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, 2021, filed with the Securities and Exchange
Commission on October 26, 2021.
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, 2022, and 2021. 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, 2021, filed with the Securities and Exchange
Commission on October 26, 2021. For purposes of the following discussion, fiscal
2022 or 2022 refers to the year that will end on July 31, 2022, and fiscal 2021
or 2021 refers to the year ended July 31, 2021.
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 and T3
Communications, Inc. (both referred to herein as "T3"), respectively, and Nexogy
Inc., a Florida corporation, 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™.
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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.
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 events
On December 31, 2021, the Company closed on an Asset Purchase Agreement with
Skynet Telecom LLC. Pursuant to the Purchase Agreement, the Company acquired the
customer base, certain equipment, certain intellectual property, inventory,
contract rights, software and other licenses and miscellaneous assets used in
connection with the operation of Seller's communications business, including but
not limited to subscriber-based Interconnected Voice Over Internet Protocol
communication services ("I-VoIP"), Unified Cloud Communications Services
("UCCS"), and IPPBX based systems of telephony.
On February 4, 2022, the Company acquired the equity interest in San Diego based
Next Level Internet, Inc., a service provider engaged in the business of
providing cloud based Unified Communications as a Service, collaboration,
contact center, managed connectivity and other voice and data services to small,
medium, and large enterprises. The acquisition of Next Level Internet expands
the Company's growing nationwide footprint and adds a strong West Coast presence
with nearly 1,000 SMB clients in California.
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.
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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 January 31, 2022, Compared to Three Months ended January 31,
2021.
Cloud Software and Service Revenue. Cloud software and service revenue increased
by $693,000, or 21% from the three months ended January 31, 2021, to the three
months ended January 31, 2022. The increase in revenue is primarily attributed
to the increase in total customers between periods due to the acquisitions of
Skynet in December 2021 and the acquisitions of Nexogy and ActivePBX during
FY2021. Our total number of customers increased from 2,583 for the three months
ended January 31, 2021, to 2,960 customers for the three months ended January
31, 2022.
Cost of Services (exclusive of depreciation and amortization). The cost of
services increased by $119,000, or 8%, from the three months ended January 31,
2021, to the three months ended January 31, 2022. The increase in cost of
services is primarily attributed to the consolidation of various networks as
part of the increase in total customers between periods due to the acquisition
of Skynet on December 2021 and the acquisitions of Nexogy and ActivePBX during
FY2021. Our total number of customers increased from 2,583 for the three months
ended January 31, 2021, to 2,960 customers for the three months ended January
31, 2022. However, our consolidated gross margin improved by $574,000 from the
three months ended January 31, 2021, to the three months ended January 31, 2022.
Selling, General and Administrative (SG&A) Expenses (exclusive of legal and
professional fees and stock compensation expense). SG&A expenses increased by
$172,000, or 9%, from the three months ended January 31, 2021, to the three
months ended January 31, 2022. The increase in SG&A is attributed to the
acquisition of Skynet in December 2021 and the acquisitions of Nexogy and
ActivePBX during FY2021, as part of the consolidation, the Company absorbed all
of the employees responsible for managing the customer base, technical support,
sales, customer service, and administration.
Stock Compensation expense. Stock compensation expense decreased by $10,000,
from the three months ended January 31, 2021, to the three months ended January
31, 2022. The decrease between periods is attributed to the recognition during
the three months ended January 31, 2021 of stock option expense of $33,000.
During the three months ended January 31, 2022, the Company only recognized
$23,000 in stock compensation for the amortization of stock options issued to
our team over the last few years.
Legal and professional fees. Legal and professional fees increased by $920,000,
from the three months ended January 31, 2021, to the three months ended January
31, 2022. The increase between periods is attributed to the recognition during
the three months ended January 31, 2022 of $1,021,720 in professional fees for
the audits, quality of earnings and due diligence related to the acquisitions of
Skynet and Next Level Internet.
Bad debt. Bad debt decreased by $2,000, from the three months ended January 31,
2021, to the three months ended January 31, 2022. The decrease is attributed to
the recognition of $4,000 in bad debt for accounts deemed uncollectible during
the period ended January 31, 2021.
Depreciation and amortization. Depreciation and amortization increased by
$49,000, from the three months ended January 31, 2021, to the three months ended
January 31, 2022. The increase is primarily attributed to the acquisitions and
related amortization of $434,000 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 $1,319,000 for the
three months ended January 31, 2022 compared to an operating loss of $764,000
for the three months ended January 31, 2021. The increase in operating loss
between periods is primarily due to the increase in legal fees of $920,000, the
increase in depreciation of $49,000, and the increase in SG&A of $172,000. These
increases were slightingly offset by the decrease in stock compensation expense
of $10,000, the decrease of $2,000 in bad debt expense and the improvement of
$574,000 gross margin.
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Gain (loss) on derivative instruments. Gain (loss) on derivative instruments
increased by $3,265,000 from the three months ended January 31, 2021, to the
three months ended January 31, 2022. We are required to re-measure all
derivative instruments at the end of each reporting period and adjust those
instruments to market, as a result of the re- measurement of all derivative
instruments we recognized a loss between periods.
Loss on extinguishment of debt. Loss on extinguishment of debt increased by
$5,480,000 from the three months ended January 31, 2021, to the three months
ended January 31, 2022. On December 20, 2021, the Company and our lender entered
into an amendment to a Credit Agreement, as described in Note 6, in connection
with the amendment, the Company recognized a loss on extinguishment of debt for
the amendment fee of $1,419,000 and the debt discount associated with the note
of $4,061,000 was also recognized as a loss on extinguishment of debt.
Gain (loss) on settlement of debt. Gain (loss) on settlement of debt decreased
by $197,000 from the three months ended January 31, 2021, to the three months
ended January 31, 2022. The Company determined that a previously accrued
obligation was satisfied with our vendors and recognized a gain of $197,000
during the three months ended January 31, 2021.
Income tax benefit (expense). During the three months ended January 31, 2022,
the Company recognized an income tax expense of $41,000. During the three months
ended January 31, 2021, the Company recognized an income tax expense of $51,000.
Other income (expense). Other income (expense) improved by $1,000 from the three
months ended January 31, 2021, to the three months ended January 31, 2022.
During the three months ended January 31, 2022, the Company recognized other
income of $1,000 and during the period ended January 31, 2021, the Company did
not recognize other income.
Interest expense. Interest expense increased by $178,000 from the three months
ended January 31, 2021, to the three months ended January 31, 2022. During the
quarter ended January 31, 2022, the Company recognized non-cash interest /
accretion expense of $663,000 related to the adjustment to the present value of
various convertible notes and debt. Additionally, the Company recognized
$506,000 in interest expense for cash interest payments on various promissory
notes, accrual of $172,000 for interest expense for various promissory notes and
$40,000 in interest expense added to the principal balance on two promissory
notes as consideration for extension of the maturity date.
Net income (loss) including noncontrolling interest. Net loss including
noncontrolling interest for the three months ended January 31, 2022, was
$11,644,000, an increase in net loss of $9,664,000, as compared to a net loss
for the three months ended January 31, 2021, of $1,980,000. The increase in net
loss including noncontrolling interest between periods is primarily due to the
increase in derivative loss of $3,265,000, increase in loss on extinguishment of
debt of $5,480,000, the increase of $172,000 in SG&A, the increase of $920,000
in legal and professional fees, and the increase of $49,000 in depreciation
expense. These increases were slightingly offset by the decrease of $10,000 in
stock compensation expense, the decrease of $2,000 in bad debt and the
improvement of $574,000 in gross margin.
Net loss attributable to the noncontrolling interest. During the three months
ended January 31, 2022, and 2021, the consolidated entity recognized net income
in noncontrolling interest of $602,000 and $30,000, respectively. The
noncontrolling interest is presented as a separate line item in the Company's
stockholders equity section of the balance sheet.
Net income (loss) attributable to Digerati's shareholders. Net loss for the
three months ended January 31, 2022, was $11,042,000 compared to a net loss for
the three months ended January 31, 2021, of $1,950,000.
Deemed dividend on Series A Convertible Preferred Stock. Dividend declared on
convertible preferred stock for the three months ended January 31, 2022 and
2021, was $5,000, respectively.
35
Net income (loss) attributable to Digerati's common shareholders. Net loss for
the three months ended January 31, 2022, was $11,047,000 compared to a net loss
for the three months ended January 31, 2021, of $1,955,000.
Six Months ended January 31, 2022, Compared to Six Months ended January 31,
2021.
Cloud Software and Service Revenue. Cloud software and service revenue increased
by $2,918,000, or 60% from the six months ended January 31, 2021, to the six
months ended January 31, 2022. The increase in revenue is primarily attributed
to the increase in total customers between periods due to the acquisitions of
Skynet on December 2021 and the acquisitions of Nexogy and ActivePBX during
FY2021. Our total number of customers increased from 2,583 for the six months
ended January 31, 2021, to 2,960 customers for the six months ended January 31,
2022.
Cost of Services (exclusive of depreciation and amortization). The cost of
services increased by $860,000, or 39%, from the six months ended January 31,
2021, to the six months ended January 31, 2022. The increase in cost of services
is primarily attributed to the consolidation of various networks as part of the
increase in total customers between periods due to the acquisition of Skynet on
December 2021 and the acquisitions of Nexogy and ActivePBX during FY2021. Our
total number of customers increased from 2,583 for the six months ended January
31, 2021, to 2,960 customers for the six months ended January 31, 2022. However,
our consolidated gross margin improved by $2,058,000 from the six months ended
January 31, 2021, to the six months ended January 31, 2022.
Selling, General and Administrative (SG&A) Expenses (exclusive of legal and
professional fees and stock compensation expense). SG&A expenses increased by
$1,268,000, or 49%, from the six months ended January 31, 2021, to the six
months ended January 31, 2022. The increase in SG&A is attributed to the
acquisition of Skynet on December 2021 and the acquisitions of Nexogy and
ActivePBX during FY2021., as part of the consolidation, the Company absorbed all
of the employees responsible for managing the customer base, technical support,
sales, customer service, and administration.
Stock Compensation expense. Stock compensation expense decreased by $329,000,
from the six months ended January 31, 2021, to the six months ended January 31,
2022. The decrease between periods is attributed to the recognition during the
six months ended January 31, 2021 of stock option expense of $53,000, the
recognition of $247,000 in stock compensation expense associated with the
funding of the 401(K)-profit sharing plan, the recognition of $18,000 in stock
compensation for stock issued in lieu of cash payments to an employee and the
recognition of $58,000 in stock issued consultants for professional services.
During the six months ended January 31, 2022, the Company only recognized
$47,000 in stock compensation for the amortization of stock options issued to
our team over the last few years.
Legal and professional fees. Legal and professional fees increased by
$1,236,000, from the six months ended January 31, 2021, to the six months ended
January 31, 2022. The increase between periods is attributed to the recognition
during the six months ended January 31, 2022 of $1,389,260 in professional fees
for the audits, quality of earnings and due diligence related to the
acquisitions of Skynet and Next Level Internet.
Bad debt. Bad debt increased by $11,000, from the six months ended January 31,
2021, to the six months ended January 31, 2022. The increase is attributed to
the recognition of $15,000 in bad debt for accounts deemed uncollectible during
the period ended January 31, 2022.
Depreciation and amortization. Depreciation and amortization increased by
$381,000, from the six months ended January 31, 2021, to the six months ended
January 31, 2022. The increase is primarily attributed to the acquisitions and
related amortization of $868,000 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 $1,899,000 for the six
months ended January 31, 2022, compared to an operating loss of $1,390,000 for
the six months ended January 31, 2021. The increase in operating loss between
periods is primarily due to the increase in legal fees of $1,236,000, the
increase in depreciation of $381,000, the increase of $11,000 in bad debt and
the increase in SG&A of $1,268,000. These increases were slightingly offset by
the decrease in stock compensation expense of $329,000 and the improvement of
$2,058,000 gross margin.
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Gain (loss) on derivative instruments. Gain (loss) on derivative instruments
improved by $991,000 from the six months ended January 31, 2021, to the six
months ended January 31, 2022. We are required to re-measure all derivative
instruments at the end of each reporting period and adjust those instruments to
market, as a result of the re-measurement of all derivative instruments we
recognized a loss between periods.
Loss on extinguishment of debt. Loss on extinguishment of debt increased by
$5,480,000 from the six months ended January 31, 2021, to the six months ended
January 31, 2022. On December 20, 2021, the Company and our lender entered into
an amendment to a Credit Agreement, as described in Note 6, in connection with
the amendment, the Company recognized a loss on extinguishment of debt for the
amendment fee of $1,419,000 and the debt discount associated with the note of
$4,061,000 was also recognized as a loss on extinguishment of debt.
Gain (loss) on settlement of debt. Gain (loss) on settlement of debt decreased
by $197,000 from the six months ended January 31, 2021, to the six months ended
January 31, 2022. The Company determined that a previously accrued obligation
was satisfied with our vendors and recognized a gain of $197,000 during the six
months ended January 31, 2021.
Income tax benefit (expense). During the six months ended January 31, 2022, the
Company recognized an income tax expense of $119,000. During the six months
ended January 31, 2021, the Company recognized an income tax expense of $59,000.
Other income (expense). Other income (expense) increased by $2,000 from the six
months ended January 31, 2021, to the six months ended January 31, 2022. During
the six months ended January 31, 2022, the Company recognized other expense of
$2,000 and during the six months ended January 31, 2021, the Company did not
recognize other expense.
Interest expense. Interest expense increased by $1,385,000 from the six months
ended January 31, 2021, to the six months ended January 31, 2022. During the six
months ended January 31, 2022, the Company recognized non-cash interest /
accretion expense of $1,605,000 related to the adjustment to the present value
of various convertible notes and debt. Additionally, the Company recognized
$861,000 in interest expense for cash interest payments on various promissory
notes, accrual of $381,000 for interest expense for various promissory notes and
$40,000 in interest expense added to the principal balance on two promissory
notes as consideration for extension of the maturity date.
Net income (loss) including noncontrolling interest. Net loss including
noncontrolling interest for the six months ended January 31, 2022, was
$9,378,000, an increase in net loss of $6,642,000, as compared to a net loss for
the six months ended January 31, 2021, of $2,736,000. The increase of $1,268,000
in SG&A, the increase of $1,236,000 in legal and professional fees, the increase
of $11,000 in bad debt expense, the increase of $381,000 in depreciation expense
and the increase of $5,480,000 in loss on extinguishment of debt. These
increases were slightingly offset by the decrease of $329,000 in stock
compensation expense, the improvement of $991,000 in derivative loss, and the
improvement of $2,058,000 in gross margin.
Net loss attributable to the noncontrolling interest. During the six months
ended January 31, 2022, and 2021, the consolidated entity recognized net income
in noncontrolling interest of $760,000 and $65,000, 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 six
months ended January 31, 2022, was $8,618,000 compared to a net loss for the six
months ended January 31, 2021, of $2,671,000.
Deemed dividend on Series A Convertible Preferred Stock. Dividend declared on
convertible preferred stock for the six months ended January 31, 2022 and 2021,
was $10,000, respectively.
Net income (loss) attributable to Digerati's common shareholders. Net loss for
the six months ended January 31, 2022, was $8,628,000 compared to a net loss for
the six months ended January 31, 2021, of $2,681,000.
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Liquidity and Capital Resources
Cash Position: We had a consolidated cash balance of $2,844,000 as of January
31, 2022. Net cash consumed by operating activities during the six months ended
January 31, 2022 was approximately $1,003,000, primarily as a result of
operating expenses, that included $47,000 in stock compensation and warrant
expense, bad debt expense of $15,000, loss on extinguishment of debt of
$5,480,000, amortization of debt discount of $1,605,000, gain on derivative
liability of $1,009,000, depreciation and amortization expense of $974,000,
increase in accrued expense of $631,000, increase in accounts receivable of
$110,000, increase of $484,000 in accounts payable and decrease in deferred
revenue of $17,000. Additionally, we had an decrease in prepaid expenses and
other current assets of $12,000, increase in inventory of $27,000 and the
recognition of $40,000 in accrued interest added to principal.
Cash used in investing activities during the six months ended January 31, 2022,
was $4,003,000, $65,000 was used for the purchase of VoIP equipment, $4,100,000
was used to acquire the Skynet's assets and the Company received $162,000 from
Nexogy as an adjustment consideration for payables from the acquisition.
Cash provided by financing activities during the six months ended January 31,
2022, was $6,361,000. The Company secured $707,000 from convertible notes, net
of issuance costs and discounts and secured $6,000,000 from debt financing, net
of issuance costs and discounts. The Company made principal payments of $328,000
on related party notes, and $18,000 in principal payments on equipment
financing. Overall, our net operating, investing, and financing activities
during the six months ended January 31, 2022, contributed approximately
$1,355,000 of our available cash.
Digerati's consolidated financial statements for the six months ending January
31, 2022, 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 $113,998,000 and a working
capital deficit of approximately $22,102,000 which raises doubt about Digerati's
ability to continue as a going concern.
We are currently taking initiatives to reduce our overall cash deficiencies on a
monthly basis. During fiscal 2022 certain members of our management team will
continue to receive a portion of their compensation in common stock to reduce
the depletion of our available cash. To strengthen our business, we intend to
adopt best practices from or recent acquisitions and invest in a marketing and
sales strategy to grow our monthly recurring revenue; we anticipate utilizing
our value-added resellers and channel partners to tap into new sources of
revenue streams, 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 January 31, 2022, 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.
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Our current cash expenses are expected to be approximately $700,000 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 January 31,
2022, our total liabilities were approximately $48,607,000, which included
$15,824,000 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 $80,000 per month of additional working
capital to fund our corporate expenses during Fiscal 2022.
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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