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DIGERATI TECHNOLOGIES, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
[July 30, 2014]

DIGERATI TECHNOLOGIES, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


(Edgar Glimpses Via Acquire Media NewsEdge) SPECIAL NOTE: This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and 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," and "intend," or words of similar import. Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties and actual results may be materially different than our expectations.

The following is a discussion of the consolidated financial condition and results of operations for the fiscal years ended July 31, 2013 and 2012. It should be read in conjunction with our Consolidated Financial Statements, the Notes thereto, and the other financial information included elsewhere in this annual report on Form 10-K. For purposes of the following discussion, fiscal 2013 or 2013 refers to the year ended July 31, 2013 and fiscal 2012 or 2012 refers to the year ended July 31, 2012.


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 Communication Services: We provide cloud communication services (cloud-based hosted services) to value-added resellers and enterprise customers.

The 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, and multiple customized IP/PBX features in a hosted or cloud 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.

12 -------------------------------------------------------------------------------- Cloud Communication Services: We incur bandwidth, licensing, and co-location charges in connection with cloud communication services. The bandwidth charges are incurred as part of the connection between our customers to allow them access to our services.

Results of Operations The following table sets forth certain items included in our results of operations in thousands of dollars amounts and variances between periods for the years ended July 31, 2013 and 2012.

Years ended July 31, 2013 2012 Variances % OPERATING REVENUES: Global VoIP services $ 638 $ 3,746 $ (3,108 ) -83 % Cloud-based hosted services 284 389 (105 ) -27 % Total operating revenues 922 4,135 (3,213 ) -78 % Cost of services (exclusive of depreciation and amortization, shown below) 636 3,811 (3,175 ) -83 % GROSS MARGIN 286 324 (38 ) -12 % Selling, general and administrative expense (exclusive of legal and professional fees) 709 1,481 (772 ) -52 % Legal and professional fees 360 197 163 83 % Bad debt 54 - 54 -100 % Depreciation and amortization expense 29 119 (90 ) -76 % OPERATING LOSS (866 ) (1,473 ) 607 -41 % OTHER INCOME (EXPENSE): Gain on sale of an asset - 90 (90 ) -100 % Gain / loss derivative instruments 84 626 (542 ) -87 % Loss on debt extinguishment 83 (75 ) 158 -211 % Interest expense (381 ) (412 ) 31 -8 % Total other income (expense) (214 ) 229 (443 ) -193 % NET LOSS FROM CONTINUING OPERATIONS $ (1,080 ) $ (1,244 ) $ 164 -13 % Discontinued operations: Net loss from discontinued operations, net of taxes (1,851 ) - (1,851 ) 100 % NET LOSS FROM DISCONTINUED OPERATIONS (1,851 ) - (1,851 ) 100 % NET LOSS ATTRIBUTED TO DIGERATI TECHNOLOGIES, INC. $ (2,931 ) $ (1,244 ) $ (1,687 ) 136 % Global VoIP Services. Global VoIP services revenue decreased by $3,108,000, or 83%, from 2012 to 2013. Global VoIP minutes carried by our network decreased by 83% from approximately 86,240,439 minutes of voice traffic during 2012 to approximately 14,864,518 minutes of voice traffic during 2013. Our average revenue per minute decreased from $0.0434 during 2012 to $0.0429 for 2013. The decrease in revenue is attributable primarily to the price pressure in our industry due to a reduction of international termination, the overall reduction in the number of carriers connected to our network, and our de-emphasis of our wholesale carrier business.

Cloud Communication Services. Cloud communication services revenue decreased by $105,000, or 27%, from 2012 to 2013. The decrease in revenue between periods is primarily attributed to the decrease in customers that generate 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 or cloud environment.

Cost of Services (exclusive of depreciation and amortization). The consolidated cost of services decreased by $3,175,000, or 83%, from 2012 to 2013. Cost of Services as a percent of sales decreased from 92.2% in 2012 to 69.0% in 2013.

The decrease in cost of services is a direct correlation to the decline in Global VoIP services revenue.

13 -------------------------------------------------------------------------------- Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees). SG&A expenses decreased by $772,000, or 52%, from 2012 to 2013. The decrease in SG&A between periods is attributable to the cost reduction measures undertaken during the fiscal 2013, including reduction in salaries and reduction in general expenses in order to realign our current operations.

Legal and professional fees. Legal and professional fees increased by $163,000, or 83%, from 2012 to 2013. The increase in legal and professional fees reflects the fees for the reverse stock split effective as of November 16, 2012, the acquisition of two oilfield services companies as of November 26, 2012, and various corporate and SEC filings relating to such transactions. In addition, we incurred legal fees relating to the voluntary petition pursuant to Chapter 11 of the U.S. Bankruptcy Code filed on May 30, 2013.

Bad debt. Bad debt increased by $54,000, or 100%, from 2012 to 2013. The increase is attributable to the recognition of bad debt expense for certain accounts receivable we deemed uncollectable in 2013. We did not recognize any bad debt expense during 2012.

Depreciation and amortization. Depreciation and amortization decreased by $90,000 or 76%, from 2012 to 2013. The decrease is as a result of most of our fixed assets reaching their fully depreciated value during 2013.

Operating loss. The Company reported an operating loss of $866,000 for 2013 compared to an operating loss of $1,473,000 for 2012. The improvement in operating loss between periods is primarily attributed to the decrease in SG&A of $772,000 and the decrease in depreciation and amortization expense of $90,000. The declines in SG&A and depreciation and amortization were offset by the increase in legal and professional fees of $163,000 between periods.

Other income (expense). Other income (expense) decreased by $443,000, or 193% from 2012 to 2013. The primary reason for the decrease in other income (expense) is attributed to the decrease of $542,000 in gain /loss on derivative instruments between periods. During 2012 we recognized $626,000 in gain on derivative instruments. During 2013 we only recognized $84,000 in gain on derivative instruments.

Net loss from continuing operations. Net loss from continuing operations improved by $164,000 from 2012 to 2013. The improvement in net loss from continuing operations is primarily attributed to the improvement in operating loss between periods by $607,000. The improvement in operating loss was slightly offset by the increase of $443,000 in other expense.

Net loss from discontinued operations, net of taxes. Net income from discontinued operations for the 2013 was $1,851,000. This represents the net loss generated by Hurley and Dishon. We acquired Hurley and Dishon during 2013 and they did not contribute any earnings to 2012. The net loss was primarily a result of the impairment of the goodwill related to the Hurley acquisition.

Net loss attributed to Digerati Technologies, Inc. Net loss attributed to Digerati Technologies, Inc. increased by $1,687,000 from 2012 to 2013. The increase in the net loss is income attributed to our loss from continuing operations and the net loss from discontinued operations.

Liquidity and Capital Resources Cash Position: We had a cash balance of $10,000 as of July 31, 2013 not including cash from discontinued operations. Net cash provided by operating activities during 2013 was approximately $5,925,000. Cash used in investing activities during 2013 was approximately $2,803,000. We had cash provided by financing activities of $3,419,000 pursuant to the issuance and payments of various promissory notes during 2013. Overall, our net operating, investing and financing activities during 2013 generated approximately $6,541,000 of cash.

We are currently utilizing our available cash to fund any deficiencies in our cash flows from operations. Additionally, we are funding Digerati from available funds from two subsidiaries classified as discontinued operations.

14 -------------------------------------------------------------------------------- Our current cash expenses are expected to be approximately $110,000 per month, including wages, rent, utilities and corporate professional fees primarily associated with finalization of our Reorganization Plan. 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 which are approximately $80,317,000. 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 intends to pay approximately $3,500,000 of unsecured claims and professional fees and up to $60,000,000 in claims secured by the shares of Dishon and Hurley. We do not anticipate that there will be any 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' Equity of approximately $80,132,000, 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.

Critical Accounting Policies Revenue Recognition. We derive our revenue from Global VoIP Services and Cloud Communication Services. Revenue is recognized when persuasive evidence of an arrangement exists, service or network capacity has been provided, the price is fixed or determinable, collectability is reasonably assured and there are no significant obligations remaining.

We record and report our revenue on the gross amount billed to our customers in accordance with the following "gross indicators": ? Digerati is the primary obligor in its arrangements, ? Digerati has latitude in establishing pricing, ? Digerati changes the product or performs part of the service and is involved in the determination of the product or service specifications, ? Digerati has discretion in supplier selection; and ? Digerati assumes credit risk for the amount billed to the customer We recognize revenue from Global VoIP Services in the period the service is provided, net of revenue reserves for potential billing credits. Such credits can result from disagreements with customers regarding the duration, destination or rates charged for each call. We recognize Cloud Communication Services revenue during the period the services are provided.

Stock-based Compensation. We account for share-based compensation in accordance with provisions on share-based payments which require measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model. We use the following key assumptions in determining the fair market value of options: For the Years Ended July 31, 2013 2012 Expected dividend yield 0.00 % 0.00 % Expected stock price volatility 0.00 % 415.75 % Risk-free interest rate 0.00 % 1.42 % Expected term 0.00 years 3.5 - 4.25 years Derivative financial instruments. We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, we evaluate the application of derivative accounting for all convertible financial instruments and freestanding warrants.

15 -------------------------------------------------------------------------------- For derivative financial instruments that meet the definition of liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, we use the Black-Scholes option-pricing model to value the derivative instruments. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

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