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Acquisitions

9 Months Ended

Apr. 30, 2022

NOTE 12 – ACQUISITIONS

Skynet Asset Purchase Agreement

On December 31, 2021, our indirect, wholly owned subsidiary, Shift8 Networks, Inc., a Texas corporation (“Shift8”), executed and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with Skynet Telecom LLC, a Texas limited liability company (“Seller” or “Skynet”), and Paul Golibart and Jerry Ou, each an individual resident in the State of Texas (each, an “Owner” and collectively, the “Owners”).

Pursuant to the Purchase Agreement, Shift8 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 (collectively, the “Purchased Assets”).

The aggregate purchase price for the Purchased Assets was $5,800,000, subject to adjustment as provided in the Purchase Agreement (the “Purchase Price”). An amount of $4,100,000 in cash, subject to a Net Working Capital Adjustment as defined in the Purchase Agreement, was paid by Shift8 on the Closing Date. Included within the $4.1 million cash payment were amounts paid by Shift8 directly to creditors of the Seller as set forth in payoff letters. An additional $600,000 (the “Earn-out Amount”) was retained by Shift8 at the Closing and will be paid to Seller in accordance with the Purchase Agreement. An additional $100,000 (the “Holdback Amount”) was retained by Shift8 at the Closing and will be paid to Seller in accordance with the Purchase Agreement. Finally, $1,000,000 (the “Share Payment”) will be paid by Shift8 to Seller by issuance of restricted shares of the Company’s common stock to the Owners. The Share Payment will be made via the issuance of shares on the earlier of (i) the effective date of that certain Registration Statement on Form S-1 (File No. 333-258733) filed by the Company with the Securities and Exchange Commission on August 11, 2021 (in which case the stock will be valued at the price set forth in the prospectus that is a part of such Registration Statement, without underwriter discounts) and (ii) 180 days after December 31, 2021 (in which case the stock will be valued at the average of the last transaction price on the OTCQB for each of the 10 trading days immediately preceding such issuance date).

The acquisition was 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 December 31, 2021. Allocation of the purchase price is based on the best estimates of management.

The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the acquisition of Skynet. The allocation of fair values is preliminary and is subject to change in the future during the measurement period.

	Skynet
	(in thousands)

Accounts receivable, net	$	134
Inventory		8
Intangible assets and Goodwill		5,800
Property and Equipment, net		16
Operating lease right-of-use asset		45
Deposits and other assets		6

Total identifiable assets	$	6,009

Less: Liabilities assumed		209
Total Purchase price	$	5,800

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

	Skynet		Useful Life
	(in thousands)		(in Years)

Customer Relationships	$	2,378	7
Trade Names and Trademarks		1,624	7
Non-Compete Agreement		174	2-3
Goodwill		1,624	-
Total intangible assets	$	5,800

In addition, the Company incurred approximately $276,000 in costs associated with the acquisition of Skynet. These included legal, regulatory, and accounting, these costs of $276,000 were expensed during the nine months ended April 30, 2022.

As part of the acquisitions of Skynet’s assets, the Company secured an office lease, with monthly base lease payment of $3,909 from July 1, 2021, through June 30, 2022, and a monthly base lease payment of $4,027 from July 1, 2022, through September 30, 2022. The lease expires in September 2022, and at the option of the Company, the lease can be extended for a period of five years, with a base rent at the prevailing market rate at the time of the renewal.

Proforma

The following schedule contains proforma consolidated results of operations for the nine months ended April 30, 2022, and 2021 as if the acquisition occurred on August 1, 2020. The proforma 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, 2020, or of results that may occur in the future.

	(In thousands)
	Nine months ended April 30,
	2022						2021
	Reported			Proforma			Reported			Proforma
Revenue	$	15,959		$	17,501		$	8,629		$	11,216
Income (loss) from operations		(3,525	)		(3,280	)		(1,978	)		(1,502	)
Net income (loss)	$	(4,726	)	$	(4,479	)	$	(15,484	)	$	(14,845	)

Earnings (loss) per common share-Basic and Diluted	$	(0.03	)	$	(0.03	)	$	(0.12	)	$	(0.12	)

Next Level Internet Equity Purchase Agreement

On February 4, 2022, the Company, T3 Nevada and the two owners of NLI (the “Sellers”), entered into and closed on an Equity Purchase Agreement (the “Equity Purchase Agreement”). Pursuant to the Equity Purchase Agreement, T3 Nevada bought all of the equity interests in NLI from the Sellers. NLI is 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 total purchase price is up to $12.90 million consisting of: (i) $8.9 million in cash which includes payoff of certain indebtedness held at closing by NLI and certain transaction expenses; (ii) unsecured promissory notes in the aggregate principal amount of $2 million issued by T3 Nevada to the Sellers (the “Unsecured Notes”) with such notes payable in eight equal quarterly installments in the aggregate amount of $250,000 each starting on June 15, 2022 through and including March 16, 2024. With a base annual interest rate of 0% and a default annual interest rate of 18%.The amount owed is subject to change based on certain revenue milestones needing to be met by NLI; and (iii) unsecured convertible promissory notes (the “Convertible Notes”) in the aggregate principal amount of $2 million issued by T3 Nevada to the Sellers with such notes payable in eight equal quarterly installments in the aggregate amount of $250,000 each starting on April 30, 2022 through and including January 31, 2024, with a base annual interest rate of 0% and a default annual interest rate of 18%. The Sellers have a onetime right to convert all or a portion of the Convertible Notes commencing on the six-month anniversary of the notes being issued and ending 30 days after such six-month anniversary. The conversion price is the volume weighted average price per share for the ten (10) consecutive trading days immediately preceding the date on which a conversion notice is received by T3 Nevada.

T3 Nevada paid $8.69 million in cash to the Sellers on the closing date of February 4, 2022.

In addition, 120 days after the closing of the transaction, T3 Nevada will pay the Sellers the amount by which net working capital deficit is better than $2.16 million or the Sellers will pay T3 Nevada the amount by which net working capital deficit is worse than $2.36 million. As of April 30, 2022, the Company and the sellers agreed that there’s no purchase price adjustment required.

The acquisition was 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 February 4, 2022. Allocation of the purchase price is based on the best estimates of management.

The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the Next Level acquisition. The allocation of fair values is preliminary and is subject to change in the future during the measurement period.

	Next Level
	Internet
	(in thousands)

Cash	$	171
Accounts receivable, net		469
Prepaid and other current assets		541
Intangible assets and Goodwill		18,103
Property and Equipment, net		1,302
Deposits and other assets		339
Operating lease right-of-use asset		1,246
Total identifiable assets	$	22,171

Less: Liabilities assumed		7,902
Less: Operating lease liability		1,408
Total Purchase price	$	12,861

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

	Next Level
	Internet		Useful Life
	(in thousands)		(in Years)

Customer Relationships	$	7,422	7
Trade Names and Trademarks		5,069	7
Non-Compete Agreement		1,991	2
Goodwill		3,621	-

Total intangible assets	$	18,103

In addition, the Company incurred approximately $845,000 in costs associated with the Next Level acquisition. These included legal, regulatory, and accounting costs which were expensed during the nine months ended April 30, 2022.

Proforma

	(In thousands)
	Nine months ended April 30,
	2022						2021
	Reported			Proforma			Reported			Proforma
Revenue	$	15,959		$	23,291		$	8,629		$	18,007
Income (loss) from operations		(3,525	)		(3,165	)		(1,978	)		(2,260	)
Net income (loss)	$	(4,726	)	$	(4,382	)	$	(15,484	)	$	(15,800	)

Earnings (loss) per common share-Basic and Diluted	$	(0.03	)	$	(0.03	)	$	(0.12	)	$	(0.12	)

As part of the acquisition of NLI., the Company secured an office lease, with a monthly base lease payment of $30,222. The lease expires on March 11, 2026. At the option of the Company, the lease can be extended for two additional five-year terms, with a base rent at the prevailing market rate at the time of the renewal.