DTGI: Digerati Reaches its Acquisition Anniversary Quarter and Looks for a New Target

By Lisa Thompson

OTC:DTGI

READ THE FULL DTGI RESEARCH REPORT

Digerati DTGI reported growth of 143% for its FYQ1 2022 and this is the last quarter with year over year comparison pre-acquisitions. Going forward we would expect 5-10% internal growth. Fortunately we expect another acquisition is just around the corner and we hope to hear an announcement before the end of this current quarter. After a deal is announced, the target's financials should be filed and then the current S-1 amended with a capital raise and uplisting to follow. Certainly we had expected the deal to be announced by year-end, but accountants and lawyers are on the critical path and it could slip a few weeks. The subsequent uplisting would involve a reverse split of the stock to reach compliance with NASDAQ's minimum stock price and at that time the company plans to change its name to "Nexogy." We expect both the acquisition and the deal to be accretive as the company plans to use proceeds to buy a company that would add to profits in excess of dilution.

This quarter the company had an unexpected profit due to gain on derivative instruments and as a result reported a quarter end fully diluted share count based on the treasury stock method of 251 million shares putting its current enterprise value at $36.1 million.

Q1 2022 Results

For the quarter ending October 31, 2021, the company grew revenue 143% year over year to $3.8 million versus $1.6 million a year ago. Gross margins were 60.6% versus 51.8% the year before. Gross margins were depressed this quarter sequentially as the company spent money to cut over one of the networks used by an acquisition to its primary network. This quarter it had start up costs as it set up servers and racks and ran two networks. After the cut over, the company expects costs to go down approximately $40,000 per month and between that, and not having start up expense, we expect margins to move back up and exceed Q4 levels.

SG&A doubled to $1.8 million. Stock-based compensation declined from $343,000 last year to $24,000 this quarter. Legal and professional fees increased $316,000 from $258,000 a year ago. This year the company incurred $368,000 in transaction costs versus $180,000 in last year's quarter. Depreciation and amortization rose to $492,000 compared to only $161,000 last year.

The operating loss for Q1 2022 decreased to $580,000 compared to a loss of $626,000 in Q1 2021.

Other income was mostly gain on derivative instruments of $4.4 million compared to only $178,000 the year before. Interest expense totaled $1.5 million compared to $300,000 last year due to higher borrowing to fund the acquisitions. Cash interest paid was $355,000 compared to $107,000 last year.

Net income to common shareholders was $2.4 million versus a loss of $726,000 in Q1 2021. This resulted in diluted earnings per share of $0.01 versus a loss per share of $0.01 a year ago. The average primary share count rose 16% to 139 million versus 120 million. Average fully diluted shares using the treasury stock method were 250.7 million for the quarter

On a non-GAAP basis, taking out loss on derivative instruments, gain on settlement of debt, and stock-based compensation, the loss would have been $2.0 million versus $561,000 or loss per share of $0.01 flat with last year.

Balance Sheet

Digerati ended the October 31^st quarter with $1.6 million in cash, a negative $21.1 million in working capital and $12.6 million in debt. Its current ratio was again 0.1. Its debt to total assets was 79.3% and its cash flow was a negative $583,000 on an operating basis and its free cash flow a negative $612,000. Adjusted EBITDA was a $317,000 in Q1 2022 versus $58,000 in Q1 2021. But if cash interest paid of $355,000 is added in, it was a negative $38,000. In its most recent 10Q, the company stated it needs approximately $80,000 per month of additional working capital to fund corporate expenses during fiscal year 2022.

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