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Business Acquisitions

6 Months Ended

Jan. 31, 2021

NOTE 12 – BUSINESS ACQUISITIONS

Acquisitions

Nexogy Merger

On November 17, 2020, T3 Nevada's wholly owned subsidiary, Nexogy Acquisition, Inc., merged with and into Nexogy, Inc. ("Nexogy") resulting in Nexogy becoming a wholly owned subsidiary of T3 Nevada (the "Merger"). Nexogy is a leading provider in South Florida of Unified Communications as a Service and managed services, offering a portfolio of cloud-based solutions to the high-growth SMB market.

The purchase price for Nexogy was $9 million in cash, plus an additional $452,000 in initial excess Net Working Capital, with $900,000 of the $9 million being placed in an indemnity escrow account and $50,000 of the $9 million being placed in a working capital escrow account. In addition, at the closing of the Merger, T3 Nevada paid a number of Nexogy's liabilities which were included in the $9 million purchase price.

ActivePBX Asset Purchase

On November 17, 2020, our indirect, wholly owned subsidiary, T3 Communications, Inc., a Florida corporation ("T3 Florida"), executed and closed on an Asset Purchase Agreement (the "Purchase Agreement") with ActiveServe, Inc., a Florida corporation ("Seller"). Pursuant to the Purchase Agreement, T3 Florida acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller's telecommunications business known as ActivePBX (collectively, the "Purchased Assets").

The aggregate purchase price for the Purchased Assets was $2,555,000 in cash, subject to adjustment as provided therein (the "Purchase Price"). $1,190,000 of the Purchase Price was payable at closing, with $50,000 of such amount being withheld by T3 Florida for a period of 12 months to cover part of potential future indemnification obligations of Seller to T3 Florida due to Seller's breaches, if any, of any representations and warranties made to T3 Florida by Seller under the Purchase Agreement, and $40,000 of such amount being credited to T3 Florida against a payment in that amount made by T3 Florida to Seller pursuant to the Second Amendment to Letter of Intent between Seller and T3 Florida dated as of October 15, 2020.

Part of the Purchase Price is payable in 8 equal quarterly payments of $136,250, subject to T3 Florida achieving quarterly post-purchase recurring revenues under monthly contracts or subscriptions from the acquired customer base, excluding charges for taxes, regulatory fees, additional set-up fees, equipment purchases or lease, and consulting fees. To the extent that a quarterly revenue threshold is not reached, the amount of the corresponding quarterly payment shall be reduced on a proportional basis. T3 Florida's $1,190,000 payment obligation is represented by a promissory note of T3 Florida in the form included as an exhibit to the Purchase Agreement. The note, in turn, is subject to the Subordination Agreement, included as an Exhibit to the Purchase Agreement, among Seller, the Company's parent, T3 Nevada, and Post Road Administrative, LLC, in its capacity as administrative agent for the Post Road lenders. $275,000 of the Purchase Price (the "Customer Renewal Value") represents an incentive earn-out to be paid with respect to Seller's customer accounts which are transferred to T3 Florida at closing, that are renewed, expanded and/or revised with T3 Florida for a minimum term of twelve months with an auto-renewal for 12 months.

In connection with the Purchase Agreement, we entered into Consulting Agreements and a Non-Compete Agreement with each of Alex Gonzalez and Jose Gonzalez, the Chief Executive Officer and Chief Technology Officer of Seller.

The total purchase price for Nexogy and ActivePBX were $9,452,000 and $2,555,000, respectively. The acquisitions were accounted for under the purchase method of accounting, with Digerati identified as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed by Digerati was allocated to customer contracts acquired and intangible assets based on their estimated fair values as of November 17, 2020. Allocation of the purchase price is based on the best estimates of management.

The following information summarizes the allocation of the fair values assigned to the assets at the purchase date. The allocation of fair values is preliminary and is subject to change in the future during the measurement period.

	Nexogy		Active PBX		Total
	(in thousands)
Cash	$	358	$	-	$	358
Accounts receivables		278		78		356
Intangible Assets and Goodwill		9,018		2,555		11,573
Property and equipment, net		164		-		164
Other Assets		83		2		85
Total identifiable assets	$	9,901	$	2,635	$	12,536
Less: liabilities assumed		270		80		350
Total Purchase price	$	9,631	$	2,555	$	12,186

The following table summarizes the estimated cost of intangible assets related to the acquisition:

	Nexogy		ActivePBX		Total		Useful life
			(in thousands)				(years)
Customer Relationships	$	4,100	$	1,610	$	5,710		7
Trade Names & Trademarks		2,600		270		2,870		7
Non-compete Agreement		200		90		290		2-3
Nexogy Goodwill		2,118		585		2,703		-
	$	9,018	$	2,555	$	11,573

The Company incurred approximately $460,000 in costs associated with the acquisitions. These included legal, regulatory, and accounting. The Company incurred and expensed these costs of $158,000 and $302,000, during the year ended July 31, 2020 and six months ended January 31, 2021, respectively.

Pro-forma

The following schedule contains unaudited pro-forma consolidated results of operations for both acquisitions for the three and six months ended January 31, 2021 and 2020 as if the acquisition occurred on August 1, 2019. The unaudited pro-forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on August 1, 2019, or of results that may occur in the future.

	Three months ended January 31,												Six months ended January 31,
	2021						2020						2021						2020
	Reported			Pro-forma			Reported			Pro-forma			Reported			Pro-forma			Reported			Pro-forma

Revenue	$	3,326		$	3,709		$	1,557		$	3,559		$	4,878		$	7,376		$	3,146		$	7,199
Income (loss) from operations		(764	)		(657	)		(699	)		(403	)		(1,390	)		(873	)		(1,370	)		(738	)
Net income (loss)	$	(1,950	)	$	(1,864	)	$	(457	)	$	(276	)	$	(2,671	)	$	(2,226	)	$	(1,965	)	$	(1,535	)
Earnings (loss) per common share-Basic and Diluted	$	(0.02	)	$	(0.02	)	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)	$	(0.06	)	$	(0.05	)

As part of the acquisitions of Nexogy and ActivePBX, the Company secured an office and rooftop lease, with monthly base lease payments of $13,720 and $3,546, respectively, the leases expire on July 31, 2022.

Additionally, the Company secured four (4) additional leases, with the following terms:

	Base Monthly		Commencement	Expiration
Lease	Lease Payment		Date	Date	Additional terms
1 - Colocation	$	4,130	June 8, 2020	June 8, 2023	With an option to extend for an additional twelve (12) months, and 5% increase in base monthly lease payment.
2 - Rooftop	$	2,450	June 1, 2015	June 1, 2021	With an option to extend for five (5) additional one (1) year terms.
3 - Rooftop	$	979	December 1, 2015	December 1, 2025	Initial term for five (5) years, lease renewed for additional five (5) years.
4 - Rooftop	$	2,700	November 30, 2013	November 30, 2023	Initial term for five (5) years, lease renewed for additional five (5) years, with an option for a second renewal for an additional five (5) years.