GAXY Galaxy Next Generation Inc (CE)

GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 1 - Summary of Significant Accounting Policies (Continued):

Capital Structure

In accordance with ASC 505, “Equity,” the Company’s capital structure is as follows:

GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 1 - Summary of Significant Accounting Policies (Continued):

Property and Equipment (Continued)

Property and equipment at December 31, 2018 and June 30, 2018, and the estimated useful lives used in computing depreciation, are as follows:

Depreciation is provided using the straight line method over the estimated useful lives of the depreciable assets. Depreciation expense was $89,211 and $0 for the three month periods ended December 31, 2018 and 2017, respectively. Depreciation expense was $178,422 and $0 for the six month periods ended December 31, 2018 and 2017, respectively.

Long-lived Assets

Long-lived assets to be held and used are tested for recoverability whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the excess of the asset’s carrying amount over the fair value of the asset.

Goodwill

Goodwill is not amortized, but is reviewed for impairment at least annually, or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable. Judgments regarding indicators of potential impairment are based on market conditions and operational performance of the business.

At each fiscal year-end, the Company performs an impairment analysis of goodwill. The Company may assess its goodwill for impairment initially using a qualitative approach to determine whether conditions exist to indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If management concludes, based on its assessment of relevant events, facts and circumstances that it is more likely than not that a reporting unit’s carrying value is greater than its fair value, then a goodwill impairment charge is recognized for the amount in excess, not to exceed the total amount of goodwill allocated to that reporting unit.

If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and no further testing is required. An impairment charge is recorded as general and administrative expense within the Company’s statement of operations.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 1 - Summary of Significant Accounting Policies (Continued):

Income Taxes

The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss from the current year and any adjustment to income taxes payable related to previous years. Current income taxes are determined using tax rates and tax laws that have been enacted or subsequently enacted by the year-end date.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Under the asset and liability method the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or all of the deferred tax asset will not be recognized.

Prior to the merger, Galaxy was organized as a Subchapter S Corporation under the Internal Revenue Code. There was no provision for federal and state income taxes for the three-month or six-month periods ending December 31, 2017 since the proportionate share of the taxable income or loss was included in the tax returns of the stockholders. However, upon completion of the merger, Galaxy consequently changed to a C Corporation.

Research and Development

The Company accounts for research and development (R&D) costs in accordance with the Research and Development topic of the ASC. Under the Research and Development topic of the ASC, all R&D costs must be charged to expense as incurred. Accordingly, internal R&D costs are expensed as incurred. Third-party R&D costs are expensed when the contracted work has been performed.

Stock-based Compensation

The Company records stock-based compensation in accordance with the provisions set forth in ASC 718, “ Stock Compensation ” using the modified prospective method. ASC 718 requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards. The Company, from time to time, may issue common stock to acquire services or goods from non-employees. Common stock issued to persons other than employees or directors are recorded on the basis of their fair value.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 1 - Summary of Significant Accounting Policies (Continued):

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-01 Business Combinations (Topic 805)-Clarifying the Definition of a Business. This guidance changes the definition of a business to assist entities in evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in Accounting Standards Codification (ASC 606) Revenue from Contracts with Customers. The new standard is effective for public entities beginning in fiscal years starting after December 15, 2017. We adopted this standard during the six-month period ended December 31, 2018. There was no significant impact on our financial statements as a result of adopting this standard.

In August 2017, FASB issued ASU No. 2017-12 Derivatives and Hedging (Topic 815)—Targeted Improvements to Accounting for Hedging Activities. This guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires, for qualifying hedges, the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also modifies the accounting for components excluded from the assessment of hedge effectiveness, eases documentation and assessment requirements and modifies certain disclosure requirements. The new standard is effective for public entities in fiscal years beginning after December 15, 2018. Early adoption is permitted. We plan to adopt this standard on July 1, 2019. We do not expect this guidance to have a material impact on our financial statements.

In August 2018, the U.S. Securities and Exchange Commission ("SEC") adopted the final rule under SEC Release No. 33-10532 Disclosure Update and Simplification, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. Among other changes, the amendments eliminated the annual requirement to disclose the high and low trading prices of our common stock. In addition, the amendments provide that disclosure requirements related to the analysis of shareholders' equity are expanded for interim financial statements. An analysis of the changes in each caption of shareholders' equity presented in the balance sheet must be provided in a note or separate statement, as well as the amount of dividends per share for each class of shares. This rule was effective on November 5, 2018, and we adopted this guidance during the quarter ended December 31, 2018.

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Note 3 - Line of Credit:

The Company increased its bank line of credit agreement from $750,000 to $1,250,000 in December 2018. The line of credit bears interest at prime plus 0.5% (6.0% as of December 31, 2018 and 5.5% as of June 30, 2018) and expires in December 2019. The line of credit is collateralized by all assets of the business, certain property owned by a family member of a stockholder, equity investments of two stockholders, personal guarantees of two stockholders, and a key man life insurance policy. A minimum average bank balance of $50,000 is required as part of the line of credit agreement.  In addition, a 20% curtailment of the outstanding balance will occur during 2019. The outstanding balance was $1,011,275 and $547,603 at December 30, 2018 and June 30, 2018, respectively.

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Short Term Notes Payable

The Company's short term notes payable obligations to unrelated parties assumed in the acquisition (Note 11) are as follows as of December 31, 2018 and June 30, 2018:

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Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Convertible Note Payable

On November 30, 2018, the Company signed a convertible promissory note with an investment firm. The $400,000 note was issued at a discount of $40,000 and bears interest at 5% per year. The loan

principal and interest are convertible into shares of common stock at the lower of (a) 70% of the lowest traded price of the common stock during the 20 trading days immediately preceding the notice of conversion or (b) $3 per share, beginning in May 2019. The note matures in August 2019. The note has prepayment penalties ranging from 110% to 125% of the principal and interest outstanding if repaid within 60 to 180 days from issuance. During the three and six month periods ended December 31, 2018, the Company recorded interest expense of $1,666 and $4,444 of amortization of debt discount, included in interest expense. As of December 31, 2018, the outstanding principal balance of the note is $400,000, with an unamortized debt discount of $35,556. The Company plans to pay the note in full prior to May 2019 through additional sources of financing.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 5 - Related Party Transactions (Continued):

Other Advances and Commitments

In support of the Company’s efforts and cash requirements, it may rely on advances from related parties until such time that it can support its operations or attains adequate financing through sales of its equity or traditional debt financing. There is no formal written commitment for continued support by officers, directors or shareholders. Amounts represent advances or amounts paid in satisfaction of liabilities. The advances are unsecured, due on demand, and the amounts outstanding at December 31, 2018 and June 30, 2018 is $149,000 and $260,173, respectively.

Galaxy pays a related party $7,500 as a collateral fee for securing the Company’s short-term note payable with a certificate of deposit (see Note 4).

Leases

The Company’s technology segment leases property used in operations from a related party under terms of an operating lease. The term of the lease expired on December 31, 2018 when the lease changed to a month-to-month operating lease. The monthly lease payment is $1,500 plus maintenance and property taxes, as defined in the lease agreement. Rent expense for this lease, as well as other month-to-month leases, totaled $17,146 and $6,000 for the three-month periods ended December 31, 2018 and 2017, respectively. Rent expense totaled $20,134 and $9,669 for the six-month periods ended December 31, 2018 and 2017, respectively.

The Company leases three vehicles from related parties under capital leases. The Company is paying the lease payments directly to the creditors, rather than the lessor. The leased vehicles are used in operations for deliveries and installations.

Other Agreements

A stockholder’s family member collateralizes the Company’s short-term note with a CD in the amount of $375,000, held at the same bank. The family member will receive a $7,500 collateral fee for this service. In May 2018, 50,000 shares of stock were issued in exchange for a $100,000 reduction in the short-term note balance.

Notes Payable Converted to Common Stock

On June 22, 2018, various board members and executives of FLCR exchanged their outstanding related party debt and accrued interest for 4% of the Company’s common stock as described in Note 11.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 6 - Lease Agreements:

Capital Lease Agreements

Capital lease agreements between the Company and related parties for vehicles (disclosed in Note 4) require monthly payments totaling $1,066 (ranging from $253 to $461), including interest (ranging from 4.0% to 4.75%), over 5-year terms expiring between April 2019 and July 2020.

Operating Lease Agreements

The Company leases office, retail shop and warehouse facilities under operating leases from a related party (disclosed in Note 5) which require monthly payments of $1,500 and subsequent to December 2018, became a month-to-month operating lease. Rent expense for this lease, as well as other month-to-month leases, totaled $17,146 and $6,000 for the three-month periods ended December 31, 2018 and 2017, respectively. Rent expense totaled $20,134 and $9,669 for the six-month periods ended December 31, 2018 and 2017, respectively.

Leases – Lessors

The Company’s Entertainment segment leases space to a Save-A-Lot grocery store at the Indianapolis theater location. Save-A-Lot corporate assumed the lease in March 2014 for seven years with three five-year options. Monthly rent charged to the tenant is $13,375 per month. Total rental income relating to this lease for the three-month periods ended December 31, 2018 and 2017 amounted to $40,125 and $0, respectively. Total rental income relating to this lease for the six-month periods ended December 31, 2018 and 2017 amounted to $80,250 and $0, respectively. The rental income is included in other income in the accompanying consolidated statements of operations.

The following is a schedule of future minimum rentals under the lease:

The initial lease term ends September 30, 2021. Save-A-Lot reserves the right to exercise three five-year options, which would extend the maturity date to September 30, 2036.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 7 - Equity:

Certain equity transactions related to the reverse triangular merger occurred in September 2018, but have been reflected as of June 30, 2018, in the consolidated financial statements due to FLCR effectively transferring control to Galaxy as of June 22, 2018 (see Note 11). The following equity transactions occurred simultaneously, and are treated in these consolidated financial statements as being effective on that date:

•

Galaxy shareholders transferred all the outstanding shares of common stock to the Merger Sub;

•

Preferred Class C shares were converted into common stock in an amount equivalent to 89% ownership in the outstanding shares of the merged company;

•

Common shares were issued to common stockholders in an amount equivalent to 7% ownership in the outstanding shares of the merged company;

•

Common shares were issued to convertible debt holders in an amount equivalent to 4% ownership in the outstanding shares of the merged company (See Note 5).

•

A reverse stock split was approved at a ratio of one new share for every 350 shares of common stock outstanding (1:350 Reverse Stock Split).

Private Placement

In March 2018, the Company offered 1,500,000 common shares to qualified investors at $2 per share in a private placement memorandum (“PPM”). The private placement offering period expired in September 2018. Proceeds were raised to purchase inventory, pay merger costs and provide working capital. As a result of the PPM, the Company issued 1,374,850 shares to new investors resulting in proceeds of $2,004,500 during the period from April 2018 to September 2018. Shares issued in the PPM are prior to the Reverse Stock Split.

On December 19, 2018, the Company issued 75,511 shares as a bonus to a board member for consulting services and as a performance incentive to an employee.

In May 2018, 50,000 shares of stock (143 shares post-Reverse Stock Split) were issued to the related party in exchange for a $100,000 reduction in the short-term note balance (see Note 4).

See the capital structure section in Note 1 for disclosure of the equity components included in the Company’s consolidated financial statements.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 8 - Income Taxes:

The U.S. Tax Cuts and Jobs Act (TCJA) legislation, enacted on December 22, 2017, reduces the U.S. federal corporate income tax rate from 35.0% to 21.0% and is effective January 1, 2018 for the Company. The Company has not generated any taxable income and has not recorded any current income tax expense at December 31, 2018. Consequently, the tax rate change has had no impact on the Company’s current tax expense but impacts the deferred tax assets and liabilities and will impact future deferred tax assets and liabilities to be recognized.

The Company’s deferred tax assets are primarily comprised of net operating losses (“NOL”) that give rise to deferred tax assets. The operating loss carry-forwards of approximately $1,500,000 were available prior to the merger and were set to expire in the year 2020. However, net operating loss carry forwards are limited when there is a change in control. Total net operating losses available at December 31, 2018 amounted to approximately $3,500,000 ($1,500,000 of pre-merger NOL’s and approximately $2,000,000 due to losses from the date of the merger to December 31, 2018). There is no tax benefit for goodwill impairment, which is permanently non-deductible for tax purposes. Additionally, due to the uncertainty of the utilization of net operating loss carry forwards a valuation allowance equal to the net deferred tax assets has been recorded.

The Company’s effective tax rate differed from the federal statutory income tax rate for the period ended December 31, 2018 is as follows:

As of December 31, 2018, the Company does not believe that it has taken any tax positions that would require the recording of any additional tax liability nor does it believe that there are any unrealized tax benefits that would either increase or decrease within the next twelve months. As of December 31, 2018, the Company’s income tax returns generally remain open for examination for three years from the date filed with each taxing jurisdiction.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 9 - Commitments, Contingencies, and Concentrations:

Contingencies

Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

Concentrations

Galaxy contracts the manufacturer of its products with overseas suppliers. The Company’s sales could be adversely impacted by a supplier’s inability to provide Galaxy with an adequate supply of inventory.

Galaxy has three customers that accounted for approximately 92% of accounts receivable at December 31, 2018 and 87% of accounts receivable at June 30, 2018. Galaxy has two customers that accounted for approximately 78% of revenues for the three month periods ended December 31, 2018 and three customers that accounted for 90% of revenues for the three-month period ended December 31, 2017. Galaxy has three customers that accounted for approximately 80% of revenues for the six month periods ended December 31, 2018 and two customers that accounted for 44% of revenues for the six-month period ended December 31, 2017. The Company routinely assesses the financial strength of its customers and, consequently, believes that its accounts receivable credit risk exposure is limited.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 10 - Material Agreements:

Manufacturing and Distributorship Agreement

In December 2016, Galaxy executed an agreement with a company in South Korea. Pursuant to such distribution agreement, the manufacturer agreed to manufacture, and the Company agreed to be the sole distributor of the interactive panels in the United States for a term of one year, with automatic annual renewals. The Company must submit a three-month rolling sales forecast (which acts as a purchase order) to the manufacturer, updated monthly. The manufacturer has three days to accept the purchase order and once accepted, the Company must pay the manufacturer 105% of the cost shown on the purchase order, 10% at the time the order is accepted and the remaining 95% within 120 days if the Company has sold the panels and been paid by the end customer. The manufacturer also provides a warranty for any defects in material and workmanship for a period of 26 months from the date of shipment to the Company.

The agreement contains a $4 million minimum annual purchase commitment. This minimum purchase commitment was not met in 2017 or 2018; however, the manufacturer and the Company extended the agreement through December 31, 2019 under the same terms. Because the Company did not meet the minimum purchase commitment, the manufacturer can require the Company to work with their sales representative to establish a performance improvement plan, and the manufacturer has the right to terminate the agreement.

Consulting Agreement

Galaxy entered into a consulting agreement in May 2017 with two consultants for advisory services through July 2019. In exchange for consulting services provided, these consultants are entitled to receive consulting fees of $15,000 per month and a 5.5% combined equity interest in Galaxy. The 5.5% equity interest was converted to common stock upon the commencement of the Common Controlled Merger Agreement of R&G and Galaxy CO (as described in Note 1). The Company paid the consultants $102,000 and $213,000 in fees and expenses for consulting services provided during the three-month and six-month periods ended December 31, 2018. No consulting fees were paid under this agreement during the periods ended December 31, 2017.

Consulting Agreement – Magellan FIN, LLC

The Company entered into a consulting agreement in May 2018 for advisory services such as maintaining ongoing stock market support such as drafting and delivering press releases and handling investor requests. The program will be predicated on accurate, deliberate and direct disclosure and information flow from the Company and dissemination to the appropriate investor audiences. In exchange for these consulting services provided, the advisor received $15,000 at contract inception, an additional $4,000 monthly through the term of the agreement, which is April 2019, and 10,000 shares of common stock. The Company incurred $0 for consulting fees during the three-month period and $23,000 during the six-month period ended December 31, 2018. No consulting fees were paid under this agreement during the periods ended December 31, 2017.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 10 - Material Agreements (Continued):

KLIK Distribution Agreement

In September 2018, the Company signed a 1-year distributor agreement with KLIK Communications to be the sole distributor of KLIK products to US educational market. The agreement will automatically renew annually, unless three months’ notice is given by either party. The agreement will end upon successful acquisition of KLIK by Galaxy, per the Letter of Intent signed in July 2018. Payment terms are 45 days after invoice. Delivery terms are FOB Deliver location. The KLIK product will replace the VIVI product (specialized interactive router) previously sold with the Galaxy panels. KLIK will provide a 2-year manufacturer’s warranty from the date of shipment, and free software updates. The agreement provides KLIK with the option of storing the manufacturer’s inventory at the Galaxy warehouse.

Distribution Agreement

Effective September 15, 2018, the Company signed a 2-year distribution agreement for Galaxy’s SLIM series of interactive panels, a new Galaxy product. Galaxy outsourced the manufacturing to a vendor as manufacturing costs are less, and customers prefer an Android operating system. The agreement includes a commitment by Galaxy to purchase $2 million of product during the first year beginning September 2018. The manufacturer will provide Galaxy with the product, including a three-year manufacturer’s warranty from the date of shipment. The agreement renews automatically in two-year increments unless three months’ notice is given by either party.

Agency Agreement

Effective December 11, 2018, the Company entered into a contract with Carter, Terry, and Company (“CTC”) to act as an agent in raising capital. CTC will have the opportunity to receive a finder’s fee ranging from 4 to 8% relative to the amount of capital raised, if successful.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 11 - Reverse Acquisition:

On June 22, 2018, Galaxy consummated a reverse triangular merger whereby Galaxy merged with and into FLCR’s newly formed subsidiary, Galaxy MS, Inc. which was formed specifically for the transaction. Under the terms of the merger, Galaxy’s shareholders transferred all their outstanding shares of common stock to Galaxy MS, in return for FLCR’s Series C Preferred Shares, which were equivalent to approximately 3,065,000,000 shares of the common stock of FLCR on a pre-reverse stock split basis. This represents approximately 89% of the outstanding common stock of FLCR, with the remaining 11% of common stock distributed as follows: (a) an ownership interest of seven percent (7%) to the holders of common stock, pro rata; and (b) four percent (4%) of the common stock to the holders of convertible debt, pro rata.

Concurrent with the reverse triangular merger, the Company applied pushdown accounting; therefore, the consolidated financial statements after completion of the reverse merger include the assets, liabilities, and results of operations of the combined company from and after the closing date of the reverse merger, with only certain aspects of pre-consummation stockholders’ equity remaining in the consolidated financial statements.

There was no cash consideration paid by Galaxy to FLCR on the date of the reverse triangular merger. Instead, shares of stock were issued and exchanged, and the Company acquired $1,511,844 of net assets of FLCR. At the closing of the merger, all of FLCR’s convertible promissory notes were converted into FLCR’s common shares. The merger agreement contains potential future tax advantages of the net operating loss carryforward available to offset future taxable income of the combined company, up to a maximum of $150,000, over a 5-year period beginning June 22, 2018. There is a valuation allowance reducing this tax benefit to zero.

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As a result of the Company pushing down the effects of the acquisition, certain accounting adjustments are reflected in the consolidated financial statements, such as goodwill recognized amounting to $834,220 and reflected in the balance sheet. Goodwill recognized is primarily attributable to the acquisition of the fair value of the public company structure and other intangible assets that do not qualify for separate recognition.

Other assets noted in the table above consist of the difference between the acquired assets and liabilities of Full Circle Entertainment to be distributed to pre-acquisition FLCR shareholders. The Company expects to exercise its option to spin out the Entertainment subsidiary within one year to focus on its primary business plan as discussed herein and distribute all respective Entertainment assets and liabilities to these shareholders. As a result, the Company does not anticipate receiving any economic benefit from the related assets in the table above, nor incurring any obligations from the corresponding liabilities.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

The Company sold the Entertainment subsidiary to a related party on February 5, 2019 in exchange for 38,625 Galaxy common shares. The sale of Entertainment enabled the Company to focus its resources into the operations of the Technology segment. The consideration received for the sale of Entertainment was 38,625 shares of Galaxy common stock at the fair value on the date of the transaction of $92,700.  In February 2019, the fair value of the Galaxy common shares received from the buyers for Entertainment will offset the assets and liabilities of Entertainment, and other assets of Technology, with any difference recorded as a reduction to additional paid in capital during the third quarter of fiscal year ending June 30, 2019.

The following table presents a summary of Entertainment’s identifiable assets and liabilities at December 31, 2018, prior to the sale on February 6, 2019:

Note 12 – Stock Plan

An Employee, Directors, and Consultants Stock Plan for the Year 2019 (“Plan”) was established by the Company. The Plan is intended to attract and retain employees, directors and consultants by aligning the economic interests of such individuals more closely with the Company’s stockholders, by paying fees or salaries in the form of shares of the Company’s common stock. The Plan is effective December 28, 2018, and expires December 31, 2019. Common shares of 1,000,000 are reserved for stock awards under the Plan. There were no shares awarded under the Plan as of December 31, 2018.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 13 - Segment Reporting

The Company has identified two reportable segments due to the merger that occurred on June 22, 2018: Technology and Entertainment.

The Technology segment sells interactive learning technology hardware and software that allows the presenter and participant to engage in a fully collaborative instructional environment. Galaxy’s products include Galaxy’s own private-label interactive touch screen panel as well as numerous other national and international branded peripheral and communication devices.

The Entertainment segment owns and operates Georgetown 14 Cinemas, a fourteen-theater movie complex located in Indianapolis, Indiana. Entertainment generates revenues from movie ticket sales and concessions. As part of the merger agreement, the parties have the right to spinout the Entertainment segment to the prior shareholders of FLCR. Management plans to implement the spinout in order to focus on its primary business plan, which is Galaxy.

The following table presents a summary of identifiable assets as of December 31, 2018:

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Note 14 - Going Concern:

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As reflected in the accompanying consolidated financial statements, the Company had negative working capital of approximately $2,600,000, an accumulated deficit of approximately $7,000,000, and cash used in operations of approximately $1,300,000 at December 31, 2018.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Six Month Period Ended December 31, 2018 and 2017 (Unaudited)

Note 14 - Going Concern (continued):

The Company’s operational activities and the payment for such has primarily been funded through related party advances, debt financing, a private placement offering of common stock and through the deferral of accounts payable and other expenses. The Company intends to raise additional capital through the sale of equity securities or borrowings from financial institutions and possibly from related and nonrelated parties who may in fact lend to the Company on reasonable terms. Management believes that its actions to secure additional funding will allow the Company to continue as a going concern. There is no guarantee the Company will be successful in achieving any of these objectives. These sources of working capital are not assured, and consequently do not sufficiently mitigate the risks and uncertainties disclosed above. The ability of the Company to continue as a going concern is dependent upon management’s ability to raise capital from the sale of its equity and, ultimately, the achievement of operating revenues. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

As part of the merger agreement, the parties have the right to spin out the Entertainment segment to the prior shareholders of FLCR. See Notes 11 and 15.