended April 30, 2021, was $15,484,000 compared to a net loss for the period ended April 30, 2020, of $3,072,000.

Liquidity and Capital Resources

Cash Position: We had a consolidated cash balance of $2,125,000 as of April 30, 2021. Net cash consumed by operating activities during the nine months ended April 30, 2021 was approximately $403,000, primarily as a result of operating expenses, that included $558,000 in stock compensation and warrant expense, amortization of debt discount of $1,827,000, loss on derivative liability of $10,860,000, depreciation and amortization expense of $1,204,000, increase in accrued expense of $1,397,000, decrease in accounts receivable of $96,000 and decrease in deferred revenue of $105,000. Additionally, we had an increase of $97,000 in accounts payable, decrease in prepaid expenses and other current assets of $141,000, increase in inventory of $26,000 and the recognition of a gain on settlement of debt of $347,000.

Cash used in investing activities during the nine months ended April 30, 2021 was $10,336,000, which included $228,000 for the purchase of equipment and the cash paid of $10,108,000, net of cash received, for the acquisitions of VoIP assets from Nexogy and ActivePBX.

Cash provided by financing activities during the nine months ended April 30, 2021, was $12,179,000. The Company secured $1,078,000 from convertible notes, net of issuance costs and discounts. In addition, the Company secured $13,036,000 from two promissory notes, net of issuance costs. (See Note 6) The Company made principal payments of $1,330,000 on various notes, principal payments of $266,000 on convertible notes, principal payments of $316,000 on related party notes, and $53,000 in principal payments on equipment financing. Overall, our net operating, investing, and financing activities during the nine months ended April 30, 2021, contributed approximately $1,440,000 of our available cash.

Digerati's consolidated financial statements for the nine months ending April 30, 2021, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Since the Company's inception in 1993, Digerati has incurred net losses and accumulated a deficit of approximately $104,166,000 and a working capital deficit of approximately $22,924,000 which raises doubt about Digerati's ability to continue as a going concern.





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We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During fiscal 2021 certain members of our management team have taken a significant portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from or recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams, we have also secured various agent agreements to accelerate revenue growth. In addition, we will continue to focus on selling a greater number of comprehensive services to our existing customer base. Further, in an effort to increase our revenues, we will continue to evaluate the acquisition of various assets with emphasis in VoIP Services and Cloud Communication Services. As a result, during the due diligence process we anticipate incurring significant legal and professional fees.

Management believes that available resources as of April 30, 2021, will not be sufficient to fund the Company's operations, debt service and corporate expenses over the next 12 months. The Company's ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off its obligations, if and when they come due.

Our current cash expenses are expected to be approximately $750,000 per month, including wages, rent, utilities, corporate expenses, and legal professional fees associated with potential acquisitions. As described elsewhere herein, we are not generating sufficient cash from operations to pay for our corporate and ongoing operating expenses, or to pay our current liabilities. As of April 30, 2021, our total liabilities were approximately $32,430,000, which included $17,340,000 in derivative liabilities. We will continue to use our available cash on hand to cover our deficiencies in operating expenses.

We estimate that we need approximately $65,000 per month of additional working capital to fund our corporate expenses during Fiscal 2021.

We have been successful in raising debt capital and equity capital in the past and as described in Notes 6, 7, and 8 to our consolidated financial statements. We have financing efforts in place to continue to raise cash through debt and equity offerings. Although we have successfully completed financings and reduced expenses in the past, we cannot assure you that our plans to address these matters in the future will be successful.

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