Filed Pursuant to Rule 424(b)(3)
Registration No.
333-239827
PROSPECTUS
200,000,000 Shares of Common Stock
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This prospectus relates to the offer and resale of up to
200,000,000 shares of our common stock par value $.0001 by Tysadco
Partners, LLC, or Tysadco Partners. Tysadco Partners is also
referred to in this prospectus as the Selling Stockholder.
The
shares of common stock being offered by the Selling Stockholder
have been or may be issued pursuant to the purchase agreement dated
May 31, 2020 that we entered into with Tysadco Partners which was
amended and restated on July 9, 2020, which we refer to in this
prospectus as the Purchase Agreement. Please refer to the section
of this prospectus entitled "Tysadco Partners Transaction" for a
description of the Purchase Agreement and the section entitled
"Selling Stockholder" for additional information regarding Tysadco
Partners. The prices at which Tydasco Partners may sell the shares
will be determined by the prevailing market price for the shares or
in negotiated transactions.
The
Selling Stockholder may sell or otherwise dispose of the shares of
common stock covered by this prospectus in a number of different
ways and at varying prices. We provide more information about how
the Selling Stockholder may sell or otherwise dispose of their
shares of common stock in the section entitled "Plan of
Distribution." The Selling Stockholder will pay all brokerage fees
and commissions and similar expenses. We will pay all expenses
(except brokerage fees and commissions and similar expenses)
relating to the registration of the shares with the Securities and
Exchange Commission.
The
Selling Stockholder is an "underwriter" within the meaning of the
Securities Act of 1933, as amended.
Our
common stock issued is traded on the OTCQB under the symbol "GAXY".
On July 24, 2020 the last reported sale price of our common stock
on the OTCQB was $0.0028
Investing in our securities involves various risks. See "Risk
Factors" beginning on page 7 of this prospectus for a discussion of
information that should be considered in connection with an
investment in our securities.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The
date of this prospectus is July 24, 2020
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TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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-iii-
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INDUSTRY AND MARKET DATA
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PROSPECTUS SUMMARY
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THE
OFFERING
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RISK FACTORS
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USE
OF PROCEEDS
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DETERMINATION OF OFFERING PRICE
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THE
TYSADCO PARTNERS TRANSACTION
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SELLING STOCKHOLDER
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DIVIDEND POLICY
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PLAN OF DISTRIBUTION
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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BUSINESS
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MANAGEMENT
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CORPORATE GOVERNANCE
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EXECUTIVE COMPENSATION
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MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
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PRINCIPAL STOCKHOLDERS
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DESCRIPTION OF SECURITIES WE ARE OFFERING
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DESCRIPTION OF OUR CAPITAL STOCK
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LEGAL MATTERS
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EXPERTS
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WHERE YOU CAN FIND MORE INFORMATION
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DISCLOSURE OF THE SECURITIES AND EXCHANGE COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
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GALAXY NEXT GENERATION, INC. AND SUBSIDIARIES CONSOLIDATED
FINANCIAL STATEMENTS
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The registration statement containing this prospectus, including
the exhibits to the registration statement, provides additional
information about us and the common stock offered under this
prospectus. The registration statement, including the exhibits, can
be read on our website and the website of the Securities and
Exchange Commission. See "Where You Can Find More
Information."
Information contained in, and that can be accessed through our web
site, www.galaxynext.us, shall not be deemed to be
part of this prospectus or incorporated herein by reference and
should not be relied upon by any prospective investors for the
purposes of determining whether to purchase the Shares offered
hereunder.
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Unless the context otherwise requires, the terms "Galaxy," "we,"
"us" and "our" in this prospectus refer to Galaxy Next Generation,
Inc., and "this offering" refers to the offering contemplated in
this prospectus.
Neither we nor the Selling Stockholder authorized anyone to provide
any information or to make any representations other than those
contained in this prospectus or in any free writing prospectus
prepared by or on behalf of us or to which we have referred you. We
take no responsibility for, and can provide no assurance as to the
reliability of, any other information that others may give you.
This prospectus is an offer to sell only the shares offered hereby,
but only under the circumstances and in the jurisdictions where it
is lawful to do so. The information contained in this prospectus or
in any applicable free writing prospectus is current only as of its
date, regardless of its time of delivery or any sale of shares of
our common stock. Our business, financial condition, results of
operations and prospects may have changed since that date. We are
not, and the Selling Stockholder is not, making an offer of these
securities in any jurisdiction where such offer is not
permitted.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains, in addition to historical information,
certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that includes information relating to
future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability
of resources. Such forward-looking statements include those that
express plans, anticipation, intent, contingency, goals, targets or
future development and/or otherwise are not statements of
historical fact. These forward-looking statements are based on our
current expectations and projections about future events and they
are subject to risks and uncertainties known and unknown that could
cause actual results and developments to differ materially from
those expressed or implied in such statements.
In
some cases, you can identify forward-looking statements by
terminology, such as "may," "should," "would," "expect," "intend,"
"anticipate," "believe," "estimate," "continue," "plan,"
"potential" and similar expressions. Accordingly, these statements
involve estimates, assumptions and uncertainties that could cause
actual results to differ materially from those expressed in them.
Any forward-looking statements are qualified in their entirety by
reference to the factors discussed throughout this prospectus or
incorporated herein by reference.
You
should read this prospectus and the documents we have filed as
exhibits to the registration statement, of which this prospectus is
part, completely and with the understanding that our actual future
results may be materially different from what we expect. You should
not assume that the information contained in this prospectus or any
prospectus supplement is accurate as of any date other than the
date on the front cover of those documents.
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Risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be different from those
expressed or implied in our written or oral forward-looking
statements may be found in this prospectus under the heading "Risk
Factors".
Forward-looking statements speak only as of the date they are made.
You should not put undue reliance on any forward-looking
statements. We assume no obligation to update forward-looking
statements to reflect actual results, changes in assumptions or
changes in other factors affecting forward-looking information,
except to the extent required by applicable securities laws. If we
do update one or more forward-looking statements, no inference
should be drawn that we will make additional updates with respect
to those or other forward-looking statements.
New
factors emerge from time to time, and it is not possible for us to
predict which factors will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements. We qualify all of the information presented in this
prospectus particularly our forward-looking statements, by these
cautionary statements.
INDUSTRY AND MARKET DATA
This prospectus contains estimates and other statistical data made
by independent parties and by us relating to market size and growth
and other data about our industry. We obtained the industry and
market data in this prospectus from our own research as well as
from industry and general publications, surveys and studies
conducted by third parties. This data involves a number of
assumptions and limitations and contains projections and estimates
of the future performance of the industries in which we operate
that are subject to a high degree of uncertainty, including those
discussed in "Risk Factors." We caution you not to give undue
weight to such projections, assumptions and estimates. Further,
industry and general publications, studies and surveys generally
state that they have been obtained from sources believed to be
reliable, although they do not guarantee the accuracy or
completeness of such information. While we believe that these
publications, studies and surveys are reliable, we have not
independently verified the data contained in them. In addition,
while we believe that the results and estimates from our internal
research are reliable, such results and estimates have not been
verified by any independent source.
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PROSPECTUS SUMMARY
Company Overview
We
are a manufacturer and distributor of interactive learning
technologies and enhanced audio solutions. We develop both hardware
and software that allows the presenter and participant to engage in
a fully collaborative instructional environment. We also develop
award winning classroom audio solutions and school PA and Intercom
products, creating a full line card offering for classrooms to our
channel partners. Our products include our own private-label
interactive touch screen panel as well as numerous other national
and international branded peripheral and communication devices. New
technologies like our own touchscreen panels are sold along with
renowned brands such as Google Chromebooks, Microsoft Surface
Tablets, Lenovo and Acer computers, Verizon WiFi and more. We
provide a multitude of services to our customers, including
installation, training, and maintenance.
Our
current distribution channel consists of 30 resellers across the
United States who primarily sell our product within the commercial
and educational market. While we do not control where our resellers
focus their efforts, based on experience, the kindergarten through
12th grade education market is the largest customer base for the
product, comprising nearly 90% of all purchases. In addition, we
possess our own resell channel that sells directly to the Southeast
region of the United States.
We
believe the market space for interactive technology in the
classroom is a perpetual highway of business opportunity. Public
and private school systems are in a continuous race to modernize
their learning environments. Our goal is to be an early provider of
the best and most modern technology available.
We
are striving to become the leader in the market for interactive
flat panel technology, associated software and peripheral devices
for classrooms. Our goal is to provide an intuitive system to
enhance the learning environment and create easy to use technology
for the teacher, increasing student engagement and achievement. Our
products are developed and backed by a management team with more
than 30 combined years in the classroom technology space.
Business Environment and Trends
The
educational technology market is currently experiencing substantial
growth due to government mandates for improving the education
results in the United States. Education, governments, corporations
and individuals are recognizing the growing need to utilize
technology for more effective delivery of information to educate
end users. Today, most classrooms are equipped with some type of
smart board technology but given the ever-changing nature of
technology, previous investments are becoming obsolete. The
industry has several hundred technology resellers, selling a
variety of products, already selling to these entities directly.
Our goal is to target the resellers to gain market share growth in
the education technology market. With the global spread of the
ongoing novel coronavirus ("COVID-19") pandemic in the first
quarter of 2020, we have implemented business continuity plans
designed to address and mitigate the impact of the COVID-19
pandemic on our employees and business. While our sales have
not declined, and actually have increased as school systems have
sought to operate remotely during this pandemic, the ability of our
customers to timely pay bills has been impacted.
-1-
Opportunities and Plan of Operations
We
believe that our products, both hardware and software, and the
products we intend to develop as part of our extensive product road
map, positions us to be one of the leading providers of interactive
educational products. We believe that the increase in consumer
spending along with the ever-evolving increase in standards for
curriculum are two driving forces for the increase in the demand
for interactive educational technology. Some additional factors
that we believe will impact our opportunity include:
Significant resources are being devoted to primary and secondary
education, both in the United States and abroad. As set forth in
the Executive Office of the President, Council of Economic Advisers
report, United States education expenditure (primary, secondary and
post-secondary) has been estimated at approximately $1.3 trillion,
with primary and secondary education accounting for close to half
($625 billion) of this spending. Global spending is approximated at
roughly triple United States spending for primary and secondary
education.
The
demand for interactive flat panels is on the rise. With traditional
interactive whiteboards having been in the market for more than
fifteen years, many of these technologies are coming to a refresh
period and are being replaced with the newer, more advanced
interactive flat panels.
We
intend to build upon our proven ability to produce and sell
interactive classroom products. We have begun to implement the
growth strategies described below and expect to continue to do so
over the course of the upcoming years. In order to implement each
goal pertaining to growth, we may need additional capital to
implement each strategy, particularly in relation to the target
acquisition(s) of complementary businesses or technologies.
We
intend to grow our business by using the following methodology:
Capitalizing on market trends in the educational industry:
We believe our long history of selling into the K-12 education
market provides us with the expertise to continue to stay on the
cutting edge of new product development and needs of the classroom
teacher. We also believe our expertise in customer service and
training positions us well for expected growth. We intend to build
our core business by leveraging the strengths of our leadership and
building a solid team with experience and expertise in our
market.
Expanding our reseller channel sales: The educational
technology industry is driven by relationships. We intend to
continue to grow and expand our resellers in strategic geographical
regions so that we are able to leverage relationships in the local
school systems within those regions.
Growth through acquisitions: We believe that the interactive
and collaborative classroom has many components and moving parts.
We intend to stay on the cutting edge of new products by building
out our product offerings and line card through strategic
acquisitions. The acquisition(s) provides us with significant
opportunities to grow our business by adding complementary products
to provide a whole classroom G2 experience to our customers. We
intend to pursue acquisitions that provide services within our
current core product offerings, extend our geographic reach and
expand our product offerings.
-2-
Further developing intellectual property: We intend to build
upon our success in developing original software that we own and
license to other brands, and distributors globally. When we develop
an original software or application, we retain the copyright and
patent of that content. We will create additional revenue streams
from development fees, brand license fees, distribution license
fees and ancillary sources.
Expanding our geographic presence: We believe that by
expanding our physical presence into select domestic and
international regions, we will be better able to attract and retain
clients. With a physical presence in strategic locations around the
US, we believe we can provide better customer service and offer
local services and training resulting in an increase in revenue for
those areas.
Corporate Information and History
We
were formed on June 7, 2000 under the laws of the State of Nevada
under the name Excel Publishing, Inc. On April 10, 2002, we merged
with FullCircle Registry, Inc., and changed our name from Excel
Publishing, Inc to FullCircle Registry, Inc.("FLCR")
Galaxy CO was organized in the state of Georgia in February 2017
while R & G Sales, Inc. ("R&G") was organized in the state
of Georgia in August 2004. Galaxy CO merged with R&G on March
16, 2018, with R&G becoming the surviving company. R&G
subsequently changed its name to Galaxy Next Generation, Inc.,
which is incorporated in the State of Nevada.
On
June 22, 2018, we consummated a reverse triangular merger whereby
we merged with and into FLCR's newly formed subsidiary, which was
formed specifically for the transaction (Galaxy MS). Under the
terms of the merger, Galaxy Next Generation, Inc's shareholders
transferred all their outstanding shares of common stock in Galaxy
Next Generation, Inc., in return for FLCR's Series C Preferred
Shares, which at the time of the merger were equivalent to
approximately 3,065,000,000 shares of the common stock of FLCR on a
pre-reverse stock split basis. This represented approximately 89%
of the outstanding common stock of FLCR at the time of the merger,
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. FLCR
owned Georgetown 14 Cinemas, a fourteen-theater movie complex
located on approximately seven acres in Indianapolis, Indiana.
Prior to the merger, its sole business and source of revenue was
from the operation of the theater, and as part of the merger
agreement, the parties have the right to spinout the theater to the
prior shareholders of FLCR. Effective February 6, 2019, we sold our
interest in our theater to focus our resources in our technology
operations.
Our
principal executive offices are located at 286 Big A Road Toccoa,
Georgia 30577, and our telephone number is (706) 391-5030. Our
website address is www.galaxynext.us. Information contained
in our website does not form part of the prospectus and is intended
for informational purposes only.
This prospectus contains references to our trademarks and to
trademarks belonging to other entities. Solely for convenience,
trademarks and trade names referred to in this prospectus,
including logos, artwork and other visual displays, may appear
without the ® or TM symbols, but such references are not
intended to indicate, in any way, that we will not assert, to the
fullest extent under applicable law, our rights or the rights of
the applicable licensor to these trademarks and trade names. We do
not intend our use or display of other companies' trade names or
trademarks to imply a relationship with, or endorsement or
sponsorship of us by, any other companies.
-3-
Summary Risks
Our
business and our ability to execute our business strategy are
subject to a number of risks of which you should be aware of before
you decide to buy our common stock. In particular, you should
carefully consider following risks, which are discussed more fully
in "Risk Factors" beginning on page 7 of this prospectus:
· we have incurred losses for the three and nine
months ended March 31, 2020, the year ended June 30, 2019, three
month period ended June 30, 2018 and year ended March 31,
2018;
· we require substantial funds to expand our
business;
· we may pursue acquisitions, joint ventures or
other growth opportunities, which could present unforeseen
integration obstacles or costs and could dilute our stockholders;
· we may have difficulty in entering into and
maintaining strategic alliances with third parties;
· we generate substantially all of our revenue from
the sale of our interactive learning technology hardware and
software products, and related installation, training, and
maintenance services, and any significant reduction in sales of
these products or services would materially harm our
business;
· our business is subject to seasonal fluctuations,
which may cause our operating results to fluctuate from
quarter-to-quarter and adversely affect our working capital and
liquidity throughout the year;
· our working capital requirements and cash flows
are subject to fluctuation, which could have an adverse effect on
our financial condition;
· we operate in a highly competitive
industry;
· our business may be adversely impacted by the
COVID-19 pandemic, the effects of which are difficult to
assess;
· if we are unable to continually enhance our
products and to develop, introduce and sell new technologies and
products at competitive prices and in a timely manner, our business
will be harmed;
· we receive a significant portion of our revenues
from a small number of customers and the loss of any one of these
customers or failure to collect a receivable from them could
adversely affect our operations and financial position;
· we rely on highly skilled personnel, and, if we
are unable to attract, retain or motivate qualified personnel, we
may not be able to operate our business effectively;
· we use resellers and distributors to promote and
sell our products;
· we are controlled by our management;
· our businesses are geographically concentrated
and could be significantly affected by any adverse change in the
regions in which we operate;
· our suppliers may not be able to always supply
components or products to us on a timely basis and on favorable
terms, and as a result, our dependency on third party suppliers has
adversely affected our revenue and may continue to do
so;
· our facilities and information systems and those
of our key suppliers could be damaged as a result of disasters or
unpredictable events, which could have an adverse effect on our
business operations;
· increases in component costs, long lead times,
supply shortages, and supply changes could disrupt our supply chain
and have an adverse effect on our business, financial condition,
and operating results;
· adverse changes in economic and political
policies of the Chinese government could have a material adverse
effect on the overall economic growth of China, which could
adversely affect our business;
· we face significant challenges growing our sales
in foreign markets;
· decreases in, or stagnation of, spending or
changes in the spending policies or budget priorities for
government funding of schools, colleges, universities, other
education providers or government agencies may have a material
adverse effect on our revenue;
-4-
· if our products fail to comply with consumer
product or environmental laws, it could materially affect our
financial performance;
· defects in our products can be difficult to
detect before shipment; If defects occur, they could have a
material adverse effect on our business;
· we may not be able to obtain patents or other
intellectual property rights necessary to protect our proprietary
technology and business;
· our business may suffer if it is alleged or
determined that our technology or another aspect of our business
infringes the intellectual property of others;
· if we are unable to anticipate consumer
preferences and successfully develop attractive products, we might
not be able to maintain or increase our revenue or achieve
profitability
· we may be unable to keep pace with changes in
technology as our business and market strategy evolves;
· future sales of our common stock could adversely
affect our share price, and any additional capital raised by us
through the sale of equity or convertible debt securities may
dilute your ownership in us and may adversely affect the market
price of our common stock;
· the market price of our common stock may be
volatile, which could cause the value of your investment to
fluctuate and possibly decline significantly;
· certain provisions of Nevada law may have
anti-takeover effects;
· we have no intention of declaring dividends in
the foreseeable future;
· we may be exposed to risks relating to
evaluations of controls required by Sarbanes-Oxley Act of 2002;
and
· if our internal controls and accounting processes
are insufficient, we may not detect in a timely manner
misstatements that could occur in our financial statements in
amounts that could be material.
-5-
THE OFFERING
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Common Stock Being Offered by the Selling Stockholder
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200,000,000 shares of common stock consisting of
· 2,500,000 commitment shares issued to Tysadco
Partners upon execution of the Purchase Agreement
· 197,500,000 shares of common stock that may be
issued and sold to Tysadco Partners pursuant to the Purchase
Agreement
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Common Stock Outstanding Before the Offering
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640,887,727 shares (as of July 7, 2020)
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Common Stock Outstanding After the Offering
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840,887,727 shares (assuming the issuance after the date of this
prospectus by us to Tysadco Partners pursuant to the Purchase
Agreement described below of all of the shares that are being
offered by this prospectus)
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Use of Proceeds
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Tysadco
Partners will receive all of the proceeds from the sale of the
shares offered for sale by it under this prospectus. We will not
receive proceeds from the sale of the shares by the Selling
Stockholder. However, we may receive in the aggregate gross
proceeds of up to $2 million from the sale of our common stock to
Tysadco Partners pursuant to the Purchase Agreement described
below. Any proceeds from Tysadco Partners that we receive under the
purchase agreement are expected to be used for general corporate
purposes, which may include, without limitation working capital and
general and administrative expenses.
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Risk Factors
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Investing in our securities involves a high degree of risk. See
"Risk Factors" beginning on page 7 and the other information
included in this prospectus for a discussion of factors you should
carefully consider before deciding to invest in our common
stock.
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OTCQB Symbol
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"GAXY"
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-6-
On
May 31, 2020, we entered into the Purchase Agreement and a
registration rights agreement (the "Registration Rights Agreement")
with Tysadco Partners. On July 9, 2020, we made certain clarifying
amendments to the Purchase Agreement. Under the Purchase Agreement,
we have the right to sell to Tysadco Partners up to $2 million in
shares of common stock, subject to certain limitations and
conditions set forth in the Purchase Agreement. As consideration
for Tysadaco Partner's commitment to purchase shares of common
stock pursuant to the Purchase Agreement, we issued to Tysadco
Partners 2,500,000 shares of common stock, or the Commitment
Shares. We did not receive any cash proceeds from the issuance of
such shares. See "The Purchase Agreement" for additional
information regarding the terms of the Purchase Agreement and
Registration Rights Agreement that we entered into with Tydasco
partners.
We
do not know what the purchase price for our common stock will be
and therefore cannot be certain as to the number of shares we might
issue to Tysadco Partners under the Purchase Agreement after the
date of this prospectus.
RISK FACTORS
An investment in our common stock involves a high degree of
risk. You should consider carefully the following risks and other
information included in this prospectus before you decide whether
to buy our common stock. The following risks may adversely affect
our business, financial condition, and operating results. As a
result, the trading price of our common stock could decline and you
could lose part or all of your investment. Additional risks,
uncertainties and other factors not presently known to us or that
we currently deem immaterial may also impair our business
operations.
Risks Related to This Offering
We may not be able to access the full amounts available under
the Purchase Agreement, which could prevent us from accessing the
capital we need to continue our operations, which could have an
adverse effect on our business.
We
intend to rely on the Purchase Agreement for our near-term capital
needs. We may direct Tysadco Partners to purchase up to $2.0
million of shares of our common stock over a 24-month period,
commencing upon the satisfaction of certain conditions, including
that the registration statement is declared effective by the SEC.
Thereafter, on any trading day selected by us, we may sell shares
of common stock to Tysadco Partners in an amount equal to the
lesser of $100,000 or 200% of the average shares traded for the 10
days prior to the closing request date, with a minimum request of
$25,000. The purchase price shall be 80% of the lowest average
daily traded price during the ten trading days commencing on the
first trading day following delivery and clearing of the delivered
shares (in each case, to be appropriately adjusted for any
reorganization, recapitalization, non-cash dividend, stock split,
reverse split or other similar transaction that occurs on or after
the date of the Purchase Agreement).
In
addition, Tysadco partners will not be required to purchase any
shares of our common stock if such sale would result in its
beneficial ownership exceeding 4.99% of the then outstanding shares
of our common stock. Our inability to access a portion or the full
amount available under the Purchase Agreement, in the absence of
any other financing sources, could have a material adverse effect
on our business.
The sale or issuance of our common stock to Tydasco Partners
may cause dilution and the sale of the shares of common stock
acquired by Tysadco Partners, or the perception that such sales may
occur, could cause the price of our common stock to
fall.
On
May 31, 2020, we entered into the Purchase Agreement with Tydasco
Partners, which was amended and restated on July 9, 2020, pursuant
to which Tysadco Partners has committed to purchase up to $2
million of our common stock, subject to certain limitations. Upon
the execution of the Purchase Agreement, we issued 2,500,000
Commitment Shares to Tysadco Partners in consideration for its
commitment to purchase shares of our common stock under the
Purchase Agreement. The remaining shares of our common stock that
may be issued under the Purchase Agreement may be sold by us to
Tysadco Partners at our discretion from time to time over a
24-month period commencing after the satisfaction of certain
conditions set forth in the Purchase Agreement, including that the
SEC has declared effective the registration statement of which this
prospectus is a part and that such registration statement remains
effective. The purchase price for the shares that we may sell to
Tysadco Partners under the Purchase Agreement will fluctuate based
on the price of our common stock. Depending on market liquidity at
the time, sales of such shares may cause the trading price of our
common stock to fall.
-7-
We
generally have the right to control the timing and amount of any
future sales of our shares to Tysadco Partners. Additional sales of
our common stock, if any, to Tysadco Partners will depend upon
market conditions and other factors to be determined by us. We may
ultimately decide to sell to Tysadco Partners all, some, or none of
the additional shares of our common stock that may be available for
us to sell pursuant to the Purchase Agreement. If and when we do
sell shares to Tysadco Partners, after Tysadco Partners has
acquired the shares, Tysadco Partners may resell all or some of
those shares at any time or from time to time in its discretion.
Therefore, sales to Tysadco Partners by us could result in
substantial dilution to the interests of other holders of our
common stock. Additionally, the sale of a substantial number of
shares of our common stock to Tysadco Partners, or the anticipation
of such sales, could make it more difficult for us to sell equity
or equity-related securities in the future at a time and at a price
that we might otherwise wish to effect sales.
We may not be able to access the full amounts available under
the Purchase Agreement, which could prevent us from accessing the
capital we need to continue our operations, which could have an
adverse effect on our business.
At
March 31, 2020, we had cash and cash equivalents of $194,702. We
had an accumulated deficit of $19,571,336 million at March 31, 2020
and at June 30, 2019, an accumulated deficit of $9,470,685. We have
generated significant losses to date and expect to continue to
incur significant operating losses. To date, our revenue from
operations have been insufficient to support our operational
activities and has been supplemented by the proceeds from the
issuance of securities. There is no guarantee that additional
equity, debt or other funding will be available to us on acceptable
terms, or at all.
Our
ability to direct Tysadco Partners to purchase up to $2 million of
shares of our common stock over a 24-month period is subject to the
satisfaction of certain conditions, including that the registration
statement of which this prospectus is a part is declared effective
by the SEC. The extent we rely on Tysadco Partners as a source of
funding will depend on a number of factors, including the
prevailing market price of our common stock and the extent to which
we are able to secure funding from other sources. If obtaining
sufficient funding from Tysadco Partners were to prove unavailable
or prohibitively dilutive, we will need to secure another source of
funding in order to satisfy our working capital needs. Even if we
sell all $2.0 million under the Purchase Agreement to Tysadco
Partners we may still need additional capital to fully implement
our business, operating and development plans. Should the financing
we require to sustain our working capital needs be unavailable or
prohibitively expensive when we require it, the consequences could
be a material adverse effect on our business, operating results,
financial condition and prospects.
Our
inability to access a portion or the full amount available under
the Purchase Agreement, in the absence of any other financing
sources, could have a material adverse effect on our business.
-8-
Risks Related to Our Business, Operations and Financial
Condition
We have incurred losses for the nine months ended March 31,
2020, the year ended June 30, 2019 and three month period ended
June 30, 2018 and year ended March 31, 2018 and there can be no
assurance that we will generate net income
For
the nine months ended March 31, 2020, we had a net loss of
$10,100,651. For the year ended June 30, 2019 and three month
period ended June 30, 2018, we had a net loss of $6,663,117 and
$1,370,123, respectively. There can be no assurance that our
losses will not continue in the future, even if our revenues and
expenditures for the products and solutions we sell and distribute
increase. In addition, as of March 31, 2020, the Company had an
accumulated deficit of $19,571,336 and negative working capital of
approximately $5,900,000. These factors raise substantial doubt
regarding our ability to continue as a going concern.
Our consolidated financial statements have been
prepared assuming that we will continue as a going
concern.
Our
recurring losses from operations and net capital deficiency raises
substantial doubt about our ability to continue as a going concern.
The consolidated financial statements for the nine months ended
March 31, 2020, the year ended June 30, 2019 and three month period
ended June 30, 2018 and year ended March 31, 2018 do not include
any adjustments that might result from the outcome of this
uncertainty, and contemplate the realization of assets and the
settlement of liabilities and commitments in the normal course of
business. The report of our independent registered public
accounting firm for the year ended June 30, 2019 and three month
period ended June 30, 2018 and year ended March 31, 2018 included
an explanatory paragraph expressing substantial doubt about our
ability to continue as a going concern. If we cannot generate the
required revenues and gross margin to achieve profitability or
obtain additional capital on acceptable terms, we will need to
substantially revise our business plan or cease operations and an
investor could suffer the loss of a significant portion or all of
his investment in our company.
Our Business Has Been Negatively Impacted By The Covid-19
Pandemic
With the global spread of the ongoing novel coronavirus
("COVID-19") pandemic in the first quarter of 2020, we have
implemented business continuity plans designed to address and
mitigate the impact of the COVID-19 pandemic on our employees and
business. While our sales have not declined and in fact have
increased significantly during the fourth quarter, as school
systems have sought to operate remotely during this pandemic, the
ability of our customers to timely pay bills may be adversely
impacted. Although, payments are currently being made timely, there
can be no assurance that such timely payment schedules will
continue. The business of our suppliers and other commercial
partners, our corporate development objectives and the value of and
market for our common stock, will depend on future developments
that are highly uncertain and cannot be predicted with confidence
at this time, such as the ultimate duration of the pandemic, travel
restrictions, quarantines, social distancing and business closure
requirements in the United States and other countries, and the
effectiveness of actions taken globally to contain and treat the
disease. The global economic slowdown and the other risks and
uncertainties associated with the pandemic could have a material
adverse effect on our business, financial condition, results of
operations and growth prospects. In addition, to the extent the
ongoing COVID-19 pandemic adversely affects our business and
results of operations, it may also have the effect of heightening
many of the other risks and uncertainties which we face.
-9-
We have a
limited operating history for which you can evaluate our
business.
Prior to June 2018, our sole business and source of revenue was
from the operation of the Georgetown 14 Cinemas, a fourteen-theater
movie complex located on approximately seven acres in Indianapolis,
Indiana. In June 2018, we commenced operations in the educational
products industry. We have subsequently sold the Georgetown 14
Cinemas and now our operations are solely concentrated within the
educational products industry. Therefore, we have a limited history
of operations in our current line of business upon which investors
can evaluate our business.
We require substantial funds to expand our
business.
We
will require substantial funds to purchase additional inventories
and pay our accounts payable to our vendors, as well as to build
our marketing and sales staff. If we do not succeed in raising
additional funds on acceptable terms, we may be unable to expand
our business and could default in payment of certain of our
obligations. There can be no assurance that such financing will be
available and that the equity interests of all of our stockholders
would not be substantially diluted.
We have disclosed a material weakness in our internal control
over financial reporting relating to our accounting procedures
which could adversely affect our ability to report our financial
condition, results of operations or cash flows accurately and on a
timely basis.
In
connection with our assessment of internal control over financial
reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we
identified a material weakness in our internal control over
financial reporting relating to our disclosure controls and
procedure. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented
or detected on a timely basis. As a result of the deficiencies we
have discovered, it is reasonably possible that internal controls
over financial reporting may not have prevented or detected errors
from occurring that could have been material, either individually
or in the aggregate.
We have outstanding debentures secured by a security interest
in all of our assets and our failure to comply with the terms and
covenants of such debentures could result in our loss of all of our
assets.
We
have outstanding debentures secured by a security interest in all
of our assets. The debentures contain both affirmative and negative
covenants. Our obligations under the debentures may be accelerated
upon the occurrence of an event of default in accordance with the
terms of the debentures, which includes customary events of
default, including payment defaults, the inaccuracy of
representations or warranties, cross-defaults related to material
indebtedness, bankruptcy and insolvency related defaults, defaults
relating to certain other matters. If we fail to comply with these
covenants or if we fail to make certain payments under the secured
loans when due, the debenture holders could declare the debentures
in default. If we default on the debentures, the holder has the
right to seize our assets that secure the debentures, which may
force us to suspend all operations.
-10-
Our failure to fulfill all of our registration requirements
in connection with our issued debentures may cause us to suffer
liquidated damages, which may be very costly.
Pursuant to the terms of the registration rights agreement that we
entered into in connection with the debentures, we were required to
file a registration statement with respect to securities underlying
the debentures within a certain time period, have the registration
statement declared effective within a certain time period and
maintain the effectiveness of such registration statement. The
failure to do so could result in the payment of liquidated damages
by us, which could be significant. Although the registration
statement has been declared effective, there can be no assurance
that we will be able to maintain the effectiveness of any
registration statement, and therefore there can be no assurance
that we will not incur damages with respect to such agreements.
We have pursued and may continue to pursue acquisitions,
joint ventures or other growth opportunities, which could present
unforeseen integration obstacles or costs and could dilute our
stockholders. We may also face competition in our acquisition
strategy, and such competition may limit our number of proposed
acquisitions, joint ventures and other growth
opportunities.
We
recently acquired all of the equity of Interlock Concepts, Inc. and
Ehlert Solutions Group, Inc. and have explored a wide range of
proposed acquisitions, joint ventures and other growth ventures
with other educational technology companies that have interests in
related businesses or other strategic opportunities. The process of
integrating any acquired business, including Interlock Concepts,
Inc. and Ehlert Solutions Group, Inc., may create unforeseen
operating difficulties and expenditures and is itself risky. Any
future acquisitions, joint ventures or other growth opportunities
will be subject to a number of challenges, including:
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diversion of management time and resources as well
as a shift of focus from operating the businesses to issues related
to integration and administration, which could result in the
potential disruption of our ongoing business;
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the need to integrate each company’s accounting,
management, information, human resources and other administrative
systems to permit effective management, and the lack of control if
such integration is delayed or not implemented;
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the need to implement controls, procedures and
policies appropriate for a larger public company at companies that
prior to acquisition had lacked such controls, procedures and
policies;
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difficulties in maintaining uniform standards,
controls, procedures and policies;
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difficulties in managing operations in widely
disparate time zones;
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potential unknown liabilities associated with
acquired businesses, including liability for activities of the
acquired company before the acquisition, including violations of
laws, rules and regulations, commercial disputes, tax liabilities
and other known and unknown liabilities;
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difficulty retaining key alliances on attractive
terms with partners and suppliers;
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declining employee morale and retention issues
resulting from changes in compensation, or changes in management,
reporting relationships, future prospects or the direction or
culture of the business;
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in the case of foreign acquisitions, the need to
integrate operations across different cultures and languages and to
address the particular economic, currency, political, and
regulatory risks associated with specific countries; and
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in some cases, the need to transition operations,
end-users, and customers onto our existing platforms.
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-11-
Failure to manage expansion effectively may affect our success in
executing our business plan and may adversely affect our business,
financial condition and results of operation. We may not realize
the anticipated benefits of any or all of our acquisitions, or may
not realize them in the time frame expected. Future acquisitions or
mergers may require us to issue additional equity securities, spend
our cash, or incur debt, and amortization expenses related to
intangible assets or write-offs of goodwill, any of which could
adversely affect our results of operations.
We may have difficulty in entering into and maintaining
strategic alliances with third parties.
We
have entered into and we may continue to enter into strategic
alliances with third parties to gain access to new and innovative
technologies and markets. These parties are often large,
established companies. Negotiating and performing under these
arrangements involves significant time and expense, and we may not
have sufficient resources to devote to our strategic alliances,
particularly those with companies that have significantly greater
financial and other resources than we do. The anticipated benefits
of these arrangements may never materialize, and performing under
these arrangements may adversely affect our results of
operations.
We generate substantially all of our revenue from the sale of
our interactive learning technology products and related services
and any significant reduction in sales of these products or
services would materially harm our business.
For
the year ended June 30, 2019 and for the nine months ended March
31, 2020, we generated approximately 69% and 100% of our revenue,
respectively, from sales of our interactive learning technology
hardware and software products, and related installation, training,
and maintenance services. Any material decrease in the demand for
our products and services would significantly reduce our revenue.
If any of our competitors introduces attractive alternatives to our
products or services, we could experience a significant decrease in
sales as customers migrate to those alternative products and
services.
Our business is subject to seasonal fluctuations, which may
cause our operating results to fluctuate from quarter-to-quarter
and adversely affect our working capital and liquidity throughout
the year.
We
expect quarterly fluctuations in our revenues and operating results
to continue. These fluctuations could result in volatility and
adversely affect our cash flow, working capital and liquidity. As
our business grows, we expect these seasonal fluctuations may
become more pronounced. Traditionally, the bulk of expenditures by
school districts occur in the second and third calendar quarters
after receipt of budget allocations. Because our revenues and
operating results are driven largely by the purchasing cycles of
the educational market and normally fluctuate as a result of
seasonal variations in our business sequential quarterly
comparisons of our financial results may not provide an accurate
assessment of our financial position.
Our working capital requirements and cash flows are subject
to fluctuation, which could have an adverse effect on our financial
condition.
If
we are unable to manage fluctuations in cash flow, our business,
operating results and financial condition may be materially
adversely affected. Our working capital requirements and cash
flows have historically been, and are expected to continue to be,
subject to seasonal fluctuations, depending on a number of factors.
Factors which could result in fluctuations in our working capital
and cash flows include:
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the quantity of product and service sales revenue
achieved;
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the margins achieved on sales of products and
services;
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the timing and collection of receivables;
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the timing and size of inventory and related
component purchases; and
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the timing of payment on payables and accrued
liabilities.
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-12-
We operate in a highly competitive industry.
The
interactive learning technology industry in which we operate is
highly competitive and characterized by frequent product
introductions and rapid technological advances that have
substantially increased the capabilities and use of interactive
projectors, interactive whiteboards, and microcomputer-based
logging technologies and combinations of them. We face substantial
competition from developers, manufacturers and distributors of
interactive learning products and solutions, including interactive
projectors, interactive whiteboards and microcomputer data logging
products.
Many of these competitors have, and our potential competitors may
have, significantly greater financial and other resources than we
do and have spent, and may continue to spend, significant amounts
of resources to try to enter or expand their presence in the
market. These companies may manufacture and/or distribute new,
disruptive or substitute products that compete for the pool of
available funds that previously could have been spent on
interactive displays and associated products. In addition, low cost
competitors have appeared in China and other countries. We may not
be able to compete effectively against these current and future
competitors. Increased competition or other competitive pressures
have and may continue to result in price reductions, reduced
margins or loss of market share, any of which could have a material
adverse effect on our business, financial condition or results of
operations.
Some of our customers are required to purchase equipment by
soliciting proposals from a number of sources and, in some cases,
are required to purchase from the lowest bidder. While we attempt
to price our products competitively based upon the relative
features they offer, our competitors' prices and other factors, we
are often not the lowest bidder and in such cases may lose sales.
For example, we have observed sales of tablet computers by
competitors to school districts in the U.S. whose technology
budgets could otherwise have been used to purchase interactive
displays.
Competitors may be able to respond to new or emerging technologies
and changes in customer requirements more effectively and faster
than we can or devote greater resources to the development,
promotion and sale of products than we can. Current and potential
competitors may establish cooperative relationships among
themselves or with third parties, including through mergers or
acquisitions, to increase the ability of their products to address
the needs of customers. If these interactive display competitors or
other substitute or alternative technology competitors acquire
significantly increased market share, it could have a material
adverse effect on our business, financial condition or results of
operations.
If we are unable to continually enhance our products and to
develop, introduce and sell new technologies and products at
competitive prices and in a timely manner, our business will be
harmed.
Our
future success will depend upon our ability to enhance our products
and to develop, introduce and sell new technologies and products
offering enhanced performance and functionality at competitive
prices and in a timely manner and market acceptance of any new
products. If we are unable, for any reason, to enhance, develop,
introduce and sell new products in a timely manner, or at all, in
response to changing market conditions or customer requirements or
otherwise, our business will be harmed.
The
development of new technologies and products involves time,
substantial costs and risks. Our ability to successfully develop
new technologies will depend in large measure on our ability to
maintain a technically skilled research and development staff and
to adapt to technological changes and advances in the industry. The
success of new product introductions depends on a number of
factors, including timely and successful product development,
market acceptance, the effective management of purchase commitments
and inventory levels in line with anticipated product demand, the
availability of components in appropriate quantities and costs to
meet anticipated demand, the risk that new products may have
quality or other defects and our ability to manage distribution and
production issues related to new product introductions. If we are
unsuccessful in selling the new products that we develop and
introduce, or any future products that we may develop, we may carry
obsolete inventory and have reduced available working capital for
the development of other new technologies and products.
-13-
We receive a significant portion of our revenues from a small
number of customers and the loss of any one of these customers or
failure to collect a receivable from them could adversely affect
our operations and financial position.
We
have two customers that accounted for approximately 69% of accounts
receivable at March 31, 2020 and four customers that accounted for
approximately 79% of accounts receivable at June 30, 2019. We
have two customers that accounted for approximately 43% and 33% of
total revenue for the three and nine months ended March 31, 2020
and two customers that accounted for 78% and 80% of revenues for
the three and nine months ended March 31, 2018.
Receivables from our customers are not secured by any type of
collateral and are subject to the risk of being uncollectible.
Significant deterioration in the liquidity or financial position of
any of our major customers or any group of our customers could have
a material adverse impact on the collectability of our accounts
receivable and our future operating results. Since we receive a
significant portion of our revenues from a small number of
customers, the loss of any one of these customers or failure to
collect a receivable from them could adversely affect our
operations and financial position.
We rely on highly skilled personnel, and, if we are unable to
attract, retain or motivate qualified personnel, we may not be able
to operate our business effectively.
If
any of our employees leaves us, and we fail to effectively manage a
transition to new personnel, or if we fail to attract and retain
qualified and experienced professionals on acceptable terms, our
business, financial condition and results of operations could be
adversely affected. Our success depends in large part on continued
employment of senior management and key personnel who can
effectively operate our business, as well as our ability to attract
and retain skilled employees. Competition for highly
skilledmanagement, technical, research and development and other
employees is intense in the high-technology industry and we may not
be able to attract or retain highly qualified personnel in the
future. In making employment decisions, particularly in the
high-technology industry, job candidates often consider the value
of the equity awards they would receive in connection with their
employment. Inasmuch as our products are installed in many states
throughout the United States, our employment needs include the
hiring of skilled installers in several states and we are subject
to the employment laws of many states. Our long-term incentive
programs may not be attractive enough or perform sufficiently to
attract or retain qualified personnel.
Our
success also depends on our having highly trained financial,
technical, recruiting, sales and marketing personnel. We will need
to continue to hire additional personnel as our business grows. A
shortage in the number of people with these skills or our failure
to attract them to our company could impede our ability to increase
revenues from our existing products and services, ensure full
compliance with federal and state regulations, or launch new
product offerings and would have an adverse effect on our business
and financial results.
We depend on resellers and distributors to promote and sell
our products and services.
We
depend on our ability to establish and develop new relationships
and to build on existing relationships with resellers and
distributors through whom substantially all our sales are made. Our
resellers and distributors are not our employees and therefore we
have limited control over their practices. Industry and economic
conditions have the potential to weaken the financial position of
our resellers and distributors. These resellers and distributors
also may determine to no longer sell our products and services, or
may reduce efforts to sell our products and services, which could
materially adversely affect our business, financial condition and
results of operations. Furthermore, if our resellers' and
distributors' abilities to repay their credit obligations were to
deteriorate and result in the write-down or write-off of such
receivables, it would negatively affect our operating results and,
if significant, could materially adversely affect our business,
financial condition and results of operations.
-14-
Because our resellers and most of our distributors are not
contractually required to sell our products and services
exclusively and may offer competing interactive display products
and services, and often do not devote their full time promoting our
products and services no assurance can be given that our resellers
and distributors will act in a manner that will promote the success
of our products and services. Factors that are largely within the
control of those resellers and distributors but are important to
the success of our products and services include:
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the degree to which our resellers and distributors
actively promote our products and services;
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the extent to which our resellers and distributors
offer and promote competitive products and services; and
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the quality of installation, training and other
support services offered by our resellers and distributors.
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In
addition, if some of our competitors were to offer their products
and services to resellers and distributors on more favorable terms
than or have more products and services available to meet their
needs, there may be pressure on us to reduce the price of our
products and services, or those resellers and distributors may stop
carrying our products and services or de-emphasize the sale of our
products and services in favor of the products and services of
these competitors.
Our businesses are geographically concentrated and could be
significantly affected by any adverse change in the regions in
which we operate.
Historically, our business operations have been located primarily
throughout the Southeast region of the United States. While we
expand our business to new geographic areas, we are still highly
concentrated in the United States. Because we derived all of our
total revenues on a consolidated basis for the nine months ended
March 21, 2020 and the year ended June 30, 2019 from our operations
in the United States, our business is exposed to adverse regulatory
and competitive changes, economic downturns and changes in
political conditions in the United States. If we are unable to
identify and successfully manage or mitigate these risks, our
businesses, financial condition, results of operations and
prospects could be materially adversely affected.
We are dependent upon our key suppliers for the components
used in our products. Our suppliers may not be able to always
supply components or products to us on a timely basis and on
favorable terms, and as a result, our dependency on third party
suppliers has adversely affected our revenue and may continue to do
so.
We
are subject to disruptions in our operations if our sole or limited
supply contract manufacturers decrease or stop production of
components and products, or if such suppliers and contract
manufacturers do not produce components and products of sufficient
quantity. We do not manufacture any of the products we sell and
distribute, and are dependent upon a limited number of suppliers
for all products and components. We depend on obtaining adequate
supplies of quality components on a timely basis with favorable
terms, and some of those components, as well as certain complete
products that we sell are provided to us by only one supplier or
contract manufacturer. Alternative sources for our components are
not always available. Approximately 60% of our products and
components are manufactured overseas in China, so they have long
lead times, and events such as local disruptions, natural disasters
or political conflict may cause unexpected interruptions to the
supply of our products or components.
-15-
We are currently subject to market prices for the components
that we purchase, which are subject to fluctuation beyond our
control. An increase in the price of components used in our
products could result in an increase in costs to our customers and
could have a material adverse effect on our revenues and demand for
our products.
Interruptions in our ability to procure needed components for our
systems, whether due to discontinuance by our suppliers, delays or
failures in delivery, shortages caused by inadequate production
capacity or unavailability, financial failure, manufacturing
quality, or for other reasons, would adversely affect or limit our
sales and growth. There is no assurance that we will continue to
find qualified manufacturers on acceptable terms and, if we do,
there can be no assurance that product quality will continue to be
acceptable, which could lead to a loss of sales and revenues.
Our business is subject to the risks associated with doing
business in China.
Since we rely on a third-party manufacturer located in China, our
business is subject to the risks associated with doing business in
China, including:
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· adverse political and economic conditions,
particularly those potentially negatively affecting the trade
relationship between the United States and China;
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· trade protection measures, such as tariff
increases, and import and export licensing and control
requirements;
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· potentially negative consequences from changes in
tax laws;
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· difficulties associated with the Chinese legal
system, including increased costs and uncertainties associated with
enforcing contractual obligations in China;
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· historically lower protection of intellectual
property rights;
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· changes and volatility in currency exchange
rates;
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· unexpected or unfavorable changes in regulatory
requirements; and
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· difficulties in managing foreign relationships
and operations generally.
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These risks are likely to be exacerbated by our limited experience
with our current products and manufacturing processes. If demand
for our products materializes, we may have to invest additional
resources to purchase materials, hire and train employees, and
enhance our manufacturing processes. It may not be possible for us
to manufacture our product at a cost or in quantities sufficient to
make our product commercially viable. Any of these factors may
affect our ability to manufacture our products and could reduce
gross margins and profitability.
-16-
Reliance on third-party manufacturers and suppliers entails risks
to which we would not be subject if we manufactured the components
for our products ourselves, including:
· reliance on the third parties for regulatory
compliance and quality assurance;
· the possible breach of the manufacturing
agreements by the third parties because of factors beyond our
control or the insolvency of any of these third parties or other
financial difficulties, labor unrest, natural disasters or other
factors adversely affecting their ability to conduct their
business; and
· possibility of termination or non-renewal of the
agreements by the third parties, at a time that is costly or
inconvenient for us, because of our breach of the manufacturing
agreement or based on their own business priorities.
In
addition, the recent outbreak of the novel strain of coronavirus
has caused a widespread health crisis in several districts in China
resulting in temporary work stoppage sin many affected districts.
Although our manufacturer's facilities are not located in the
affected districts, if the virus should spread to the districts in
which our manufacturer's facilities are located, we could
experience delays in manufacturing and shipments of our clinical
product, which could result in clinical trial delays. If the
third-party manufacturer were to experience any prolonged
disruption for our manufacturing, we could be forced to seek
additional third party manufacturing contracts outside of China,
thereby increasing our manufacturing costs and negatively impacting
our timelines.
If
our contract manufacturer or its suppliers fail to deliver the
required commercial quantities of our components required for our
products and, if approved, for commercial sale, on a timely
basis and at commercially reasonable prices, and we are unable to
find one or more replacement manufacturers or suppliers capable of
production at a substantially equivalent cost, in substantially
equivalent volumes and quality, and on a timely basis, we would
likely be unable to meet demand for our products, and we would lose
potential revenue. It may also take a significant period of time to
establish an alternative source of supply for our components.
In the past the U.S. Government has imposed tariffs on
products manufactured in China and imported into the United States
causing the prices for such products to increase. This could cause
customer demand for our products to decrease.
Although the components of our products that are manufactured in
China are currently exempt from the tariffs on products
manufactured in China, if the exemption were to no longer be
available to such products, the imposition of tariffs on our
products would most likely cause prices to rise, which would
generally increase the price for our products, and which may cause
a reduction in demand.
-17-
Our facilities and information systems and those of our key
suppliers could be damaged as a result of disasters or
unpredictable events, which could have an adverse effect on our
business operations.
Our
logistics are currently provided by our Toccoa, Georgia facility
and multiple import and freight carriers throughout the United
States. Our suppliers for original design manufacturing ("ODM") and
original equipment manufacturing ("OEM") are located in the United
States, China, and South Korea. If major disasters such as
earthquakes, fires, floods, wars, terrorist attacks, computer
viruses, transportation disasters or other events occur in any of
these locations, or our information systems or communications
network or those of any of our key component suppliers breaks down
or operates improperly as a result of such events, our facilities
or those of our key suppliers may be seriously damaged, and we may
have to stop or delay production and shipment of our products. We
may also incur expenses relating to such damages. If production or
shipment of our products or components is stopped or delayed or if
we incur any increased expenses as a result of damage to our
facilities, our business, operating results and financial condition
could be materially adversely affected.
Increases in component costs, long lead times, supply
shortages, and supply changes could disrupt our supply chain and
have an adverse effect on our business, financial condition, and
operating results.
Meeting customer demand partially depends on our ability to obtain
timely and adequate delivery of components for our products. All of
the components that go into the manufacturing of our products are
sourced from a limited number of third-party suppliers. Our
manufacturers generally purchase these components on our behalf,
subject to certain approved supplier lists, and we do not have
long-term arrangements with most of our component suppliers. We are
therefore subject to the risk of shortages and long lead times in
the supply of these components and the risk that our suppliers
discontinue or modify components used in our products. In addition,
the lead times associated with certain components are lengthy and
preclude rapid changes in design, quantities, and delivery
schedules. We may in the future experience component shortages, and
the predictability of the availability of these components may be
limited. In the event of a component shortage or supply
interruption from suppliers of these components, we may not be able
to develop alternate sources in a timely manner. Developing
alternate sources of supply for these components may be
time-consuming, difficult, and costly and we may not be able to
source these components on terms that are acceptable to us, or at
all, which may undermine our ability to fill our orders in a timely
manner. Any interruption or delay in the supply of any of these
parts or components, or the inability to obtain these parts or
components from alternate sources at acceptable prices and within a
reasonable amount of time, would harm our ability to meet our
scheduled product deliveries to our customers.
Moreover, volatile economic conditions may make it more likely that
our suppliers may be unable to timely deliver supplies, or at all,
and there is no guarantee that we will be able to timely locate
alternative suppliers of comparable quality at an acceptable price.
Further, since the beginning of 2018, there has been increasing
rhetoric, in some cases coupled with legislative or executive
action, from several U.S. and foreign leaders regarding tariffs
against foreign imports of certain materials. Several of the
components that go into the manufacturing of our products are
sourced internationally, including from China, where the United
States has imposed tariffs on specified products imported there
following the U.S. Trade Representative Section 301 Investigation.
These tariffs have an impact on our component costs and have the
potential to have an even greater impact depending on the outcome
of the current trade negotiations, which have been protracted and
recently resulted in increases in U.S. tariff rates on specified
products from China. Increases in our component costs could have a
material effect on our gross margins. The loss of a significant
supplier, an increase in component costs, or delays or disruptions
in the delivery of components, could adversely impact our ability
to generate future revenue and earnings and have an adverse effect
on our business, financial condition, and operating results.
-18-
Adverse changes in economic and political policies of the
Chinese government could have a material adverse effect on the
overall economic growth of China, which could adversely affect our
business.
As
a result of our reliance on third-party manufacturers and suppliers
located in China, our results of operations, financial condition,
and prospects are subject to a significant degree to economic,
political, and legal developments in China. China's economy
differs from the economies of most developed countries in many
respects, including with respect to the amount of government
involvement, level of development, growth rate and control of
foreign exchange, and allocation of resources. While the
Chinese economy has experienced significant growth in the past 20
years, growth has been uneven across different regions and among
various economic sectors of China. The Chinese government has
implemented various measures to encourage economic development and
guide the allocation of resources. Some of these measures
benefit the overall Chinese economy, but may also have a negative
effect on us. For example, our financial condition and
results of operations may be adversely affected by government
control over capital investments or changes in tax regulations that
are applicable to us.
Risks Related to our Industry and Regulations
Decreases in, or stagnation of, spending or changes in the
spending policies or budget priorities for government funding of
schools, colleges, universities, other education providers or
government agencies may have a material adverse effect on our
revenue.
Any
additional decrease in, stagnation of or adverse change in
national, federal, state, provincial or local funding for primary
and secondary schools, colleges, universities, or other education
providers or for government agencies that use our products could
cause our current and prospective customers to further reduce their
purchases of our products, which could cause us to lose additional
revenue. Our customers include primary and secondary schools,
colleges, universities, other education providers which depend
heavily on government funding. Many federal, state, and local
governments have limited fiscal capacity and have experienced
recent declines in tax revenues. Many of those governments have
reacted to the decreases in tax revenues and could continue to
react to the decreases in tax revenues by cutting funding to
educational institutions. If our products are not a high priority
expenditure for such institutions, or if such institutions allocate
expenditures to substitute or alternative technologies, we could
lose revenue. In addition, a specific reduction in governmental
funding support for products such as ours could also cause us to
lose revenue.
If our products fail to comply with consumer product or
environmental laws, it could materially affect our financial
performance.
If
our products do not meet applicable safety or regulatory standards,
we could experience lost sales, diverted resources and increased
costs, which could have a material adverse effect on our financial
condition and results of operations. Our products are subject to
environmental regulations in some jurisdictions in which we will do
business, we are and will be required to comply with a variety of
product safety, product testing and environmental regulations,
including compliance with applicable laws and standards with
respect to lead content and other child safety and environmental
issues. Events that give rise to actual, potential or perceived
product safety or environmental concerns could expose us to
government enforcement action or private litigation and result in
product recalls and other liabilities. In addition, negative
consumer perceptions regarding the safety of our products could
cause negative publicity and harm our reputation.
-19-
Risks Related to Our Intellectual Property and
Technology
Defects in our products can be difficult to detect before
shipment. If defects occur, they could have a material adverse
effect on our business.
The
occurrence of errors and defects in our products could result in
loss of, or delay in, market acceptance of our products, including
harm to our brand. Correcting such errors and failures in our
products could require significant expenditure of capital by us.
Our products are highly complex and sophisticated and, from time to
time, have contained and may continue to contain design defects or
software "bugs" or failures that are difficult to detect and
correct in advance of shipping. In addition, we are rapidly
developing and introducing new products, and new products may have
higher rates of errors and defects than our established products.
We have historically provided product warranties between one and
five years, and the failure of our products to operate as described
could give rise to warranty claims. The consequences of such
errors, failures and other defects and claims could have a material
adverse effect on our business, financial condition, results of
operations and our reputation.
We may not be able to obtain patents or other intellectual
property rights necessary to protect our proprietary technology and
business.
Our
commercial success depends to a significant degree upon our ability
to develop new or improved technologies and products, and to obtain
patents or other intellectual property rights or statutory
protection for these technologies and products in the United States
and other countries. We will seek to patent concepts, components,
processes, designs and methods, and other inventions and
technologies that we consider have commercial value or that will
likely give us a technological advantage. Despite devoting
resources to the research and development of proprietary
technology, we may not be able to develop technology that is
patentable or protectable. Patents may not be issued in connection
with pending patent applications, and claims allowed may not be
sufficient to allow them to use the inventions that they create
exclusively. Furthermore, any patents issued could be challenged,
re-examined, held invalid or unenforceable or circumvented and may
not provide sufficient protection or a competitive advantage. In
addition, despite efforts to protect and maintain patents,
competitors and other third parties may be able to design around
their patents or develop products similar to our products that are
not within the scope of their patents. Finally, patents provide
certain statutory protection only for a limited period of time that
varies depending on the jurisdiction and type of patent. The
statutory protection term of certain patents may expire and,
thereafter, the underlying technology of such patents can be used
by any third party including competitors.
Prosecution and protection of the rights sought in patent
applications and patents can be costly and uncertain, often involve
complex legal and factual issues and consume significant time and
resources. In addition, the breadth of claims allowed in our
patents, their enforceability and our ability to protect and
maintain them cannot be predicted with any certainty. The laws of
certain countries maynot protect intellectual property rights to
the same extent as the laws of the United States. Even if our
patents are held to be valid and enforceable in a certain
jurisdiction, any legal proceedings that we may initiate against
third parties to enforce such patents will likely be expensive,
take significant time and divert management's attention from other
business matters. We cannot assure that any of the issued patents
or pending patent applications will provide any protectable,
maintainable or enforceable rights or competitive advantages to
us.
-20-
In
addition to patents, we will rely on a combination of copyrights,
trademarks, trade secrets and other related laws and
confidentiality procedures and contractual provisions to protect,
maintain and enforce our proprietary technology and intellectual
property rights. However, our ability to protect our brands by
registering certain trademarks may be limited. In addition, while
we will generally enter into confidentiality and nondisclosure
agreements with our employees, consultants, contract manufacturers,
distributors and resellers and with others to attempt to limit
access to and distribution of our proprietary and confidential
information, it is possible that:
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misappropriation of our proprietary and
confidential information, including technology, will nevertheless
occur;
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our confidentiality agreements will not be honored
or may be rendered unenforceable;
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third parties will independently develop
equivalent, superior or competitive technology or products;
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disputes will arise with our current or future
strategic licensees, customers or others concerning the ownership,
validity, enforceability, use, patentability or registrability of
intellectual property; or
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unauthorized disclosure of our know-how, trade
secrets or other proprietary or confidential information will
occur.
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We
cannot assure that we will be successful in protecting, maintaining
or enforcing our intellectual property rights. If we are
unsuccessful in protecting, maintaining or enforcing our
intellectual property rights, then our business, operating results
and financial condition could be materially adversely affected,
which could:
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adversely affect our relationships with current or
future distributors and resellers of our products;
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adversely affect our reputation with customers;
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be time-consuming and expensive to evaluate and
defend;
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cause product shipment delays or stoppages;
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divert management’s attention and resources;
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subject us to significant liabilities and
damages;
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require us to enter into royalty or licensing
agreements; or
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require us to cease certain activities, including
the sale of products.
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If
it is determined that we have infringed, violated or are infringing
or violating a patent or other intellectual property right of any
other person or if we are found liable in respect of any other
related claim, then, in addition to being liable for potentially
substantial damages, we may be prohibited from developing, using,
distributing, selling or commercializing certain of our
technologies and products unless we obtain a license from the
holder of the patent or other intellectual property right. We
cannot assure that we will be able to obtain any such license on a
timely basis or on commercially favorable terms, or that any such
licenses will be available, or that workarounds will be feasible
and cost-efficient. If we do not obtain such a license or find a
cost-efficient workaround, our business, operating results and
financial condition could be materially adversely affected and we
could be required to cease related business operations in some
markets and restructure our business to focus on our continuing
operations in other markets.
-22-
Our business may suffer if it is alleged or determined that
our technology or another aspect of our business infringes the
intellectual property of others.
The
markets in which we will compete are characterized by the existence
of a large number of patents and trade secrets and also by
litigation based on allegations of infringement or other violations
of intellectual property rights. Moreover, in recent years,
individuals and groups have purchased patents and other
intellectual property assets for the purpose of making claims of
infringement to extract settlements from companies like ours. Also,
third parties may make infringement claims against us that relate
to technology developed and owned by one of our suppliers for which
our suppliers may or may not indemnify us. Even if we are
indemnified against such costs, the indemnifying party may be
unable to uphold its contractual obligations, and determining the
extent such of such obligations could require additional
litigation. Claims of intellectual property infringement against us
or our suppliers might require us to redesign our products, enter
into costly settlements or license agreements, pay costly damage
awards or face a temporary or permanent
injunction prohibiting us from marketing or selling our products or
services. If we cannot or do not license the infringed intellectual
property on reasonable terms or at all, or substitute similar
intellectual property from another source, our revenue and
operating results could be adversely impacted. Additionally, our
customers and distributors may not purchase our offerings if they
are concerned that they may infringe third party intellectual
property rights. Responding to such claims, regardless of their
merit, can be time consuming, costly to defend in litigation,
divert management's attention and resources, damage our reputation
and cause us to incur significant expenses. The occurrence of any
of these events may have a material adverse effect on our business,
financial condition and operating results.
If we are unable to anticipate consumer preferences and
successfully develop attractive products, we might not be able to
maintain or increase our revenue or achieve
profitability
If
we are unable to introduce new products or technologies in a timely
manner or our new products or technologies are not accepted by our
customers, our competitors may introduce more attractive products
which would adversely impact our competitive position. Failure to
respond in a timely manner to changing consumer preferences could
lead to, among other things, lower revenues and excess inventory
positions of outdated products. Our success depends on our ability
to identify and originate product trends as well as to anticipate
and react to change demands and preferences of customers in a
timely manner.
-23-
We may be unable to keep pace with changes in technology as
our business and market strategy evolves.
There can be no assurance that we will be able to respond
successfully to technological change. We will need to respond to
technological advances and emerging industry standards in a
cost-effective and timely manner in order to remain competitive.
The need to respond to technological changes may require us to make
substantial, unanticipated expenditures.
Risks Related to Our Common Stock
Future sales of our common stock could adversely affect our
share price, and any additional capital raised by us through the
sale of equity or convertible debt securities may dilute your
ownership in us and may adversely affect the market price of our
common stock.
We
intend, from time to time, to seek additional equity or debt
financing to finance working capital requirements, continue our
expansion, develop new products or make acquisitions or other
investments. In addition, we have issued convertible securities
that are convertible into shares of our common stock. In addition,
if our business plans change, general economic, financial or
political conditions in our industry change, or other circumstances
arise that have a material effect on our cash flow, the anticipated
cash needs of our business, as well as our conclusions as to the
adequacy of our available sources of capital, could change
significantly. Any of these events or circumstances could result in
significant additional funding needs, requiring us to raise
additional capital. If additional funds are raised through the
issuance of equity shares, preferred shares or debt securities, the
terms of such securities could impose restrictions on our
operations and would reduce the percentage ownership of our
existing stockholders. If financing is not available on
satisfactory terms, or at all, we may be unable to expand our
business or to develop new business at the rate desired and our
results of operations may suffer.
-24-
The market price of our common stock may be volatile, which
could cause the value of your investment to fluctuate and possibly
decline significantly.
The
market price of our common stock may be highly volatile and subject
to wide fluctuations. Our financial performance, government
regulatory action, tax laws and market conditions in general could
have a significant impact on the future market price of our common
stock. Investors may not be able to resell your shares at or above
the current price due to a number of factors such as those listed
under this "Risk Factors" section. Some of the factors that could
negatively affect our share price or result in fluctuations in the
price of our stock include:
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our operating and financial performance and
prospects;
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our quarterly or annual earnings or those of other
companies in our industry;
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the public’s reaction to our press releases, our
other public announcements and our filings with the SEC;
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the failure of analysts to cover our common
stock;
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strategic actions by us or our competitors, such as
acquisitions or restructurings;
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announcements by us, our competitors or our vendors
of significant contracts, acquisitions, joint marketing
relationships, joint ventures or capital commitments;
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new laws or regulations or new interpretations of
existing laws or regulations applicable to our business;
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changes in accounting standards, policies,
guidance, interpretations or principles;
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announcements by third parties or governmental
entities of significant claims or proceedings against us;
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new laws and governmental regulations, or other
regulatory developments, applicable to our industry;
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changes in general conditions in the United States
and global economies or financial markets, including those
resulting from war, incidents of terrorism or responses to such
events;
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changes in government spending levels on
education;
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changes in key personnel;
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sales of common stock by us, members of our
management team or our stockholders;
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the granting or exercise of employee stock options
or other equity awards;
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the volume of trading in our common stock; and
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the realization of any risks described in this
section under the caption “Risk Factors.”
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-25-
Furthermore, the stock market has recently experienced volatility
that, in some cases, has been unrelated or disproportionate to the
operating performance of particular companies. These broad market
and industry fluctuations may adversely affect the market price of
our common stock, regardless of our actual operating
performance.
In
the past, following periods of market volatility, stockholders have
instituted securities class action litigation. If we were involved
in securities litigation, it could have a substantial cost and
divert resources and the attention of executive management from our
business regardless of the outcome of such litigation.
Certain Provisions of Nevada law may have anti-takeover
effects.
Certain provisions of Nevada law applicable to our company could
also delay or make more difficult a merger, tender offer or proxy
contest involving our company, including Sections 78.411 through
78.444 of the Nevada Revised Statutes, which prohibit a Nevada
corporation from engaging in any business combination with any
"interested stockholder" (as defined in the statute) for a period
of two years unless certain conditions are met. In addition, our
senior management is entitled to certain payments upon a change in
control and certain of the stock options and restricted shares we
have granted provide for the acceleration of vesting in the event
of a change in control of our company.
We have no intention of declaring dividends in the
foreseeable future.
The
decision to pay cash dividends on our common stock rests with our
board of directors and will depend on our earnings, unencumbered
cash, capital requirements and financial condition. We do not
anticipate declaring any dividends in the foreseeable future, as we
intend to use any excess cash to fund our operations. Investors in
our common stock should not expect to receive dividend income on
their investment, and investors will be dependent on the
appreciation of our common stock to earn a return on their
investment.
The exercise or conversion of currently outstanding
securities would further dilute holders of our common
stock.
We
currently have outstanding securities that convert into shares of
our common stock, including preferred stock that converts into
shares of our common stock and debt that converts into shares of
our common stock. Our Series D Preferred Stock converts into
twenty percent of the number of shares that are outstanding on the
date of conversion and our Series E Preferred Stock converts into
1,190,476 shares of our common stock. Our
Board of Directors has authority, without action or vote of our
shareholders, to issue shares of common and preferred stock. We may
issue shares of our common stock or preferred stock to complete a
business combination or to raise capital. Such stock issuances
could be made at a price that reflects a discount from the
then-current trading price of our common stock. These conversions
and issuances would dilute our stockholders' ownership interest,
which among other things would have the effect of reducing their
influence on matters on which our stockholders vote. In addition,
our stockholders and prospective investors may incur additional
dilution if holders of stock options and warrants, whether
currently outstanding or subsequently granted, exercise their
options or warrants to purchase shares of our common stock or if
our convertible debt holders convert their debt.
-26-
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by Tysadco Partners. We will
receive no proceeds from the sale of shares of common stock by
Tysadco Partners in this offering.
We
may receive up to $2 million in gross proceeds if we issue to
Tysadco Partners all of the additional shares issuable pursuant to
the Purchase Agreement. All such proceeds are currently expected to
be used for general corporate purposes, including working capital
and general and administrative expenses. As we are unable to
predict the timing or amount of potential issuances of all of the
additional shares issuable purchase to the Purchase Agreement, we
cannot specify with certainty the proceeds that we will have from
the sale of such additional shares. Our management will have broad
discretion in the application of the net proceeds. We may use the
proceeds for purposes that are not contemplated at the time of this
offering. It is possible that no additional shares will be issued
under the Purchase Agreement.
After the issuance of any of the shares issuable under the Purchase
Agreement, we would not receive any proceeds from the resale of
those shares by Tysadco Partners because those shares will be sold
for the account of Tysadco Partners.
We
will incur all costs associated with this prospectus and the
registration statement of which it is a part.
DETERMINATION OF OFFERING PRICE
The
prices at which the shares covered by this prospectus may actually
be sold will be determined by the prevailing public market price
for shares of our common stock, by negotiations between the Selling
Stockholder and buyers of our common stock in private transactions
or as otherwise described in the "Plan of Distribution."
THE TYSADCO TRANSACTION
General
On
May 31, 2020, we entered into the Purchase Agreement and the
Registration Rights Agreement with Tysadco Partners, which was
amended and restated on July 9, 2020. Pursuant to the terms of the
Purchase Agreement, Tysadco Partners has agreed to purchase from us
up to $2 million of our common stock (subject to certain
limitations) from time to time during the term of the Purchase
Agreement. Pursuant to the terms of the Registration Rights
Agreement, we have filed with the SEC the registration statement of
which this prospectus is a part to register for resale under the
Securities Act of the shares that have been or may be issued to
Tysadco Partners under the Purchase Agreement. The registration
statement of which this prospectus is a part may not register all
of the shares issuable pursuant to the Purchase Agreement. To sell
additional shares to Tysadco Partners under the Purchase Agreement,
we may have to file one or more additional registration statements
for those shares. Pursuant to the terms of the Purchase Agreement,
we issued 2,500,000 Commitment Shares to Tysadco Partners as
consideration for its commitment to purchase shares of our common
stock under the Purchase Agreement.
-27-
We
may, from time to time and at our sole discretion, direct Tysadco
Partners to purchase shares of our common stock upon the
satisfaction of certain conditions set forth in the Purchase
Agreement at a purchase price per share based on a discount to the
market price of our common stock at the time of sale as computed
under the Purchase Agreement. Tysadco Partners may not assign or
transfer its rights and obligations under the Purchase
Agreement.
The
Purchase Agreement prohibits us from directing Tysadco
Partners to purchase any shares of our common stock if those
shares, when aggregated with all other shares of our common stock
then beneficially owned by Tysadco Partners, would result in
Tysadco Partners and its affiliates exceeding 4.99% of our then
outstanding equity.
Purchase of Shares under the Purchase Agreement
Under the Purchase Agreement, on any business day selected by us,
we may direct Tysadco Partners to purchase the lesser of $100,000
or 200% of the average shares traded for the 10 days prior to the
closing request date, with a minimum request of $25,000. The
purchase price shall be 80% of the lowest average daily traded
price during the ten trading days commencing on the first trading
day following delivery and clearing of the delivered shares (in
each case, to be appropriately adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, reverse split or
other similar transaction that occurs on or after the date of the
Purchase Agreement).
Other than as described above, there are no trading volume
requirements or restrictions under the Purchase Agreement, and we
will control the timing and amount of any sales of our common stock
to Tysadco Partners.
Conditions to Obligations To Purchase
Tysadco Partners obligation to buy the shares of common stock is
subject to certain conditions being met which include the
following:
· The Commitment Shares having been
issued;
· This registration statement having been declared
effective;
· No Event of Default having occurred;
· The representations and warranties in the
transaction documents being true and correct in all material
respects.
-28-
Events of Default
Events of default under the Purchase Agreement include the
following:
· the effectiveness of the registration statement
of which this prospectus is a part lapses for any reason
(including, without limitation, the issuance of a stop order), or
the registration statement of which this prospectus is a part is
unavailable to Tysadco Partners for the resale of our common stock
offered hereby, and such lapse or unavailability continues for a
period of 10 consecutive business days or for more than an
aggregate of 30 business days in any 365-day period, but excluding
a lapse or unavailability where (i) we terminate a registration
statement after Tysadco Partners has confirmed in writing that all
of the shares of our common stock covered thereby have been resold
or (ii) we supersede one registration statement with another
registration statement, including (without limitation) by
terminating a prior registration statement when it is effectively
replaced with a new registration statement covering the shares of
our common stock covered by the Purchase Agreement (provided in the
case of this clause (ii) that all of the shares of our common stock
covered by the superseded (or terminated) registration statement
that have not theretofore been resold are included in the
superseding (or new) registration statement);
· suspension by our principal market of our common
stock from trading for a period of one business day;
· the de-listing of our common stock from the
OTCQX, our principal market, provided our common stock is not
immediately thereafter trading on the New York Stock Exchange, the
Nasdaq Capital Market, the Nasdaq Global Select Market, the NYSE
American, the NYSE Arca, the OTC Bulletin Board, the OTCQX operated
by the OTC Markets Group, Inc., or the OTC Markets Group, Inc. (or
any other comparable market);
· if at any time the Exchange Cap is reached and
our stockholders have not approved the transactions contemplated by
the Purchase Agreement in accordance with the applicable rules and
regulations of the OTCQX, to the extent applicable;
· the failure for any reason by our transfer agent
to issue purchase shares of our common stock to Tysadco Partners
within three business days after the applicable purchase date on
which Tysadco Partners is entitled to receive such
shares;
· any breach of the representations, warranties,
covenants or other terms or conditions contained in the Purchase
Agreement or Registration Rights Agreement that has or could have a
Material Adverse Effect (as defined in the Purchase Agreement) and,
in the case of a breach of a covenant that is reasonably curable,
that is not cured within a period of at least five business
days;
· our common stock ceases to be DTC authorized and
ceases to participate in the DWAC/FAST systems; and
· certain bankruptcy events, including any
voluntary or involuntary participation or threatened participation
in insolvency or bankruptcy proceedings by or against
us.
-29-
Tysadco Partners does not have the right to terminate the Purchase
Agreement upon any of the events of default set forth above,
however, the Purchase Agreement will automatically terminate upon
initiation of insolvency or bankruptcy proceedings by or against
us. During an event of default, all of which are outside of Tysadco
Partners' control, we may not direct Tysadco Partners to purchase
any shares of our common stock under the Purchase Agreement.
Our Termination Rights
We
have the unconditional right, at any time, for any reason and
without any payment or liability to us, to give notice to Tysadco
Partners to terminate the Purchase Agreement. In addition, the
Purchase Agreement automatically terminates upon the bankruptcy
events described above, if the commencement shall not have occurred
on or before October 31, 2020 or we sell the entire $2.0 million of
shares of common stock.
No Short-Selling or Hedging by Tysadco Partners
Tysadco Partners has agreed that neither it nor any of its
affiliates shall engage in any direct or indirect short-selling or
hedging of our common stock during any time prior to the
termination of the Purchase Agreement.
Effect of Performance of the Purchase Agreement on our
Stockholders
All
shares registered in this offering that have been or may be issued
or sold by us to Tysadco Partners under the Purchase Agreement are
expected to be freely tradable. Shares registered in this offering
may be sold by us to Tysadco Partners over a period of up to 24
months commencing on the date of this registration statement of
which this prospectus is a part becomes effective. The resale by
Tysadco Partners of a significant amount of shares registered in
this offering at any given time, or the perception that these sales
may occur, could cause the market price of our common stock to
decline and to be highly volatile. Sales of our common stock to
Tysadco Partners, if any, will depend upon market conditions and
other factors to be determined by us. We may ultimately decide to
sell to Tysadco Partners all, some or none of the additional shares
of our common stock that may be available for us to sell pursuant
to the Purchase Agreement. If and when we do sell shares to Tysadco
Partners, after Tysadco Partners has acquired the shares, Tysadco
Partners may resell all, some or none of those shares at any time
or from time to time in its discretion. Therefore, sales to Tysadco
Partners by us under the Purchase Agreement may result in
substantial dilution to the interests of other holders of our
common stock. In addition, if we sell a substantial number of
shares to Tysadco Partners under the Purchase Agreement, or if
investors expect that we will do so, the actual sales of shares or
the mere existence of our arrangement with Tysadco Partners may
make it more difficult for us to sell equity or equity-related
securities in the future at a time and at a price that we might
otherwise wish to effect such sales.
However, we have the right to control the timing and amount of any
additional sales of our shares to Tysadco Partners and the Purchase
Agreement may be terminated by us at any time at our discretion
without any cost to us.
Pursuant to the terms of the Purchase Agreement, we have the right,
but not the obligation, to direct Tysadco Partners to purchase up
to $2 million of our common stock, subject to certain limitations
and exclusive of the 2,500,000 Commitment Shares issued to Tysadco
Partners on the date of the Purchase Agreement. We have registered
what could be all of the shares issuable under the Purchase
Agreement; however, since the number of Shares we may sell cannot
be determined at this time, we may have registered only a portion
of the shares issuable under the Purchase Agreement and, therefore,
we may seek to issue and sell to Tysadco Partners under the
Purchase Agreement more shares of our common stock than are offered
under this prospectus. If we choose to do so, we must first
register for resale under the Securities Act any such additional
shares, which could cause additional substantial dilution to our
stockholders. The number of shares ultimately offered for resale
under this prospectus is dependent upon the number of shares we
direct Tysadco Partners to purchase under the Purchase
Agreement.
-30-
The
following table sets forth the amount of gross proceeds we would
receive from Tysadco Partners from our sale of shares to Tysadco
Partners under the Purchase Agreement at varying purchase
prices:
Assumed Average Purchase Price Per Share
|
|
Number
of Registered Shares to be Issued if Full Purchase(1)
|
|
Percentage of Outstanding Shares After Giving Effect to the
Issuance to Tysadco Partners(2)
|
|
Gross
Proceeds from the Sale of Shares to Tydasco Partners Under the
Purchase Agreement
|
|
$
|
0.0023(3)
|
|
|
197,500,000
|
|
23%
|
|
|
$
|
545,250
|
$
|
0.0026
|
|
|
197,500,000
|
|
23%
|
|
|
$
|
513,500
|
$
|
0.0030
|
|
|
197,500,000
|
|
23%
|
|
|
$
|
592,500
|
$
|
0.0034
|
|
|
197,500,000
|
|
23%
|
|
|
$
|
671,500
|
$
|
0.0038
|
|
|
197,500,000
|
|
23%
|
|
|
$
|
750,500
|
$
|
0.0042
|
|
|
197,500,000
|
|
23%
|
|
|
$
|
829,500
|
$
|
0.0046
|
|
|
197,500,000
|
|
23%
|
|
|
$
|
908,500
|
$
|
0.0050
|
|
|
197,500,000
|
|
23%
|
|
|
$
|
987,500
|
$
|
0.01
|
|
|
197,500,000
|
|
23%
|
|
|
$
|
1,975,000
|
|
|
|
|
|
|
|
|
|
|
|
_______________
(1) Although the Purchase Agreement provides that
we may sell up to $2 million of our common stock to Tysadco
Partners, we are only registering 200,000,000 shares (inclusive of
the 2,500,000 Commitment Shares issued to Tysadco Partners) under
this prospectus, which may or may not cover all of the shares we
ultimately sell to Tysadco Partners under the Purchase Agreement.
The number of registered shares to be issued as set forth in this
column (i) excludes the 2,500,000 Commitment Shares previously
issued and registered because no proceeds will be attributable to
such shares, and (ii) is without regard for the Beneficial
Ownership limitation.
(2)
The denominator is based on 640,887,727 shares outstanding as
of July 7, 2020, and the number of shares set forth in the adjacent
column that we would have sold to Tysadco Partners, assuming the
average purchase price in the first column. The numerator is based
on the number of shares issuable under the Purchase Agreement (that
are the subject of this offering) at the corresponding assumed
average purchase price set forth in the first column.
(3)
The closing sale price of our common stock on July 9,
2020.
-31-
Registration Rights
Pursuant to the terms of a Registration Rights Agreement entered
into between us and the Selling Stockholder dated as of May 31,
2020, which was entered into in connection with the Purchase
Agreement, we agreed to file a registration statement for the
resale of the shares of Common Stock within 60 days of the date of
the agreement.
We
will pay all reasonable expenses incurred in connection with the
registrations described above. However, we will not be responsible
for any broker or similar concessions or any legal fees or other
costs of the Selling Stockholders.
SELLING STOCKHOLDER
This prospectus relates to the possible resale by the selling
securityholder, Tysadco Partners, of shares of common stock that
have been or may be issued to Tysadco Partners pursuant to the
Purchase Agreement. We are filing the registration statement of
which this prospectus forms a part pursuant to the provisions of
the Registration Rights Agreement, which we entered into with
Tysadco Partners on May 31,2020 concurrently with our execution of
the Purchase Agreement, in which we agreed to provide certain
registration rights with respect to sales by Tydasco Partners of
the shares of common stock that have been or may be issued to
Tydasco Partners under the Purchase Agreement.
Tysadco Partners, as the selling securityholder, may, from time to
time, offer and sell pursuant to this prospectus any or all of the
shares that we have issued or may sell to Tydasco Partners under
the Purchase Agreement. The selling securityholder may sell some,
all or none of its shares. We do not know how long the selling
securityholder will hold the shares before selling them, and we
currently have no agreements, arrangements or understandings with
the selling securityholder regarding the sale of any of the
shares.
The
shares beneficially owned after the offering assumes the sale of
all of the shares offered by the Selling Stockholder pursuant to
this prospectus. However, because the Selling Stockholder may sell
all or some or none of the shares under this prospectus or another
permitted manner, we cannot assure you that the actual number of
shares that will be sold by the Selling Stockholder or that will be
held by the Selling Stockholder after completion of any sales.
We do not know how long the Selling Stockholder will hold the
shares before selling them.
The
Selling Stockholder may sell all, some or none of the shares in
this offering. See "Plan of Distribution."
-32-
The
following table presents information regarding the selling
securityholder and the shares that it may offer and sell from time
to time under this prospectus. The table is prepared based on
information supplied to us by the selling securityholder, and
reflects its holdings as of July 7, 2020. Neither Tysadco Partners
nor any of its affiliates has held a position or office, or had any
other material relationship, with us or any of our predecessors or
affiliates other than a consulting agreement that we entered into
with Tydasco Partners effective May 1, 2019 that expired May 1,
2020 pursuant to which Tydasco Partners was issued 52,508 shares of
common stock as well as cash compensation. Beneficial ownership is
determined in accordance with Section 13(d) of the Exchange Act and
Rule 13d-3 thereunder.
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Stockholder
|
|
Shares
Beneficially
Owned Before
this
Offering
|
|
|
Percentage of
Outstanding
Shares
Beneficially
Owned Before
this Offering
|
|
|
Shares to be Sold
in this Offering Assuming
The Company issues
the Maximum Number
of Shares Under the
Purchase Agreement
|
|
|
Percentage
of
Outstanding
SharesBeneficially Owned
After thisOffering
|
Tydasco Partners, LLC(1)
|
|
200,052,508 (2)
|
|
|
*
|
|
|
200,000,000
|
|
|
*
|
* less than 1%
(1)
Howard Davner, the Managing Members of Tydasco Partners, LLC, is
deemed to be beneficial owner of all of the shares of common stock
owned by Tydasco Partners, LLC. Mr. Davner has sole voting and
investment power over the shares being offered under the prospectus
filed with the SEC in connection with the transactions contemplated
under the Purchase Agreement. Tydasco Partners is not a
licensed broker-dealer or an affiliate of a licensed broker-dealer.
The address of Tydasco Partners is 222 West 80th Street, New York,
New York 10024.
(2)
Represents (a) 2,500,000 shares issued to Tydasco Partners as
Commitment Shares under the Purchase Agreement and being registered
under this prospectus; (b) an additional 197,500,000 shares which
may be issued under the Purchase Agreement, if and when we sell
shares to Tydasco Partners under the Purchase Agreement, and which
may or may not cover all the shares we ultimately sell to Tydasco
Partners under the Purchase Agreement, depending on the purchase
price per share; and (c) 52,508 shares issued to Tydasco Partners
as consulting fees pursuant to the terms of the consulting
agreement described above.
(3)
Based on outstanding shares of our common stock as of July 7, 2020
of 640,887,727 shares.
(4)
Although the Purchase Agreement provides that we may sell up to
$2,000,000 of our common stock to Tydasco Partners in addition to
the 2,500,000 Commitment Shares that have already been issued to
Tydasco Partners, only 200,000,000 shares of our common stock are
being offered under this prospectus that have been or may be
sold by us to Tydasco Partners at our discretion from time to time
over a 24-month period commencing after the satisfaction of certain
conditions set forth in the Purchase Agreement, including that the
SEC has declared effective the registration statement that includes
this prospectus. Depending on the price per share at which we sell
our common stock to Tydasco Partners pursuant to the Purchase
Agreement, we may need to sell to Tydasco Partners under the
Purchase Agreement more shares of our common stock than are offered
under this prospectus in order to receive aggregate gross proceeds
equal to the $2,000,000 total commitment available to us under the
Purchase Agreement. If we choose to do so, we must first register
for resale under the Securities Act such additional shares. The
number of shares ultimately offered for resale by Tydasco Partners
is dependent upon the number of shares we sell to Tydasco Partners
under the Purchase Agreement.
-33-
DIVIDEND POLICY
We
have never declared nor paid any cash dividends on our
C-Corporation common stock, and currently intend to retain all of
our cash and any earnings for use in our business and, therefore,
do not anticipate paying any cash dividends in the foreseeable
future. Any future determination to pay cash dividends on our
common stock will be at the discretion of the Board of Directors
and will be dependent upon our consolidated financial condition,
results of operations, capital requirements and such other factors
as the Board of Directors deems relevant.
PLAN OF DISTRIBUTION
An
aggregate of up to 175,000,000 shares of our common stock may be
offered by this prospectus by Tysadco Partners pursuant to
the Purchase Agreement. The common stock may be sold or distributed
from time to time by Tysadco Partners directly to one or more
purchasers or through brokers, dealers, or underwriters who may act
solely as agents at market prices prevailing at the time of sale,
at prices related to the prevailing market prices, at negotiated
prices, or at fixed prices, which may be changed. The sale of the
common stock offered by this prospectus could be effected in one or
more of the following methods:
- ordinary brokers' transactions;
- transactions involving cross or block
trades;
- through brokers, dealers, or underwriters who may
act solely as agents;
- "at the market" into an existing market for the
common stock;
- in other ways not involving market makers or
established business markets, including direct sales to purchasers
or sales effected through agents;
- in privately negotiated transactions; or
- any combination of the foregoing.
-34-
In
order to comply with the securities laws of certain states, if
applicable, the shares may be sold only through registered or
licensed brokers or dealers. In addition, in certain states, the
shares may not be sold unless they have been registered or
qualified for sale in the state or an exemption from the state's
registration or qualification requirement is available and complied
with.
Tysadco Partners is an "underwriter" within the meaning of Section
2(a)(11) of the Securities Act.
Tysadco Partners has informed us that it intends to use an
unaffiliated broker-dealer to effectuate all sales, if any, of the
common stock that it may purchase from us pursuant to the Purchase
Agreement. Such sales will be made at prices and at terms then
prevailing or at prices related to the then current market price.
Each such unaffiliated broker-dealer will be an underwriter within
the meaning of Section 2(a)(11) of the Securities Act. Tysadco
Partners has informed us that each such broker-dealer will
receive commissions from Tysadco Partners that will not exceed
customary brokerage commissions.
Brokers, dealers, underwriters or agents participating in the
distribution of the shares as agents may receive compensation in
the form of commissions, discounts, or concessions from Tysadco
Partners and/or purchasers of the common stock for whom the
broker-dealers may act as agent. The compensation paid to a
particular broker-dealer may be less than or in excess of customary
commissions. Neither we nor Tysadco Partners can presently estimate
the amount of compensation that any agent will receive. We know of
no existing arrangements between Tysadco Partners or any
other stockholder, broker, dealer, underwriter or agent relating to
the sale or distribution of the shares offered by this prospectus.
At the time a particular offer of shares is made, a prospectus
supplement, if required, will be distributed that will set forth
the names of any agents, underwriters or dealers and any
compensation from Tysadco Partners , and any other required
information.
We
will pay the expenses incident to the registration, offering, and
sale of the shares to Tysadco Partners. We have agreed to indemnify
Tysadco Partners and certain other persons against certain
liabilities in connection with the offering of shares of common
stock offered hereby, including liabilities arising under the
Securities Act or, if such indemnity is unavailable, to contribute
amounts required to be paid in respect of such liabilities. Tysadco
Partners has agreed to indemnify us against liabilities under the
Securities Act that may arise from certain written information
furnished to us by Tysadco Partners specifically for use in this
prospectus or, if such indemnity is unavailable, to contribute
amounts required to be paid in respect of such liabilities.
Tysadco Partners has represented to us that at no time prior to the
Purchase Agreement has it or its agents, representatives or
affiliates engaged in or effected, in any manner whatsoever,
directly or indirectly, any short sale (as such term is defined in
Rule 200 of Regulation SHO of the Exchange Act) of our common stock
or any hedging transaction, which establishes a net short position
with respect to our common stock. Tysadco Partners has agreed
that during the term of the Purchase Agreement, it, its agents,
representatives or affiliates will not enter into or effect,
directly or indirectly, any of the foregoing transactions.
-35-
We
have advised Tysadco Partners that it is required to comply with
Regulation M promulgated under the Exchange Act. With certain
exceptions, Regulation M precludes Tysadco Partners, any affiliated
purchasers, and any broker-dealer or other person who participates
in the distribution from bidding for or purchasing, or attempting
to induce any person to bid for or purchase any security which is
the subject of the distribution until the entire distribution is
complete. Regulation M also prohibits any bids or purchasesmade in
order to stabilize the price of a security in connection with the
distribution of that security. All of the foregoing may affect the
marketability of the securities offered by this prospectus.
This offering will terminate on the date that all shares offered by
this prospectus have been sold by Tysadco Partners.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and plan of operations together with our
financial statements and the related notes appearing elsewhere in
this prospectus. In addition to historical information, this
discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results
may differ materially from those discussed below. Factors that
could cause or contribute to such differences include, but are not
limited to, those identified below, and those discussed in the
section titled "Risk Factors" included elsewhere in this
prospectus. All amounts in this report are in U.S. dollars, unless
otherwise noted.
Since we completed a reverse triangular merger in June 2018, we
have been a distributor of interactive learning technology hardware
and software that allows the presenter and participant to engage in
a fully collaborative instructional environment. Our products
include our own private-label interactive touch screen panel as
well as numerous other national and international branded
peripheral and communication devices. New technologies like our own
touchscreen panels are sold along with renowned brands such as
Google Chromebooks, Microsoft Surface Tablets, Lenovo and Acer
computers, Verizon WiFi and more. We provide a multitude of
services to our customers, including installation, training, and
maintenance. Prior to the merger, our sole revenue source was
derived from FullCircle Entertainment, Inc. ("FLCE") our
subsidiary's operation of a cinema complex in Indianapolis,
Indiana, which was sold in February 2019. In September 2019, we
acquired Interlock Concepts, Inc. (Concepts) and Ehlert Solutions
Group, Inc. (Solutions).
This Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) includes a discussion of our
operations for the three and nine months ended March 31, 2020 and
the three and nine month period ended March 31, 2019. The
discussion of our operations for the three and nine months ended
March 31, 2019 does not include the operations of Concepts
and Solutions but includes the operations of the cinema complex in
Indianapolis, Indiana. The discussion of the operations for the
three and nine months ended March 31, 2020 includes the operations
of Concepts and Solutions since they were acquired in September
2019 but does not include the operations of the cinema complex.
Accordingly, the results of operations reported for the three and
nine months ended March 31, 2019 and 2020 are not comparable.
-36-
With the global spread of the ongoing novel coronavirus
("COVID-19") pandemic in the first quarter of 2020, we have
implemented business continuity plans designed to address and
mitigate the impact of the COVID-19 pandemic on our employees and
business. While our sales have not declined and in fact have
increased significantly during the fourth quarter, as school
systems have sought to operate remotely during this pandemic, the
ability of our customers to timely pay bills may be adversely
impacted. Although, payments are currently being made timely, there
can be no assurance that such timely payment schedules will
continue. The business of our suppliers and other commercial
partners, our corporate development objectives and the value of and
market for our common stock, will depend on future developments
that are highly uncertain and cannot be predicted with confidence
at this time, such as the ultimate duration of the pandemic, travel
restrictions, quarantines, social distancing and business closure
requirements in the United States and other countries, and the
effectiveness of actions taken globally to contain and treat the
disease. The global economic slowdown and the other risks and
uncertainties associated with the pandemic could have a material
adverse effect on our business, financial condition, results of
operations and growth prospects. In addition, to the extent the
ongoing COVID-19 pandemic adversely affects our business and
results of operations, it may also have the effect of heightening
many of the other risks and uncertainties which we face.
Revenue for the quarter and year ended June 30, 2020 are expected
to be significantly higher than the revenue reported for the same
time periods last year. However, there can be no assurance that
such revenue will continue to be achieved after the pandemic is
over or that we will be able to collect amounts owed to use in a
timely manner.
Recent Developments
The
Purchase Agreement
On
May 31, 2020, we entered into a purchase agreement, or the Purchase
Agreement, and the Registration Rights Agreement with Tysadco
Partners, which was amended and restated on July 9, 2020. Under the
Purchase Agreement, we have the right to sell to Tysadco Partners
up to $2 million in shares of common stock, subject to certain
limitations and conditions set forth in the Purchase Agreement. As
consideration for Tysadco Partner's commitment to purchase shares
of common stock pursuant to the Purchase Agreement, we issued to
Tysadco Partners 2,500,000 shares of common stock, or the
Commitment Shares. We did not receive any cash proceeds from the
issuance of such shares. See "The Tydasco Transaction" for
additional information regarding the terms of the Purchase
Agreement and Registration Rights Agreement that we entered into
with Tysadco partners. There can be no assurance that we will
be able to generate sufficient proceeds from the issuance of shares
to Tydasco Partners to satisfy our liquidity needs.
-37-
Purchase of Concepts and Solutions
On
September 4, 2019, we entered into a stock purchase agreement with
Concepts and Solutions. Under the stock purchase agreement,
we acquired 100% of the outstanding capital stock of both Concepts
and Solutions. The purchase price for the acquisition was 1,350,000
shares of common stock and a two year note payable to the seller
for $3,000,000. The note payable to the seller is subject to
adjustment based on the achievement of certain future gross
revenues and successful completion of certain pre-acquisition
withholding tax issues of Concepts and Solutions. Solutions and
Concepts are Utah-based audio design and manufacturing companies
creating innovative products that provide fundamental tools for
building notification systems primarily to K-12 education market
customers located primarily in the north and north-west United
States. Solutions and Concepts' products and services allow
institutions access to intercom, scheduling, and notification
systems with improved ease of use. The products provide an
open architecture solution to customers which allows the products
to be used in both existing and new environments. Intercom,
public announcement (PA), bell and control solutions are easily
added and integrated within the open architecture design and
software model. These products combine elements over a common
internet protocol (IP) network, which minimizes infrastructure
requirements and reduces costs by combining systems.
Private Placement
Pursuant to the terms of a Securities Purchase Agreement, initially
dated as of October 28, 2019 and amended and restated as of
November 25, 2019 (the "Securities Purchase Agreement"), we issued
and sold a convertible debenture (the "Convertible Debenture") to
an investor in the aggregate principal amount of $1,000,000 that is
convertible into shares of our common stock, which bears interest
at the rate of 8.0% per annum that matures on November 25, 2020,
which may be extended at the option of the investor in the event
that, and for so long as, an Event of Default (as defined in the
Convertible Debenture) will have occurred and be continuing on the
maturity date. The Convertible Debenture was issued with a 7.0%
original issue discount, resulting in net proceeds to us of
$930,000. As part of the issuance of the Convertible Debenture, we
issued to the investor 500,000 shares of common stock.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis discusses our condensed
consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these condensed consolidated
financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the balance
sheet date and reported amounts of revenue and expenses during the
reporting period. On an ongoing basis, we evaluate our estimates
and judgments. We base our estimates and judgments on historical
experience and on various other factors that are reasonable under
the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
We
believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
condensed consolidated financial statements.
-38-
Revenue recognition
Theater Ticket Sales and Concessions
Revenues are generated principally through admissions and
concessions sales with proceeds received in cash or via credit card
at the point of sale. Revenues from ticket sales and concessions
ended on February 6, 2019 when this segment was sold.
Interactive Panels and Related Products
We
derive revenue from the sale of interactive panels and other
related products. Sales of these panels may also include optional
equipment, accessories and services (installation, training and
other services, including maintenance services and/or an extended
warranty). Product sales and installation revenue are recognized
when all of the following criteria have been met: (1) products have
been shipped or customers have purchased and accepted title to the
goods; service revenue for installation of products sold is
recognized as the installation services are performed, (2)
persuasive evidence of an arrangement exists, (3) the price to the
customer is fixed, and (4) collectability is reasonably
assured.
Product sales resulting from fixed-price contracts involve a signed
contract for a fixed price or a binding purchase order to provide
our interactive panels and accessories. Contract arrangements
exclude a right of return for delivered items. Product sales
resulting from fixed-price contracts are generated from
multiple-element arrangements that require separate units of
accounting and estimates regarding the fair value of individual
elements. We have determined that our multiple-element arrangements
that qualify as separate units of accounting are (1) product sales
and (2) installation and related services. There is objective and
reliable evidence of fair value for both the product sales and
installation services and allocation of arrangement consideration
for each of these units is based on their relative fair values.
Each of these elements represent individual units of accounting, as
the delivered item has value to a customer on a
stand-alone basis. Our products can be sold on a stand-alone basis
to customers which provides objective evidence of the fair value of
the product portion of the multi-element contract, and thus
represents our best estimate of selling price.
The
fair value of installation services is separately calculated using
expected costs of installation services. Many times the value of
installation services is calculated using price quotations from
subcontractors to us who perform installation services on a
stand-alone basis.
We
sell equipment with embedded software to our customers. The
embedded software is not sold separately and it is not a
significant focus of our marketing effort. We do not provide
post-contract customer support specific to the software or incur
significant costs that are within the scope of Financial Accounting
Standards Board ("FASB") guidance on accounting for software to be
leased or sold. Additionally, the functionality that the software
provides is marketed as part of the overall product. The software
embedded in the equipment is incidental to the equipment as a
whole.
-39-
Deferred revenue consists of customer deposits and advance billings
of our products where sales have not yet been recognized. Shipping
and handling costs billed to customers are included in revenue in
the accompanying statements of operations. Costs incurred by us
associated with shipping and handling are included in cost of sales
in the accompanying statements of operations. Sales are recorded
net of sales returns and discounts, and sales are presented net of
sales-related taxes.
Because of the nature and quality of our products, we provide for
the estimated costs of warranties at the time revenue is recognized
for a period of five years after purchase as a secondary warranty.
(See "Product Warranty".)
Stock Compensation
We
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. We, 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.
Business Combinations
We
account for business combinations under the acquisition method of
accounting. Under this method, acquired assets, including
separately identifiable intangible assets, and any assumed
liabilities are recorded at their acquisition date estimated fair
value. The excess of purchase price over the fair value amounts
assigned to the assets acquired and liabilities assumed represents
the goodwill amount resulting from the acquisition. Determining the
fair value of assets acquired and liabilities assumed involves the
use of significant estimates and assumptions.
Concurrent with the acquisition of Concepts and Solutions on
September 4, 2019, we applied pushdown accounting. Pushdown
accounting refers to the use of the acquirer's basis in the
preparation of the acquiree's separate financial statements as the
new basis of accounting for the acquiree.
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. Judgements regarding indicators of potential
impairment are based on market conditions and operational
performance of the business.
-40-
At
each fiscal year-end, we perform an analysis of goodwill. We
may assess our 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. If determined to be impaired, an impairment charge is
recorded as a general and administrative expense within our
consolidated statements of operations.
Our
management determined that a triggering event to assess goodwill
impairment occurred during the three months ended March 31, 2020
due to the separation of a key executive associated with the
acquisition of Concepts and Solutions. While there was no single
determinative event, the consideration in totality of several
factors that developed during the third quarter of 2020 led
management to conclude that it was more likely than not that the
fair values of certain intangible assets and goodwill acquired as
part of that acquisition were below their carrying amounts. These
factors included: a) former key executive separating from us; b)
respective former key executive violating his noncompete changing
the use and value of it; c) sustained decrease in our share price
which reduced market capitalization; and d) uncertainty in the
United States and global economies beginning in March and
continuing through May 2020 due to COVID-19. As a result of the
interim impairment test, the unaudited results for the third
quarter of 2020 included non-cash impairment losses of
approximately $2,000,000, including $800,287 related to goodwill
and $1,200,000 related to finite-lived intangible assets.
Intangible Assets
Intangible assets are stated at the lower of cost or fair value.
Intangible assets are amortized on a straight-line basis over
periods ranging from two to five years, representing the period
over which we expect to receive future economic benefits from these
assets.
As
noted above, management determined certain intangible assets were
impaired during the three months ended March 31, 2020.
-41-
Product Warranty
We
generally warrant our product against certain manufacturing and
other defects. These product warranties are provided for specific
periods of time, depending on the nature of the product, the
geographic location of its sales and other factors. The accrued
warranty costs are based primarily on historical experience of
actual warranty claims as well as current information on repair
costs.
Derivative Liabilities
We
generally do not use derivative financial instruments to hedge
exposures to cash flow or market risks. However, certain
other financial instruments, such as warrants and embedded
conversion features on convertible debt, are classified as
derivative liabilities due to protection provisions within the
agreements. Such financial instruments are initially recorded
at fair value using the Monte Carlo model and subsequently adjusted
to fair value at the close of each reporting period. We
account for derivative instruments and debt instruments in
accordance with ASC 815, ASU 2017-11, and associated pronouncements
related to the classification and measurement of warrants and
instruments with conversion features.
Recently Adopted Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU is
intended to improve the reporting of leasing transactions to
provide users of financial statements with more decision-useful
information. This ASU will require organizations that lease assets
to recognize on the balance sheet the assets and liabilities for
the rights and obligations created by those leases. The amendments
in this update are effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal
years, using a modified retrospective approach. We adopted the
standard on July 1, 2019 with no material impact on the
consolidated financial statements.
In
November 2019, the FASB issued ASU No. 2019-08, Compensation –
Stock Compensation (Topic 718). This ASU requires that an entity
measure and classify share based payment awards granted to a
customer by applying the guidance in Topic 718. The amount
recorded as a reduction of the transaction price is required to be
measured on the basis of the grant-date fair value of the
share-based payment award in accordance with Topic 718. The
amendments in this update are effective for fiscal years beginning
after December 15, 2019, and interim periods within those years.
Early adoption is permitted. We adopted the standard on July 1,
2019 with no material impact on the consolidated financial
statements.
-42-
In
April 2019, the FASB issued ASU No. 2019-04, Codification
Improvements to Topic 326, Financial Instruments – Credit Losses,
Topic 815, Derivatives and Hedging, and Topic 825, Financial
Instruments. This ASU provides amendments to Topic 326 related to
estimating and measuring credit losses. The amendments in this
update are effective for fiscal years beginning after December 15,
2019, and interim periods within those years. Early adoption is
permitted. We adopted the standard on July 1, 2019 with no material
impact on the consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value
Measurement (Topic 820) – Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurements. This ASU
provides amendments on changes in unrealized gains and losses, the
range and weighted average of significant unobservable inputs used
to develop Level 3 fair value measurements, and the narrative
description of the measurement uncertainty that should be applied.
The amendments in this update are effective for fiscal years
beginning after December 15, 2019, and interim periods within those
years. Early adoption is permitted. We adopted the standard on July
1, 2019 with no material impact on the consolidated financial
statements.
Results of Operations for the Nine Months Ended March 31, 2020
and 2019 and for the Three Months ended March 31, 2020 and March
31, 2019
Revenue
Total revenues recognized were $349,247 and $348,723 for the three
months ended March 31, 2020 and 2019, respectively, an increase of
0.2%. Total revenues recognized were $1,850,673 and $1,717,353 for
the nine months ended March 31, 2020 and 2019, respectively, an
increase of 8%. Additionally, deferred revenue amounted to $926,358
and $247,007 as of March 31, 2020 and June 30, 2019, respectively.
There were no revenues during the three and nine months ended March
31, 2020 from our entertainment segment which was sold in February
2019. Revenues during the three and nine months ended March 2020
substantially consisted of revenues from sales of technology
interactive panels and related products. Revenues increased
over the three and nine months ended March 31, 2020 due to the
increases in the customer base for interactive panels and related
products as well as additional revenues received through Concepts
and Solutions, which were acquired in September 2019, offset by the
decrease in entertainment revenue resulting from the sale of FLCE
in February 2019. (See Purchase of Concepts and Solutions).
Cost of Sales and Gross Profit Summary
Our
cost of sales was $130,614 and $285,148 for the three months ended
March 31, 2020 and 2019, respectively, a decrease of approximately
54%. Our cost of sales was $1,116,398 and $1,165,711 for the nine
months ended March 31, 2020 and 2019, respectively, a decrease of
approximately 4%. Cost of sales for the three and nine months ended
March 31, 2020 consists primarily of manufacturing, freight, and
installation costs. There was no cost of sales for the three and
nine months ended March 31, 2020 associated with the entertainment
segment. There are no significant overhead costs which impact cost
of sales. Cost of sales decreased from the three and nine
months ended March 31, 2020 due to costs associated with higher
revenues generated from technology and interactive panels offset by
the fact that there was no cost of sales related to the
entertainment segment during the three and nine months ended March
31, 2020 due to the sale of FLCE. (See Purchase of Concepts and
Solutions). Our gross profit as a percentage of total revenues was
63% and 18% for the three months ended March 31, 2020 and 2019,
respectively, and 40% and 32% for the nine months ended March 31,
2020 and 2019, respectively.
-43-
General and Administrative
Total general and administrative expenses (including stock
compensation expenses) were $3,710,680 and $2,043,181 for the three
months ended March 31, 2020 and 2019, respectively, an increase of
82%. General and administrative expenses were $8,319,900 and
$4,408,951 for the nine months ended March 31, 2020 and 2019,
respectively an increase of 89%. General and administrative
expenses consist primarily of salaries and stock compensation
expense, office rent, travel expense, amortization expense,
impairment charges and professional fees. Of this amount, $48,034
and $2,055,726 represent consulting fees and employee compensation
paid through the issuance of stock, which did not impact cash, for
the three and nine months ended March 31, 2020, respectively. There
was no stock compensation or stock issued for services during the
three and nine months ended March 31, 2019. Additionally,
amortization of intangible assets for the three and nine months
ended March 31, 2020 totaled $278,750 and $536,000, which did not
impact cash. There was no amortization of intangibles during the
three and nine months ended March 31, 2019.
Management of the Company determined that a triggering event to
assess the impairment of goodwill and intangibles associated with
the acquisition of Concepts and Solutions occurred during the third
quarter of 2020. While there was no single determinative
event, the consideration in totality of several factors that
developed during this quarter led management to conclude that it
was more likely than not that the fair values of certain intangible
assets and goodwill acquired as part of the acquisition were below
their carrying amounts. As a result of the assessment, we
recorded non-cash impairment charges to write-down the carrying
values of our intangible assets to their fair values by $1,200,000.
In addition, we recognized goodwill impairment charges of
approximately $800,287 to write-down the carrying value of the
goodwill acquired through the acquisition to its fair value. These
impairment charges are more fully described in Note 1, 5 and 12 to
the accompanying condensed consolidated financial statements.
When excluding the non-cash impairment charge taken during the
three month period ended March 31, 2020, general and administrative
expenses decreased to $1,743,768 from $2,043,181 for the three
months ended March 31, 2020 and 2019, respectively, a decrease of
15%. This is directly related to saving money when we can during
our growth and the desire to take advantage of market opportunities
for less expensive services.
Interest Expense
Interest expense amounted to $1,860,498 and $100,893 for the three
months ended March 31, 2020 and 2019, respectively, and $3,822,927
and $163,258 for the nine months ended March 31, 2020 and 2019. The
increase in interest expense was due to the increase in our debt.
During the three months and nine months ended March 31, 2020,
we amortized $91,338 and $247,794 of debt discounts to interest
expense, respectively. During the three months and nine months
ended March 31, 2019, we amortized $40,578 and $45,022 to interest
expense, respectively.
During the three and nine months ended March 31, 2020, the Company
amortized $603,852 and $1,412,705 of original issue debt discount
on derivative instruments to interest accretion, respectively.
No debt discounts were amortized or accreted during the three
and nine months ended March 31, 2019.
-44-
Other Income (Expense)
The
outstanding warrants and conversion features in convertible notes
meet the definition of a derivative liability instrument because
the exercise price of the warrants and the conversion rates are
variable. As a result, the outstanding warrants and conversion
features of the notes are recorded as a derivative liability at
fair value and marked-to-market each period with the change in fair
value charged or credited to income. A derivative liability of
$179,013 and $1,025,944 is recorded at March 31, 2020 and June 30,
2019. A change in fair value of the derivative instruments was
accreted by $695,300 and $1,326,957 during the three and nine
months ended March 31, 2020, respectively, due to the change in our
stock price. There were no outstanding derivative liability
instruments during the three month or nine months ended March 31,
2019, and therefore no change in fair value was recognized for that
period. These amounts do not impact cash.
Net Loss for the Period
As
a result of the foregoing, net loss incurred for the three months
ended March 31, 2020 and 2019 was $5,261,097 and $1,983,028,
respectively, an increase of 165%. Net loss incurred for the nine
months ended March 31, 2020 and 2019 was $10,100,651 and
$3,869,278, respectively, an increase of 161%. Noncash
contributing factors for the net loss incurred for the three and
nine months ended March 31, 2020 is as follows: a) $48,034 and
$2,055,726 represent consulting fees and employee compensation paid
through the issuance of stock for the three and nine months ended
March 31, 2020, respectively; b) amortization of intangible assets
for the three and nine months ended March 31, 2020 totaling
$278,750 and $536,000; and c) impairment charges taken of
$2,000,287 for the three and nine months ended March 31, 2020.
Results of Operations for the Year Ended June 30, 2019 and Three
Month Period ended June 30, 2018 and Year ended March 31,
2018
Technology:
Revenues recognized were $1,292,353 for the year ended June 30,
2019. Additionally, deferred revenue amounted to $247,007 as of
June 30, 2019. Revenues increased from the three months ending June
30, 2018, because this was the first complete year of our current
operations as a learning technology manufacturer.
Revenues recognized were $172,754 for the three months ended June
30, 2018. Additionally, deferred revenue amounted to $219,820 as of
June 30, 2018. Revenues decreased from the year ended March 31,
2018 due to a combination of change in fiscal year-end and
transitioning from a distributor of interactive panels to a
manufacturer of interactive panels.
Revenues recognized were $2,319,488 for the year ended March 31,
2018, when the Company was primarily a distributor of interactive
panels.
-45-
Theater:
Revenues were $589,705 for the period from July 1, 2018 through
February 6, 2019. Revenues fluctuate based on attendance by
customers which fluctuates based on viewing options, however, the
increase as compared to the three months ending June 30, 2018 is
because this was approximately an eight month period of
operations.
Revenues were $34,946 for the period from acquisition on June 22,
2018 to June 30, 2018. Revenues fluctuate based on attendance by
customers. Attendance at the theater fluctuates based on viewing
options.
There were no revenues for the theater during the year ended March
31, 2018.
Cost of Revenue and Gross Profit Summary
Technology:
Our
cost of revenue was $1,545,093 for the year ended June 30, 2019
consisting primarily of manufacturing, freight, warranty and
installation costs. There are no significant overhead costs which
impact cost of revenue.
Our
gross margin percentage was -19.6% for the year ended June 30,
2019.
Our
cost of revenue was $171,304 for the three months ended June 30,
2018 consisting primarily of manufacturing, freight, and
installation costs. There are no significant overhead costs which
impact cost of revenue. Our gross margin was -6% for the period
ended June 30, 2018, excluding office supplies.
Our
cost of revenue was $1,893,109 for the year ended March 31, 2018
consisting primarily of distribution, freight, and installation
costs. There are no significant overhead costs which impact cost of
revenue. Our gross margin was 19% for the year ended March 31,
2018, excluding office supplies.
Theater:
Our
cost of revenue was $221,238 for the period from July 1, 2018
through February 6, 2019. Cost of revenues represent film
rental costs and concession food costs primarily.
Our
gross margin percentage was 62.5% for the period from July 1, 2018
through February 6, 2019.
Our
cost of revenue was $6,804 for the period from acquisition on June
22, 2018 to June 30, 2018. Cost of revenues represent film rental
costs and concession food costs primarily. Our gross margin
percentage was 81% for the period from acquisition on June 22, 2018
to June 30, 2018.
There were no costs of revenue for the theater during the year
ended March 31, 2018.
-46-
Operating Expenses Summary
Technology
Sales and Marketing
Sales and marketing expenses were $42,991 for the year ended June
30, 2019. Sales and marketing expenses were $30,614 for the three
months ended June 30, 2018. Sales and marketing expenses were
$41,883 for the year ended March 31, 2018. Such expenses consist
primarily of advertising expenses and presentations at technology
trade shows and are included in total general and administrative
expenses. The Company is making efforts to develop new technology
and to market that technology through advertising.
General and Administrative
General and administrative expenses were $5,408,917 for the year
ended June 30, 2019 consisting primarily of salary expense, office
rent, insurance premiums, and professional fees. Of this amount,
$2,416,934 of consulting fees and employee compensation were paid
through the issue of stock, which did not impact the Company's
cash.
General and administrative expenses were $1,364,124 for the three
months ended June 30, 2018, which include sales and marketing
expenses of $30,614 and stock issued for compensation and services
of $645,200.
General and administrative expenses were $1,574,808 for the year
ended March 31, 2018, which include sales and marketing expenses of
$41,883.
General and administrative expenses consist primarily of salary
expense, office rent, insurance premiums, and professional
fees.
Interest Expense
Interest expenses amounted to $292,391 for the year ended June 30,
2019. During the year ended June 30, 2019, the Company amortized
$89,279 of debt discounts to interest expense. Significant noncash
transactions involving interest expense during the year ended June
30, 2019 included prepayment penalty interest of $134,461 due to
the advance repayment of two convertible notes.
During the year ended June 30, 2019, the Company amortized $644,055
of original issue discount on derivative instruments to interest
accretion.
Interest expense amounted to $9,458 for the three months ended June
30, 2018.
Interest expense amounted to $40,235 for the year ended March 31,
2018.
-47-
Other Income and Expense
The
outstanding warrants and conversion features in convertible notes
meet the definition of a derivative liability instrument because
the exercise price of the warrants and the conversion rates are
variable. As a result, the outstanding warrants and
conversion features of the notes are recorded as a derivative
liability at fair value and marked-to-market each period with the
changes in fair value charged or credited to income. A
derivative liability of $1,025,944 is recorded at June 30, 2019 and
a change in fair value of the derivative warrant liability from
inception to June 30, 2019 of $89,198 was incurred. In
addition, the initial fair value of the derivative instruments was
accreted by $644,055 during the year ended June 30, 2019.
These amounts do not impact cash.
There were no expenses related to convertible notes payable and
warrants during the three months ended June 30, 2018 and year ended
March 31, 2018.
Net Loss for the Period
As
a result of the foregoing, net loss incurred for the period ended
June 30, 2019 was $6,629,669.
As
a result of the foregoing, net loss incurred for the three months
ended June 30, 2018 was $1,367,195.
As
a result of the foregoing, net loss incurred for the year ended
March 31, 2018 was $1,177,925
Theater
General and Administrative
General and administrative expenses for the period from July 1,
2018 through February 6, 2019 was $427,620.
General and administrative expenses during the period from
acquisition on June 22, 2018 to June 30, 2018 was $7,404. There
were no general and administrative expenses for the theater during
the year ended March 31, 2018. General and administrative expenses
consist primarily of salary expense, general overhead, depreciation
and professional fees.
Interest Expense
Interest expense was $41,460 for the period from July 1, 2018
through February 6, 2019. Interest expense was $23,666 for the
period from acquisition on June 22, 2018 to June 30, 2018. There
was no interest expense related to the theater during the year
ended March 31, 2018. Interest expense is primarily related to the
mortgage on the theater building.
-48-
Net Loss for the Period
As
a result of the foregoing, net loss for the period from July 1,
2018 through February 6, 2019 was $33,448.
As
a result of the foregoing, net loss for the period from acquisition
on June 22, 2018 to June 30, 2018 was $2,928.
There was no net income or loss for the theater during the year
ended March 31, 2018.
Off-Balance Sheet Arrangements
Other than office lease commitments discussed in Note 6 and
commitments discussed in Note 7 to our audited financial statements
for the year ended June 30, 2019, we did not have any off-balance
sheet arrangements as of June 30, 2019.
Liquidity and Capital Resources
Since the merger in June 2018, our revenues generated from
operations have been insufficient to support our operational
activities and have been supplemented by the proceeds from the
issuance of securities, including equity and debt issuances. As
stated in Note 14 to the notes to the condensed consolidated
financial statements included in our Quarterly report on Form 10-Q
for the quarter ended March 31, 2020, our ability 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. If our revenues continue to be
insufficient to support our operational activities, we intend 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 us on reasonable
terms. Management believes that its actions to secure additional
funding will allow us to continue as a going concern. We currently
do not have any committed sources of financing other than our line
of credit which has conditions to be met for use and which has
little remaining availability and under the Purchase Agreement
which we may be unable to meet the conditions for use or access the
full amount. There is no guarantee we will be successful in raising
capital and if so that we will be able to do so on favorable terms,
including price.
-49-
Our
cash totaled $194,702 at March 31, 2020, as compared with $169,430
at June 30, 2019, an increase of $25,272. Net cash of $7,438,550
was used by operations for the nine month period ended March 31,
2020. Net cash of $2,950,282 was provided from investing activities
for the nine month period ended March 31, 2020. Net cash of
$4,513,540 was provided from financing activities for the nine
month period ended March 31, 2020, primarily due to proceeds from
convertible notes payable.
Total current liabilities of $7,609,301 and $6,395,904 as of March
31, 2020 and June 30, 2019, respectively, primarily consists of
borrowings under a line of credit, convertible notes payable,
related party notes payable, derivative liability, accrued expenses
and accounts payable.
To
implement our business plan, we may require additional financing.
Additional financing may come from future equity or debt offerings
that could result in dilution to our stockholders. Further, current
adverse capital and credit market conditions could limit our access
to capital. We may be unable to raise capital or bear an
unattractive cost of capital that could reduce our financial
flexibility.
Our
long-term liquidity requirements will depend on many factors,
including the rate at which we grow our business and footprint in
the industries. To the extent that the funds generated from
operations are insufficient to fund our activities in the long
term, we may be required to raise additional funds through public
or private financing. No assurance can be given that additional
financing will be available or that, if it is available, it will be
on terms acceptable to us.
Our
outstanding long term note obligations as of March 31, 2020 and
June 30, 2019 was as follows:
Long Term Notes Payable
The
Company's long-term notes payable obligations to unrelated parties
are as follows at:
|
|
|
|
|
March 31, 2020
|
|
June
30, 2019
|
Note
payable with a bank bearing interest at 4.00% and maturing on June
26, 2020. The note is guaranteed by a stockholder and
collateralized by a certificate of deposit owned by a related
party.
|
|
|
|
|
|
|
|
|
|
274,900
|
|
274,900
|
|
|
|
|
Operating lease liabilities for offices and warehouses with monthly
installments of $18,080 (ranging from $4,530 to $1,413) over terms
ranging from 2 to 3 years, expiring through December 2021.
|
95,426
|
|
-
|
|
|
|
|
Financing leases with a related party for delivery vehicles with
monthly installments totaling $724 (ranging from $263 to $461),
including interest (ranging from 4.5% to 4.75%), over 5-year terms
expiring through July 2020. One of the financing leases was paid in
full in July 2019 leaving one delivery vehicle financing lease
remaining.
|
1,938
|
|
6,053
|
|
|
|
|
Financing lease with a finance company for a delivery vehicle
requiring monthly installments totaling $679 including interest at
8.99% over a 6-year term expiring in December 2025.
|
36,085
|
|
-
|
|
|
|
|
Total
Notes Payable
|
408,349
|
|
280,953
|
|
|
|
|
Current Portion of Notes Payable
|
338,434
|
|
279,346
|
|
|
|
|
Long-term Portion of Notes Payable
|
$
69,915
|
|
$
1,607
|
-50-
Future minimum principal payments on the long-term notes payable to
unrelated parties are as follows
|
|
|
Period ending March 31,
|
|
|
2021
|
|
$
338,434
|
2022
|
|
44,051
|
2023
|
|
6,071
|
2024
|
|
6,640
|
2025
|
|
7,263
|
Thereafter
|
|
5,889
|
|
|
|
|
|
$
408,349
|
Our
convertible notes payable as of March 31, 2020 and June 30, 2019
was as follows:
|
|
|
|
|
March 31, 2020
|
|
June 30, 2019
|
On January
16, 2019, the Company signed a convertible promissory note with an
investor. The $382,000 note was issued at a discount of $38,200 and
bears interest at 12% per year. The Company issued 92,271 common
shares to the investor. The note 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 June 2019. The note matured in July 2019 and
was converted to equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
$ -
|
|
$382,000
|
|
|
|
|
On February
22, 2019, the Company signed a convertible promissory note with an
investor. The $200,000 note was issued at a discount of $20,000 and
bears interest at 5% per year. The note 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 August 2019. The note was paid in full by
partial conversion to stock and proceeds from issuance of debt.
|
|
|
|
-
|
|
200,000
|
|
|
|
|
On March 28,
2019, the Company signed a convertible promissory note with an
investor. The $225,000 note was issued at a discount of $20,000 and
bears interest at 10% per year. The Company issued 25,000 common
shares to the investor. Three draws of $56,250, $112,500, and
$56,250 were borrowed under this note. The note 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 September 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.
The note matures in three intervals in March 2020, June 2020, and
November 2020. The note was partially repaid by conversion to
stock.
|
|
|
|
|
|
|
|
|
|
83,435
|
|
168,750
|
|
|
|
|
On April 1,
2019, the Company signed a convertible promissory note with an
investor. The $225,000 note was issued at a discount of $25,000 and
bears interest at 10% per year. The Company issued 25,000 shares to
the investor. An initial draw of $100,000 was borrowed under this
note. The note principal and interest are convertible into shares
of common stock at the lower of 70% of the lowest traded price of
the common stock during the 20 trading days immediately preceding
the notice of conversion. The note matures in April 2020. 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. The note was paid in full by conversion to stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
112,500
|
-51-
Convertible Notes Payable
|
|
|
|
On April 29,
2019, the Company signed a convertible promissory note with an
investor. The $1,325,000 note was issued at a discount of $92,750
and bears interest at 8% per year. The note principal and interest
are convertible into shares of common stock at the lower of (a) 75%
of the lowest traded price of the common stock during the 10
trading days immediately preceding the notice of conversion or (b)
$2.75 per share. The note matures in April 2020. The note has
prepayment penalties of 120% of the sum of the outstanding
principal, plus accrued interest, plus defaulted interest, plus any
additional principal, plus at the holder's option, any amounts owed
to the holder pursuant to any other provision of the note. The note
was paid in full with proceeds from issuance of debt and preferred
stock.
|
|
|
|
|
|
|
|
|
|
-
|
|
1,325,000
|
|
|
|
|
On May 28,
2019, the Company signed a convertible promissory note with an
investor. The $322,580 note was issued at a discount of $22,580 and
bears interest at 8% per year. The note principal and interest are
convertible into shares of common stock at the lower of (a) 75% of
the lowest traded price of the common stock during the 10 trading
days immediately preceding the notice of conversion or (b) $2.75
per share beginning in November 2019. The note matures in May 2020.
The note has prepayment penalties of 120% of the principal and
interest outstanding if repaid before 180 days from issuance.
The note was partially repaid by a combination of conversion
to stock and cash.
|
|
|
|
|
|
|
|
|
|
83,458
|
|
322,580
|
|
|
|
|
On June 18,
2019, the Company signed a convertible promissory note with an
investor. The $366,120 note was issued at a discount of $27,120 and
bears interest at 8% per year. The note principal and interest are
convertible into shares of common stock at 75% of the lowest traded
price of the common stock during the 10 trading days immediately
preceding the notice of conversion. The note matures in May 2020.
The note has prepayment penalties of 120% of the principal and
interest outstanding if repaid before 180 days from issuance. The
note was fully repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
-
|
|
366,120
|
|
|
|
|
On August 6,
2019, the Company signed a convertible promissory note with an
investor. The $220,000 note was issued at a discount of $20,000 and
bears interest at 12% per year. The note principal and interest are
convertible into shares of common stock at 75% of the lowest traded
price of the common stock during the 10 trading days immediately
preceding the notice of conversion. The note matures in August
2020. The note has prepayment penalties of 120% of the principal
and interest outstanding if repaid before 180 days from issuance.
The note was partially repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
125,400
|
|
-
|
|
|
|
|
On August
29, 2019, the Company signed a convertible promissory note with an
investor. The $234,726 note was issued at a discount of $16,376 and
bears interest at 8% per year. The note principal and interest are
convertible into shares of common stock at 75% of the lowest traded
price of the common stock during the 10 trading days immediately
preceding the notice of conversion. The note matures in August
2020. The note has prepayment penalties of 120% of the principal
and interest outstanding if repaid before 180 days from
issuance.
|
|
|
|
|
|
|
|
|
|
234,726
|
|
-
|
-52-
Convertible Notes Payable
|
|
|
|
On November
18, 2019, the Company signed a convertible promissory note with an
investor. The $55,000 note was issued at a discount of $5,000 and
bears interest at 8% per year. The note principal and interest are
convertible into shares of common stock at the lower of (a) 70% of
the lowest traded price of common stock during the 15 trading days
prior to the issue date or (b) 70% of the lowest traded price for
the common stock during the 15 trading days prior to conversion of
the note. The note matures in November 2020. The note has
prepayment penalties between 115% and 125% of the principal and
interest outstanding if repaid before 180 days from issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,000
|
|
-
|
|
|
|
|
On November
18, 2019, the Company signed a convertible promissory note with an
investor. The $110,000 note was issued at a discount of $10,000 and
bears interest at 8% per year. The note principal and interest are
convertible into shares of common stock at the lower of (a) 70% of
the lowest traded price of common stock during the 15 trading days
prior to the issue date or (b) 70% of the lowest traded price for
the common stock during the 15 trading days prior to conversion of
the note. The note matures in November 2020. The note has
prepayment penalties between 115% and 125% of the principal and
interest outstanding if repaid before 180 days from issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,000
|
|
-
|
|
|
|
|
On December
11, 2019, the Company signed a convertible promissory note with an
investor. The $220,430 note was issued at a discount of $15,430 and
bears interest at 8% per year. The note principal and interest are
convertible into shares of common stock at the lower of (a) $0.46
per share or (b) 75% of the lowest trading price of common stock
during the 10 trading days prior to conversion beginning in June
2020. The note matures in December 2020. The note has prepayment
penalties between 120% and 130% of the principal and interest
outstanding if repaid before 180 days from issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220,430
|
|
-
|
|
|
|
|
On November
25, 2019, the Company signed a convertible promissory note with an
investor. The $1,000,000 note was issued at a discount of $70,000
and bears interest at 8% per year. The note principal and interest
up to $250,000 every 30-day calendar period are convertible into
shares of common stock at the lower of (a) 75% of the lowest traded
price of the common stock during the 10 trading days immediately
preceding the notice of conversion or (b) $0.46 per share. The note
matures in November 2020. The note has a redemption premium of 115%
of the principal and interest outstanding if repaid before
maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
-
|
|
|
|
|
On January
9, 2020, the Company entered into a $225,000 convertible note. The
$225,000 note was issued at a discount of $13,500 and bears
interest at 8% per year. The note principal and interest are
convertible into shares of common stock at the lower of (a) 75% of
the lowest traded price of the common stock during the 10 trading
days immediately preceding the notice of conversion or (b) the
lowest traded price of the common stock during the 10 trading days
prior to the issuance of this note. The note matures in October
2020. The note has prepayment penalties of 110% to 125% of the
principal and interest outstanding if repaid before 180 days from
issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,000
|
|
-
|
-53-
Convertible Notes Payable
|
|
|
|
On January
27, 2020, the Company entered into a $223,300 convertible note. The
$223,300 note was issued at a discount of $20,300 and bears
interest at 8% per year. The note principal and interest are
convertible into shares of common stock at 75% of the average of
the lowest 3 trading prices during 15 trading days prior to
conversion. The note matures in January 2021. The note has
prepayment penalties of 110% to 125% of the principal and interest
outstanding if repaid before 180 days from issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
223,300
|
|
-
|
|
|
|
On March 25,
2020 the Company signed a convertible promissory note with an
investor. The $338,625 note was issued at a discount of $23,625 and
bears interest at 8% per year. The note principal and interest are
convertible into shares of common stock at the lower of (a) $0.46
per share or (b) 75% of the lowest trading price of common stock
during the 10 trading days prior to conversion. The note matures in
March 2021. The note has prepayment penalties between 120% and 130%
of the principal and interest outstanding if repaid before 180 days
from issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
338,625
|
|
-
|
|
|
|
|
Total
Convertible Notes Payable
|
2,699,374
|
|
2,876,950
|
|
|
|
|
Less:
Unamortized original issue discounts
|
1,345,241
|
|
752,126
|
|
|
|
|
Current
Portion of Convertible Notes Payable
|
1,354,133
|
|
2,124,824
|
|
|
|
|
Long-term
Portion of Convertible Notes Payable
|
$
-
|
|
$
-
|
-54-
The
original issue discount is being amortized over the terms of the
convertible notes using the effective interest method. During the
three and nine months ended March 31, 2020, the Company amortized
$91,338 and $247,794, respectively, of debt discounts to interest
expense and $603,852 and $1,412,705, respectively, to interest
accretion. During the three and nine months ended March 31, 2019,
the Company amortized $40,578 and $45,022, respectively, of debt
discounts to interest expense.
Convertible notes are subordinate to the bank debt of the
Company.
Accrued but unpaid interest on the notes is convertible by the
lender into, and payable by the Company in shares of common stock
at a price per common share equal to the most recent closing price
of the Company's shares of common stock prior to the delivery to
the Company of a request to convert interest, or the due date of
interest, as applicable. Interest, when due, is payable either in
cash or shares of common stock.
The
conversion features meet the definition of a derivative liability
instrument because the conversion rate is variable and therefore
does not meet the "fixed-for-fixed" criteria outlined in ASC
815-40-15. As a result, the conversion features of the notes are
recorded as a derivative liability at fair value and
marked-to-market each period with the changes in fair value each
period charged or credited to other income (expense).
Off-Balance Sheet Arrangements
Other than commitments discussed in Notes 10 and 11 to our
condensed consolidated financial statements, we do not have any
off-balance sheet arrangements as of March 31, 2020.
BUSINESS
Business Overview
We
are a manufacturer and distributor of interactive learning
technologies and enhanced audio solutions. We develop both hardware
and software that allows the presenter and participant to engage in
a fully collaborative instructional environment. We also develop
award winning classroom audio solutions and school PA and Intercom
products, creating a full line card offering for classrooms to our
channel partners. Our products include our own private-label
interactive touch screen panel as well as numerous other national
and international branded peripheral and communication devices. New
technologies like our own touchscreen panels are sold along with
renowned brands such as Google Chromebooks, Microsoft Surface
Tablets, Lenovo and Acer computers, Verizon WiFi and more. We
provide a multitude of services to our customers, including
installation, training, and maintenance.
In
2017, we secured a contract with a large manufacturer of
interactive flat panels that would allow for a new panel to be
brought to the United States market, which far exceeds the current
market expectations. These panels are fully connected displays that
provide "tablet like" functionality for the classroom. Teachers and
students can interact with content, simultaneously write and draw
on the surface, or mirror classroom table activities in a fully
engaged and collaborative environment. These panels are available
in sizes ranging from 55" to 70" in the 1080P high definition range
and from 75" to 98" for the 4K ultra high definition panel. The
panels can be wall mounted in a static position or offered as
either a fixed or mobile height adjustable option, all with built
in speakers.
-55-
Our
current distribution channel consists of 30 resellers across the
United States who primarily sell our product within the commercial
and educational market. While we do not control where our resellers
focus their efforts, based on experience, the kindergarten through
12th grade education market is the largest customer base for the
product, comprising nearly 90% of all purchases. In addition, we
possess our own resell channel that sells directly to the Southeast
region of the United States.
We
believe the market space for interactive technology in the
classroom is a perpetual highway of business opportunity. Public
and private school systems are in a continuous race to modernize
their learning environments. Our goal is to be an early provider of
the best and most modern technology available.
We
are striving to become the leader in the market for interactive
flat panel technology, associated software and peripheral devices
for classrooms. Our goal is to provide an intuitive system to
enhance the learning environment and create easy to use technology
for the teacher, increasing student engagement and achievement. Our
products are developed and backed by a management team with more
than 30 combined years in the classroom technology space.
On
June 22, 2018, we consummated a reverse triangular merger whereby
Galaxy merged with and into FullCircle Registry, Inc.'s (FLCR)
newly formed subsidiary, Galaxy MS, Inc. (Galaxy MS or Merger Sub),
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. FLCR is an over-the-counter public
company traded under the stock symbol FLCR. FLCR owns Georgetown 14
Cinemas, a fourteen-theater movie complex located on approximately
seven acres in Indianapolis, Indiana. Prior to the merger, its sole
business and source of revenue was from the operation of the
theater, and as part of the merger agreement, the parties have the
right to spinout the theater to the prior shareholders of FLCR.
Effective February 6, 2019, we sold our interest in the theater to
focus its resources in its technology operations. This filing
includes our consolidated financial statements for the years ended
June 30, 2019 and March 31, 2018 and three month period ended June
30, 2018 which presents the full year of operations for the
technology segment and approximately eight months of activity for
the entertainment segment.
Recent Developments
Purchase of Concepts and Solutions
On
September 4, 2019, we entered into a stock purchase agreement with
Concepts and Solutions. Under the stock purchase agreement,
we acquired 100% of the outstanding capital stock of both Concepts
and Solutions. The purchase price for the acquisition was 1,350,000
shares of our common stock and we issued to Concepts and Solutions
three notes payable in the aggregate principal amount of
$3,000,000. The notes payable issued to the seller are
subject to adjustment based on the achievement of certain future
gross revenues and successful completion of certain pre-acquisition
withholding tax issues of Concepts and Solutions.
-56-
Solutions and Concepts are Utah-based audio design and
manufacturing companies creating innovative products that provide
fundamental tools for building notification systems primarily to
K-12 education market customers located primarily in the north and
north-west United States. Solutions and Concepts' products and
services allow institutions access to intercom, scheduling, and
notification systems with improved ease of use. The products
provide an open architecture solution to customers which allows the
products to be used in both existing and new environments.
Intercom, public announcement (PA), bell and control
solutions are easily added and integrated within the open
architecture design and software model. These products
combine elements over a common internet protocol (IP) network,
which minimizes infrastructure requirements and reduces costs by
combining systems.
Our Markets
The
global education industry is undergoing a significant transition,
as primary and secondary school districts, colleges and
universities, as well as governments, corporations and individuals
around the world are increasingly recognizing the importance of
using technology to more effectively provide information to educate
students and other users. In the United States, which is our
primary market, we sell and distribute interactive educational
products for K-12 to both public and private schools. The K-12
education sector represents one of the largest industry segments.
The sector is comprised of approximately 15,600 public school
districts across the 50 states and 132,000 public and private
elementary and secondary schools. In addition to its size, the U.S.
K-12 education market is highly decentralized and is characterized
by complex content adoption processes. We believe this market
structure underscores the importance of scale and industry
relationships and the need for broad, diverse coverage across
states, districts and schools. Even while we believe certain
initiatives in the education sector, such as the Common Core State
Standards, a set of shared math and literacy standards benchmarked
to international standards, have increased standardization in K-12
education content, we believe significant state standard specific
customization still exists, and we believe the need to address
customization provides an ongoing need for companies in the sector
to maintain relationships with individual state and district
policymakers and expertise in state-varying academic standards.
According to "All Global Market Education & Learning",
an industry publication, the market for hardware products is
growing due to increases in the use of interactive whiteboards and
simulation-based learning hardware. Educational institutions have
become more receptive to the implementation of hi-tech learning
tools. The advent of technology in the classroom has enabled
multi-modal training and varying curricula. In general, technology
based tools help develop student performance when integrated with
the curriculum. The constant progression of technology in education
has helped educators to create classroom experiences that are
interactive, developed and collaborative.
-57-
Business environment and trends
The
educational technology market is currently experiencing substantial
growth due to government mandates for improving the education
results in the United States. Education, governments, corporations
and individuals are recognizing the growing need to utilize
technology for more effective delivery of information to educate
end users. Today, most classrooms are equipped with some type of
smart board technology but given the ever-changing nature of
technology, previous investments are becoming obsolete. It is
believed that 96% of United States classrooms have a need to update
their technology.
There are approximately 132,000 primary and secondary schools and
7,000 higher education entities in the United States. The industry
has several hundred technology resellers, selling a variety of
products, already selling into these entities directly. Our goal is
to target the resellers to gain market share growth in the
education technology market.
Opportunities and plan of operations
We
believe that our products, both hardware and software, and the
products we intend to develop as part of our extensive product road
map, positions us to be one of the leading providers of interactive
educational products. We believe that the increase in consumer
spending along with the ever-evolving increase in standards for
curriculum are two driving focuses for the increase in the demand
for interactive educational technology. Some additional factors
that we believe will impact our opportunity include:
Significant resources are being devoted to primary and secondary
education, both in the United States and abroad. As set forth in
the Executive Office of the President, Council of Economic Advisers
report, United States education expenditure (primary, secondary and
post-secondary) has been estimated at approximately $1.3 trillion,
with primary and secondary education accounting for close to half
($625 billion) of this spending. Global spending is approximated at
roughly triple United States spending for primary and secondary
education.
The
United States primary and secondary market has always been a point
of political debate and scrutiny. With American students ranking
far behind other global students in international tests, the United
States education system severely impairs the United States'
economic, military and diplomatic security as well as broader
components of America's global leadership.
The
demand for interactive flat panels is on the rise. With traditional
interactive whiteboards having been in the market for more than
fifteen years, many of these technologies are coming to a refresh
period and are being replaced with the newer, more advanced
interactive flat panels.
We
intend to build upon our proven ability to produce and sell
interactive classroom products. We have begun to implement the
growth strategies described below and expect to continue to do so
over the course of the next couple of upcoming years. In order to
implement each goal pertaining to growth, we may need additional
capital to implement each strategy, particularly in relation to the
target acquisition(s) of complementary businesses or
technologies.
-58-
We
intend to grow our business by using the following methodology:
Capitalizing on market trends in the educational industry: We
believe our long history of selling into the K-12 education market
provides us with the expertise to continue to stay on the cutting
edge of new product development and needs of the classroom teacher.
We also believe our expertise in customer service and training
positions us well for expected growth. We intend to build our core
business by leveraging the strengths of our leadership and building
out a solid team with experience and expertise in our market.
Expanding our reseller channel sales: The educational technology
industry is driven a lot by relationships. We intend to continue to
grow and expand our resellers in strategic geographical regions so
that we are able to leverage the relationships in the local school
systems within those regions.
Growth through acquisitions: We believe that the interactive and
collaborative classroom has many components and moving parts. We
intend to stay on the cutting edge of new products by building out
our product offerings and line card through strategic acquisitions.
The acquisition(s) provides us with significant opportunities to
grow our business by adding complementary products to provide a
whole classroom G2 experience to our customers. We intend to pursue
acquisitions that provide services within our current core product
offerings, extend our geographic reach and expand our product
offerings.
Further developing intellectual property: We intend to build upon
our success in developing original software that we own and license
to other brands, and distributors globally. When we develop an
original software or application, we retain the copyright and
patent of that content. We will create additional revenue streams
from development fees, brand license fees, distribution license
fees and ancillary sources.
Expanding our geographic presence: We believe that by expanding our
physical presence into select domestic and international regions,
we will be better able to attract and retain clients. With a
physical presence in strategic locations around the US, we believe
we can provide better customer service and offer local services and
training resulting in an increase in revenue for those areas.
Our current products
G2SLIM Interactive Flat Panel Displays – Our G2SLIM series
of interactive LED panels are available in six sizes – 55", 65",
70", 75", 86", and 98". Each offers 4K resolution that creates
images suitable for a range of classroom sizes. They also include a
slot for an optional integrated PC with Windows 10. All also
include embedded Android computing capability for control,
applications, and annotation. G2Slim Interactive LED panels utilize
infrared touch tracking technology, offering 20 points of touch for
simultaneous interaction of multiple users.
G2SLIM(a) Interactive Flat Panel Displays – Our G2SLIM(a)
series of Interactive LED panels follow all the same feature set as
the G2Slim series. The (a) series difference is its embedded audio,
G2 Spoke system, which includes an amplifier, teacher microphone,
student microphone and speaker bar for front of the room projected
audio.
-59-
G2Spoke – Our G2Spoke audio system is a classroom audio
amplification system that includes an audio amplifier, microphones,
and speakers to enhance the audio in the classroom and improve the
student's ability to hear, therefore increasing engagement.
G2Multishare – Our G2Multishare software allows for devices
in the classroom to wireless connect and present to the panel. The
application will support sharing up to 9 simultaneous client
devices to the IFPD. The teacher or student devices can be shared,
and multiple platforms are supported including; Android,
Chromebook, Windows, Mac, and iOS.
G2Overlay – G2Overlay is a control application that gives
the user the ability to annotate on the Interactive Flat Panel no
matter the input or source being presented. Overlay acts as a
control center for the user to quickly access tools and change
between apps on the IFPD screen.
G2Accessories – Our product line also includes an accessory
portion. These accessories include optional integrated PCs, mobile
stands, height adjustable wall mounts, and other cable and
installation products.
Logistics and suppliers
Logistics is currently provided by our Toccoa, Georgia facility and
multiple import and freight carriers throughout the US. These
partners allow us to provide affordable freight routes and shorter
delivery times to our customers. Our suppliers for ODM and OEM are
located in the USA, China, and Korea.
On
September 15, 2018, we signed an agreement with a company in China
for the manufacturing of our SLIM series of interactive panels, a
new product. The manufacturer agreed to manufacture, and we agreed
to be the sole distributor of the interactive panels in the United
States for a term of two years. The agreement includes a commitment
by us to purchase $2 million of product during the first year
beginning September 2018. If the minimum purchase is not met, the
manufacturer can require us to establish a performance improvement
plan, and the manufacturer has the right to terminate the
agreement. The payment terms are 20% in advance, 30% after the
product is ready to ship, and the remaining 50% 45 days after
receipt. The manufacturer provides us 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.
Technical support and service
We
currently have our technical support and service centers located in
Toccoa, Georgia. Our technical support division is responsible for
the repair and management of customer service cases.
Sales and marketing
Our
sales force consists of two regional account managers in the United
States. Our marketing team consists of one Director of Marketing
and Brand Strategy. The marketing and sales team drive sales of the
entire product line. We also go to market through an indirect
channel and use traditional valueadded resellers. We support them
and train them on the products. We currently have approximately 30
resellers.
-60-
Competition
The
interactive education industry is highly competitive and has
frequent product introductions and quick technological advances.
With less barriers on the school technology entry, we face heated
competition from other interactive panel developers, manufacturers
and distributors. We compete with other developers, manufacturers
and distributors of interactive panels and personal computer
technologies, tablets, television screens, smart phones, such as
Smart Technologies, Promethean, Boxlight Inc, Dell Computers,
Samsung, Panasonic and ClearTouch.
Employees
As
of July 1, 2020, we had approximately twelve employees, of whom two
are executives, three employees are engaged in product development,
engineering and research and development, two employees are engaged
in sales and marketing, three employees are engaged in
administrative and clerical services and two employees are engaged
in service and training. In addition, approximately five
individuals provide consulting services as independent
contractors.
None of our employees are represented by labor organizations. We
consider our relationship with our employees to be excellent.
Property
We
maintain the following operating facility:
Location
|
Description
|
Owned
/ Leased
|
Approx. Sq. Ft.
|
Toccoa,
Georgia
|
Corporate
office
|
Leased
|
10,500
|
The lease on this
property is with a family member of a shareholder. The term of the
lease expires on December 31, 2021. 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 operating
leases, totaled $18,000, $5,150, and $35,583 for the year ended
June 30, 2019, the three months ended June 30, 2018, and the year
ended March 31, 2018, respectively. Rent expense for this lease
totaled $4,500 and $13,500 for the three and nine months ended
March 31, 2020, respectively. In the opinion of our management, our
property is adequate for its present needs. We do not anticipate
difficulty in renewing the existing lease as it expires or in
finding alternative facilities if necessary. We believe all of our
assets are adequately covered by insurance.
-61-
Corporate Information
We
were formed on June 7, 2000 under the laws of the State of Nevada
under the name Excel Publishing, Inc. On April 10, 2002, we merged
with FullCircle Registry, Inc., with FullCircle Registry, Inc.
surviving the merger. In connection with the merger we
changed our name from Excel Publishing, Inc to FullCircle Registry,
Inc.
Galaxy Next Generation LTD CO. ("Galaxy CO") was organized in the
state of Georgia in February 2017 while R & G Sales, Inc.
("R&G") was organized in the state of Georgia in August 2004.
Galaxy CO merged with R&G on March 16, 2018, with R&G
becoming the surviving company. R&G subsequently changed its
name to Galaxy Next Generation, Inc., which is incorporated in the
State of Nevada.
Our
principal executive offices are located at 286 Big A Road Toccoa,
Georgia 30577, and our telephone number is (706) 391-5030. Our
website address is www.galaxynext.us. Information contained
in our website does not form part of the prospectus and is intended
for informational purposes only.
MANAGEMENT
Executive Officers and Directors
The
following table sets forth the name, age and position of each of
our executive officers, key employees and directors as of July 1,
2020.
|
|
|
|
|
|
Name
|
Age
|
Position(s)
|
Gary LeCroy
|
51
|
Chief
Executive Officer, President and Director
|
Magen McGahee
|
34
|
Chief
Operating Officer, Chief Financial Officer, Secretary and
Director
|
Carl R. Austin
|
80
|
Director
|
-62-
Gary LeCroy, Chief Executive Director, President and
Director
Since the merger on June 22, 2018, Mr. LeCroy has served as our
Chief Executive Officer. Mr. LeCroy owned and operated R&G
Sales, Inc. located in Toccoa, Georgia from 2004 to 2018. He served
as CEO and sales director for that company which was involved in
the sale and distribution of educational technology. From
November 2016 to until the merger on June 22, 2018, Mr. LeCroy
served as CEO/Owner and Director of Galaxy Next Generation LTD CO.
("Galaxy CO"), a company engaged in the business of developing and
selling presentation and educational technology. In May 1988,
Mr. LeCroy graduated with an Associate degree in business from
Piedmont College in Demarest, Georgia.
We
believe that Mr. LeCroy is qualified to serve as a member of our
Board because of his extensive C-level and board level experience,
his leadership skills and his extensive industry experience in the
sale and distribution of educational technology.
Magen McGahee, Chief Operating Officer, Chief Financial
Officer, Secretary and Director
Since the merger on June 22, 2018, Ms. McGahee has served as our
Chief Financial Officer and Chief Operating Officer. Ms. McGahee
was employed by MIMIO Corporation on its sales leadership team from
2008 to 2013. MIMIO is a manufacturer of interactive video displays
for the educational market. From 2013 to 2014, she was employed by
Qomo, Inc. as a Director, Strategic Partnerships, developing
programs and video display models that would allow expansion into
the U.S. market. From 2014 to 2016, Ms. McGahee was employed
by R&G Sales, Inc. located in Toccoa, Georgia, which was
involved in the sale and distribution of educational technology.
LeCroy Educational Technology sells interactive presentation
panels in the educational market. From 2016 to the merger,
Ms. McGahee served as COO and co-founder of Galaxy CO. Ms. McGahee
received a Bachelor of Science degree in early childhood education
at Valdosta State College in 2005, located in Valdosta, Georgia. In
2010, Ms. McGahee received a Master of Business Administration
degree from Georgia Tech, located in Atlanta, Georgia.
We
believe that Ms. McGahee is qualified to serve as a member of our
Board because of her extensive C-level and board level experience,
her leadership skills and her extensive industry experience in the
sale and distribution of educational technology.
Carl R. Austin, Director
Mr.
Austin is the founder and owner of CJ Austin, LLC, a company
located in Brandenburg, Kentucky. CJ Austin, LLC is in the
real estate, development and investment business, and Mr. Austin
has served as its principal from its organization in 1992 to the
present. Mr. Austin is an entrepreneur and he owns and
operates various shopping centers, car washes and residential and
commercial real estate properties. In 1962, Mr. Austin
received a Bachelor of Science degree from Indiana University,
located in Bloomington, Indiana.
We
believe that Mr. Austin is qualified to serve as a member of our
Board due to his significant real estate, development and
investment business experience, his achievements in the real
estate, development and investment business industries and his
overall business expertise.
CORPORATE GOVERNANCE
Our Board of Directors
Our
Board currently consists of three members. Our Board has decided
that it would judge the independence of its directors by the
heightened standards established by the Nasdaq Stock Market,
despite the Company not being subject to these standards at this
time. Accordingly, the Board has determined that only Mr. Austin,
our only non-employee director, meets the independence standards
established by the Nasdaq Stock Market and the applicable
independence rules and regulations of the SEC, including the rules
relating to the independence of the members of our audit committee
and compensation committee.
-63-
Board Committees
Our
Board has not designated an audit committee, compensation committee
or corporate governance and nominating committee and instead the
full board performs the functions typically performed by such
committees.
Code of Business Conduct and Ethics
Each of the Company's directors and employees, including its
executive officers, are required to conduct themselves in
accordance with ethical standards set forth in the Code of Business
Conduct and Ethics adopted by the Board of Directors. The
Code of Business Conduct and Ethics was previously filed with the
Commission. Any amendments to or waivers from the code will be
posted on our website. Information on our website does not
constitute part of this filing.
EXECUTIVE COMPENSATION
Summary Compensation Table
Compensation of Officers and Directors:
The
following table lists the compensation received by our former and
current officers over the last two years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
Position
|
Year
|
Salary
|
Stock
|
Other
|
Total
|
Gary
D. LeCroy
|
CEO,
President, Director
|
2020
|
$200,050
|
-
|
-
|
$200,050
|
|
|
2019
|
$292,028
|
-
|
-
|
$292,028
|
|
|
|
|
|
|
|
Magen
McGahee
|
COO,
CFO, Sec., Director
|
2020
|
$172,500
|
-
|
-
|
$172,500
|
|
|
2019
|
$217,500
|
-
|
-
|
$217,500
|
Employment Agreement
On
January 1, 2017, we entered into an employment agreement with Magen
McGahee to serve as our Chief Financial Officer and Chief Operating
Officer. For her services, Ms. McGahee is entitled to receive an
annual base salary of $180,000. In addition, pursuant to the
employment agreement Ms. McGahee was issued 1,522,637 shares of our
common stock. Ms. McGahee may terminate the employment
agreement at any time upon two weeks' notice. We may terminate the
employment agreement at any time without notice or payment in lieu
of notice for cause and at any time without cause upon payment of
all amounts then legally due to Ms. McGahee.
-64-
Outstanding Equity Awards at Fiscal Year-End
There are no outstanding equity awards held by the named executive
officers at June 30, 2020.
Director Compensation
The
following table sets forth information for the fiscal year ended
June 30, 2019 regarding the compensation of our director who at
June 30, 2020 was not also named an executive officer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
|
|
Fees Earned
or Paid
in Cash
|
|
Option
Awards
|
|
Other
Compensation
|
|
Totals
|
|
|
|
|
|
|
|
|
|
Carl R. Austin(1)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
(1)We compensated our non-executive director, Carl
R. Austin by the issue of 44,511 shares of restricted stock, valued
at $1.00 per share during the year ended June 30, 2019. Mr. Austin
has not received other equity compensation as a director. We record
stock-based compensation in accordance with the provisions set
forth in ASC 718, Stock Compensation, using the modified
prospective method.
The
executive directors were not paid any fees for their service as
directors; however, each of Mr. LeCroy and Ms. McGahee received
compensation for service as officers of our company.
-65-
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Our
common stock issued is traded on the OTCQB Venture Market under the
symbol "GAXY". On July 1, 2020, the last reported sale price of our
common stock on the OTCQB Venture Market was $0.012.
Shareholders
As
of July 1, 2020, there were an estimated 340 holders of record of
our common stock. A certain amount of the shares of common stock
are held in street name and may, therefore, be held by additional
beneficial owners.
Dividends
We
have never paid a cash dividend on our common stock since
inception. The payment of dividends may be made at the discretion
of our Board of Directors, and will depend upon, but not limited
to, our operations, capital requirements, and overall financial
condition.
We
do not anticipate paying cash dividends on our common stock in the
foreseeable future. The payment of dividends on our common stock
will depend on earnings, financial condition and other business and
economic factors affecting it at such time as the Board of
Directors may consider relevant. We intend to follow a policy of
retaining all of our earnings to finance the development and
execution of our strategy and the expansion of our business. If we
do not pay dividends, our common stock may be less valuable because
a return on your investment will occur only if our stock price
appreciates.
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
The
following includes a summary of transactions during our fiscal
years ended June 30, 2020 and three month periods therein, three
month period ended June 30, 2019 and year ended March 31, 2018 and
subsequent thereto to which we have been a party, in which the
amount involved in the transaction exceeds the lesser of $120,000
or 1% of the average of our total assets at year-end for the last
two completed fiscal years, and in which any of our directors,
executive officers or, to our knowledge, beneficial owners of more
than 5% of our capital stock or any member of the immediate family
of any of the foregoing persons had or will have a direct or
indirect material interest, other than equity and other
compensation, termination, change in control and other arrangements
other than compensation arrangements described under "'Executive
Compensation"
-66-
We
had a short-term note payable to a stockholder, totaling $200,000
at December 31, 2019 and June 30, 2019, in which the note principal
plus interest of $10,000 is payable in December 2019. Effective
October 2019, the note was increased to $400,000 and the maturity
extended to December 2021. Principal of the note is convertible
into 400,000 shares of our Series D Preferred Stock at
maturity.
We
have notes payable to the seller of Concepts and Solutions, a
related party, bearing interest at 3% annually, payable in annual
installments from October 31, 2019 to November 30, 2021. Payments
are subject to annual earnings. The balance of the notes payable at
December 31, 2019 totaled $1,073,467 with $823,467 being considered
current and remainder as long term. The balance of the notes
payable at March 31, 2020 totaled $1,030,079 with $573,467 being
considered current and remainder as long term.
We
have a note payable to a stockholder, bearing interest at 6%
annually, payable in November 2021. Principal of the note is
convertible into 1,000,000 shares of our Series D Preferred
Stock.
We
have a note payable to a stockholder, bearing interest at 6%
annually, payable in November 2021. Principal of the note is
convertible into 200,000 shares of our Series D Preferred
Stock.
We
lease property used in operations from a related party under terms
of an operating lease. The term of the lease expires on December
31, 2021. 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 operating leases, totaled $18,000,
$5,150, and $35,583 for the year ended June 30, 2019, the three
months ended June 30, 2018, and the year ended March 31, 2018,
respectively. Rent expense for this lease totaled $4,500 and
$17,146 for the three months ended December 31, 2019 and December
31, 2018, respectively. Rent expense for this lease totaled $4,500
and $13,500 for the three and nine months ended March 31, 2020,
respectively.
We
lease vehicles from related parties under capital leases. We are
paying the lease payments directly to the creditors, rather than
the lessor. The leased vehicles are used in operations for
deliveries and installations.
On
May 1, 2019, the Company engaged Tydasco Partners to provide
consulting services under an Investor Relations and Advisory
Agreement. The Company pays $8,000 per month under this agreement
in the form of $2,000 cash and a restricted common stock monthly
fee of $6,000 in advance of services each month. The number of
shares issued is calculated based on the closing price of the
Company's common shares on the first day of the month. The
shares do not have registration rights, and the shares may be sold
by the advisor, subject to Rule 144. The Company paid $6,000 and
$24,000 in fees during the three and nine months ended March 31,
2020, respectively. No fees were paid under this agreement during
the three or nine months ended March 31, 2019. The Company issued
52,508 common shares during December 2019.
A
related party collateralizes our short-term note with a CD in the
amount of $274,900, held at the same bank. The related party will
receive a $7,500 collateral fee for this service. In May 2018,
50,000 shares of stock were issued to the related party in exchange
for a $100,000 reduction in the short-term note balance.
-67-
At
June 30, 2018, we had outstanding a $15,000 note payable to a
related party which the notes accrued interest on the original
principal balance at a rate of 8% annually and was due on demand.
The liability for the note was sold with the Entertainment
segment on February 6, 2019.
At
June 30, 2018, we had various notes payable to a related party
outstanding in the aggregate principal amount of $91,000. The
notes accrued interest on the original principal balance at a rate
of 6.25% annually and were due on demand. The liability for the
notes were sold with the Entertainment segment on February 6,
2019.
At
June 30, 2018, we had a note payable to a related party outstanding
in the principal amount of $8,000. The note accrued interest
on the original principal balance at a rate of 6.25% annually and
was due on demand. The liability for the note was sold with the
Entertainment segment on February 6, 2019.
At
June 30, 2018, we had a note payable to a related party outstanding
in the principal amount of $25,000. The note did not accrue
interest and was due on demand. The liability for the note
was sold with the Entertainment segment on February 6, 2019.
At
June 30, 2018, we had a note payable to a related party outstanding
in the principal amount of $125,000. The note accrued interest on
the original principal balance at a rate of 9% annually and was due
on October 2019. The liability for the note was sold with the
Entertainment segment on February 6, 2019.
In
February 2018, we issued a note payable to a related party
outstanding in the principal amount of $10,000. The note accrued
interest on the original principal balance at a rate of 18%
annually and was due on demand. The liability for the note was sold
with the Entertainment segment on February 6, 2019.
At
June 30, 2018, we had various notes payable to a related party in
the amount of $211,534 in which the notes accrue interest on the
original principal balance at a rate of 10% annually through
December 31, 2016 at which time the interest rate was reduced to
6.25% interest annually. The notes were scheduled to mature at
various dates through July 2021. The liability for the notes were
sold with the Entertainment segment on February 6, 2019.
Advances
In
support of our efforts and cash requirements, it may rely on
advances from related parties until such time that it can support
its operations or attain 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 June 30, 2019 and 2018 are
$0 and $260,173, respectively.
-68-
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 our common stock.
PRINCIPAL STOCKHOLDERS
The
following table sets forth certain information regarding the
beneficial ownership of our common stock as of July 7, 2020 by:
· each of
our named executive officers;
· each of
our directors;
· all of
our current directors and executive officers as a group;
and
· each
stockholder known by us to own beneficially more than five percent
of our common stock.
Beneficial ownership is determined in accordance with the rules of
the SEC and includes voting or investment power with respect to the
securities. Shares of common stock that may be acquired by an
individual or group within 60 days of July 1, 2020, pursuant to the
exercise of options or warrants, are deemed to be outstanding for
the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person
shown in the table. Percentage of ownership is based on 640,887,727
shares of common stock outstanding.
Except as indicated in footnotes to this table, we believe that the
stockholders named in this table have sole voting and investment
power with respect to all shares of common stock shown to be
beneficially owned by them, based on information provided to us by
such stockholders. Unless otherwise indicated, the address for each
director and executive officer listed is c/o Galaxy Next
Generation, Inc., 286 Big A Road, Toccoa, Georgia 30577.
|
|
|
|
|
|
Name
of Beneficial Owner
|
Number
of Shares Beneficially Owned Prior to Offering
|
Percentage of common stock Beneficially Owned
|
Directors and
Executive Officers
|
|
|
|
|
|
Gary LeCroy
|
5,454,257
|
*
|
|
|
|
Magen McGahee
|
1,522,637
|
*
|
|
|
|
Carl Austin
|
483,904
|
*
|
|
|
|
All current executive
officers and directors as a group (3 persons)
|
7,460,798
|
1.2%
|
|
|
|
5% or Greater
Stockholders
|
|
|
* less than 1%
-69-
DESCRIPTION OF SECURITIES WE ARE OFFERING
We
are offering up to 200,000,000 shares of our common stock.
Common Stock
The
material terms and provisions of our common stock and each other
class of our securities which qualifies or limits our common stock
are described under the caption "Description of Capital Stock" in
this prospectus.
Registration Rights
The
Selling Stockholder is entitled to certain rights with respect to
the registration of the Shares issuable upon conversion of the
Convertible Debenture.
Pursuant to the terms of a Registration Rights Agreement entered
into between us and the Selling Stockholder dated as of July 9,
2020, which was entered into in connection with the Purchase
Agreement, we agreed to file a registration statement for the
resale of the shares of common stock that have been or will
be issued to the Selling Stockholder within 60 days of the
date of the agreement.
We
will pay all reasonable expenses incurred in connection with the
registrations described above. However, we will not be responsible
for any broker or similar concessions or any legal fees or other
costs of the Selling Stockholders.
DESCRIPTION OF OUR CAPITAL STOCK
General
The
total number of shares of all classes which we have authority to
issue is 4,212,250,000 of which 4,000,000,000 shares are designated
as "Common Stock" with a par value of $0.0001 per share, and
200,000,000 shares are designated as "Preferred Stock," 750,000
shares are designed as "Preferred Stock - Class A"; 1,000,000
shares are designated as "Preferred Stock - Class B"; 9,000,000
shares are designated as "Preferred Stock - Class C", all with par
value of $0.0001; 1,000,000 shares are designated as "Preferred
Stock - Class D" and 500,000 shares are designated as of "Preferred
Stock - Class E".
As
of July 7, 2020 we had 640,887,727 issued and outstanding shares of
common stock and 500,000 shares of Series E preferred stock issued
and outstanding. We also have outstanding notes that convert
to shares of Series D preferred stock on their maturity in November
2021.
The
designations and the preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the
shares of each class of stock are as follows:
-70-
Preferred Stock
The
Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more series. The description of
shares of Preferred Stock, including any preferences, conversion
and other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption
shall be as set forth in resolutions adopted by the Board of
Directors, and Articles of Amendment shall be filed as required by
law with respect to issuance of such Preferred Stock, prior to the
issuance of any shares of Preferred Stock.
The
Board of Directors is expressly authorized, at any time, by
adopting resolutions providing for the issuance of, dividing of
such shares into series or providing for a change in the number of,
shares of any Preferred Stock and, if and to the extent from time
to time required by law, by filing Articles of Amendment which are
effective without Shareholder action to increase or decrease the
number of shares included in the Preferred Stock, but not below the
number of shares then issued, and to set or change in any one or
more respects the designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms and conditions of redemption relating to
the shares of Preferred Stock. Notwithstanding the foregoing,
the Board of Directors shall not be authorized to change the rights
of holders of the Common Stock of the Corporation to vote one vote
per share on all matters submitted for shareholder action.
The authority of the Board of Directors with respect to the
Preferred Stock shall include, but not be limited to, setting or
changing the following:
1. The annual dividend rate, if any, on shares of
Preferred Stock, the times of payment and the date from which
dividends shall be accumulated, if dividends are to be
cumulative;
2. Whether the shares of Preferred Stock shall be
redeemable and, if so, the redemption price and the terms and
conditions of such redemption;
3. The obligation, if any, of the Corporation to
redeem shares of Preferred Stock pursuant to a sinking fund;
4. Whether shares of Preferred Stock shall be
convertible into, or exchangeable for, shares of stock of any other
class or classes and, if so, the terms and conditions of such
conversion or exchange, including the price or prices or the rate
or rates of conversion or exchange and the terms of adjustment, if
any;
5. Whether the shares of Preferred Stock shall have
voting rights, in addition to the voting rights provided by law,
and, if so, the extent of such voting rights;
6. The rights of the shares of Preferred Stock in
the event of voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation; and
7. Any other relative rights, powers, preferences,
qualifications, limitations or restrictions thereof relating to the
Preferred Stock.
The
shares of Preferred Stock of any one series shall be identical with
each other in all respects except as to the dates from and after
which dividends thereon shall cumulate, if cumulative.
-71-
Series A Preferred Stock
Ranking
The
Series A Preferred Stock will, with respect to payment of dividends
and amounts upon liquidation, dissolution or winding up, rank(i)
senior to the Common Stock and to shares of all other series of
preferred stock issued by the Company the terms of which
specifically provide that the capital stock of such series rank
junior to such Series A Preferred Stock with respect to dividend
rights or distributions upon dissolution of the Company ("Junior
Stock"); (ii) on a parity with the shares of all other capital
stock issued by the Company whether or not the dividend rates,
dividend payment dates, or redemption or liquidation prices per
share thereof shall be different from those of the Series A
Preferred Stock, if the holders of stock of such class or series
shall be entitled by the terms thereof to the receipt of dividends
or of amounts distributable upon liquidation, dissolution or
winding up, as the case may be, in proportion to their respective
dividend rates or liquidation prices, without preference or
priority of one over the other as between the holders of such stock
and the holders of shares of Series A Preferred Stock ("Parity
Stock"); and (iii) junior to all other capital stock issued by the
Company the terms of which specifically provide that the shares
rank senior to the Series A Preferred Stock with respect to
dividends and distributions upon dissolution of the Company
("Senior Stock").
Dividends
Holders of shares of Series A Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the
Company, out of funds of the Company legally available for payment,
cumulative cash dividends at the rate per annum of 40 cents per
share of Series A Preferred Stock. Dividends on the Series A
Preferred Stock will be payable quarterly in arrears on the last
calendar day of March, June, September, and December of each year,
commencing September 30, 2002 (and in the case of any accumulated
and unpaid dividends not paid on the corresponding dividend payment
date, at such additional time and for such interim periods, if any,
as determined by the Board of Directors). Each such dividend
will be payable to holders of record as they appear on the stock
records of the Company at the close of business on such record
dates, not more than 60 days nor less than 10 days preceding the
payment dates thereof, as shall be fixed by the Board of Directors
of the Company. Dividends will accrue from the date of the
original issuance of the Series A Preferred Stock. Dividends
will be cumulative from such date, whether or not in any dividend
period or periods there shall be funds of the Company legally
available for the payment of such dividends. Accumulations of
dividends on shares of Series A Preferred Stock will not bear
interest. Dividends payable on the Series A Preferred Stock
for any period greater or less than a full dividend period will be
computed on the basis of actual days. Dividends payable on
the Series A Preferred Stock for each full dividend period will be
computed by dividing the annual dividend rate by four.
Except as provided in the next sentence, no dividend will be
declared or paid on any Parity Stock unless full cumulative
dividends have been declared and paid or are contemporaneously
declared and funds sufficient for payment set aside on the Series A
Preferred Stock for all prior dividend periods. If accrued
dividends on Series A Preferred Stock for all prior periods have
not been paid in full, then any dividends declared on the Series A
Preferred Stock for any dividend period and on any Parity Stock
will be declared ratably in proportion to accumulated and unpaid
dividends on the Series A Preferred Stock and such Parity Stock.
-72-
So
long as the shares of the Series A Preferred Stock shall be
outstanding, unless (i) full cumulative dividends shall have been
paid or declared and set apart for payments on all outstanding
shares of the Series A Preferred Stock and any Parity Stock (ii)
sufficient funds have been paid or set apart for the payment of the
dividend for the current dividend period with respect to the Series
A Preferred Stock and any Parity Stock (iii) the Company is not in
default or in arrears with respect to the mandatory or optional
redemption or mandatory repurchase or other mandatory retirement
of, or with respect to any sinking or other analogous fund for, the
Series A Preferred Stock, the Company may not declare any dividends
on any Junior Stock, or make any payment on account of, or set
apart money for, the purchase, redemption or other retirement of ,
or for a sinking or other analogous fund for, any shares of Junior
Stock or make any distribution in respect thereof, whether in cash
or property or in obligation or stock of the Company, other than
(x) Junior Stock which is neither convertible into, nor
exchangeable or exercisable for, any securities of the Company
other than Junior Stock, or (y) Common Stock acquired in connection
with the cashless exercise of options under employee incentive or
benefit plans of the Company of any subsidiary or any other
redemption or purchase of other acquisition of Common Stock made in
the ordinary course of business which has been approved by the
Board of Directors of the Company, for the purpose of any employee
incentive or benefit plan of the Company. The limitations in
this paragraph do not restrict the Company's ability to take the
actions in this paragraph with respect to any Parity Stock.
As
used in the preceding paragraph, the term "dividend" with respect
to Junior Stock does not include dividends payable solely in shares
of Junior Stock on Junior Stock, or in options, warrants or rights
to holders of Junior Stock to subscribe for or purchase any Junior
Stock.
Redemption
Optional Redemption. Except in the case of a Public
Offering, the shares of Series A Preferred Stock will not be
redeemable by the Company prior to May 14, 2005. On or after
May 14, 2005, the shares of Series A Preferred Stock will be
redeemable at the option of the Company in whole or in part for
$10.00 per share in cash or for such number of shares of Common
Stock as equals the liquidation preference of the Series A
Preferred Stock to be redeemed (without regard to accumulated and
unpaid dividends) divided by the Conversion Price (as defined below
under "Conversion Rights") as of the opening of business on the
date set for such redemption (equivalent to a conversion rate of
four shares of Common Stock for each share of Series A Preferred
Stock), subject to adjustment in certain circumstances. The
Company may exercise this option only if for 20 trading days,
within any period of 30 consecutive trading days, including the
last trading day of such period, the closing price of the Common
Stock on the OTC Bulletin Board exceeds the Conversion Price.
In order to exercise its redemption option, the Company must
notify the holders of record of its Series A Preferred Stock in
writing (the "Conditions Satisfaction Notice") prior to the opening
of business on the second trading day after the conditions in the
preceding sentences have, from time to time, been satisfied.
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Mandatory Redemption. Upon any public offering of the
Company's Common Stock ("Public Offering"), whereby the Company
sells shares of its Common Stock pursuant to an effective
registration statement under the Securities Act of 1933, as
amended, the Series A Preferred Stock will be redeemed in whole by
the Company for such number of shares of Common Stock as equals the
liquidation preference of the Series A Preferred Stock to be
redeemed (without regard to accumulated and unpaid dividends)
divided by the Conversion Price as of the opening of business on
the date set for such redemption (equivalent to a conversion rate
of four shares of Common Stock for each share of Series A Preferred
Stock), subject to adjustment in certain circumstances. In order to
exercise its redemption option, the Company must deliver a
Conditions Satisfaction Notice prior to the opening of business on
the second trading day after the conditions in the preceding
sentences have, from time to time, been satisfied.
Notice of Redemption. Notice of redemption (the
"Redemption Notice") will be given by mail to the holders of the
Series A Preferred Stock not more than seven business days after
the Company delivers the Conditions Satisfaction Notice. The
Company's right to exercise its redemption option will be affected
by changes in the closing price of the Common Stock following such
30-day period. The redemption date will be a date selected by
the Company not less than 30 nor more than 60 days after the date
on which the Company delivers the Redemption Notice. If fewer
than all the shares of Series A Preferred Stock are to be redeemed,
the shares to be redeemed shall be selected by lot or pro rata or
in some other equitable manner determined by the Board of Directors
of the Company.
If
full cumulative dividends on the outstanding shares of Series A
Preferred Stock shall not have been paid or declared and set apart
for payment for all regular dividend payment dates to and including
the last dividend payment date prior to the date fixed for
redemption, the Company shall not call for redemption any shares of
Series A Preferred Stock unless all such shares then outstanding
are called for simultaneous redemption.
On
the redemption date, the Company must pay, in cash, on each share
of Series A Preferred Stock to be redeemed any accumulated and
unpaid dividends through the redemption date. In the case of
a redemption date falling after a dividend payment record date and
prior to the related payment date, the holder of the Series A
Preferred Stock at the close of business on such record date will
be entitled to receive the dividend payable on such shares on the
corresponding dividend payment date, notwithstanding the redemption
of such shares following such dividend payment records date. Except
as provided for in the preceding sentence, no payment or allowance
will be made for accumulated and unpaid dividends on any shares of
Series A Preferred Stock called for redemption or on the shares of
Common Stock issuable upon such redemption.
On
and after the date fixed for redemption, provided that the Company
has made available at the office of its registrar and transfer
agent a sufficient number of shares of Common Stock and an amount
of cash to effect the redemption, dividends will cease to accrue on
the Series A Preferred Stock called for redemption (except that, in
the case of a redemption date after the dividend payment record
date and prior to the related dividend payment date, holders of
Series A Preferred Stock on the dividend payment record date will
be entitled on such dividend payment date to receive the dividend
payable on such shares), such shares shall no longer be deemed to
be outstanding and all rights of the holders of such shares of
Series A Preferred Stock shall cease except the right to receive
the shares of Common Stock upon such redemption and any cash
payable upon such redemption, without interest from the date of
such redemption. Any shares of Common Stock so set aside and
unclaimed at the end of three years from the date fixed for
redemption shall revert to the Company. At the close of
business on the redemption date upon surrender in accordance with
such notice of the certificates representing any such shares
(properly endorsed or assigned for transfer, if the Board of
Directors of the Company shall so require and the notice shall so
state), each holder of Series A Preferred Stock (unless the Company
defaults in the delivery of the shares of Common Stock or cash)
will be, without any further action, deemed holder of the number of
shares of Common Stock for which such Series A Preferred Stock is
redeemable.
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Fractional shares of Common Stock are not to be issued upon
redemption of the Series A Preferred Stock, but in lieu thereof,
the Company will pay a cash adjustment based on the current market
price of the Common Stock on the day prior to the redemption date.
If fewer than all the shares represented by any such certificate
are redeemed, a new certificate shall be issued representing the
unredeemed shares without cost of the holder thereof.
Subject to applicable law and the limitation on purchase when
dividends on the Series A Preferred Stock are in arrears, the
Company may, at any time and from time to time, purchase any shares
of the Series A Preferred Stock by tender of by private
agreement.
Liquidation Preference
The
holders of the shares of Series A Preferred Stock will be entitled
to receive in the event of any liquidation, dissolution or winding
up on the Company, whether voluntary or involuntary, $5.00 per
share of Series A Preferred Stock (the "Liquidation Preference"),
plus an amount per share of Series A Preferred Stock equal to all
dividends (whether or not earned or declared) accumulated and
unpaid thereon to the date of final distribution to such holders,
and no more. If, upon any liquidation, dissolution or winding
up of any Company, the assets of the Company, or proceeds thereof,
distributable among the holders of Series A Preferred Stock and any
other Parity Stock, then such assets, or the proceeds therefore,
will be distributed among the holders of Series A Preferred Stock
and any such Parity Stock ratably in accordance with the respective
amounts which would be payable on such Series A Preferred Stock and
any such Parity Stock if all amounts payable on such Series A
Preferred Stock and any such Parity Stock if all amounts payable
thereon were paid in full.
Neither a consolidation or merger of the Company with or into
another corporation, nor a sale, lease or transfer of all or
substantially all of the Company's assets will be considered a
liquidation, dissolution or winding up, voluntary or involuntary,
of the Company.
Voting Rights
Except as indicated below, and as otherwise from time to time
required by applicable law, the holders of shares of Series A
Preferred Stock will have no voting rights.
If
an amount equal to the dividend payable to the Series A Preferred
Stock for six quarterly dividends payable on the Series A Preferred
Stock is in arrears, the number of directors then constituting the
Board of Directors of the company will be increased by two and the
holders of share of Series A Preferred Stock, voting together as a
class with the holders of any other series of Parity Stock (any
such other series, the "Voting Preferred Shares"), will have the
right to elect two additional directors to serve on the Company's
Board of Directors at an annual meeting of stockholders or a
properly called special meeting of the holders of the Series A
Preferred Stock and such Voting Preferred Shares and at each
subsequent annual meeting of stockholders until all such dividend
on the Series A Preferred Stock have been paid in full. Such
voting rights will terminate when all such accumulated and unpaid
dividends have been paid in full with funds placed in trust for
stockholders who cannot be located. The term of office of all
directors so elected will terminate with the termination of such
voting rights.
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With respect to any matter as to which the Series A Preferred Stock
is entitled to vote, holders, of shares of the Series A Preferred
shall be entitled to one vote per share.
Without the vote of the holders of at least 66-2/3% in number of
shares of the Series A Preferred Stock then outstanding, the
Company may not (i) create or issue or increase the authorized
number of shares of any class or classes or series of Senior Stock
or (ii) amend, alter or repeal any of the provisions of the
Company's Restated Certificate of Incorporation or the Certificate
of Designation so as to materially affect adversely the
preferences, special rights or powers of the Series A Preferred
Stock or (iii) authorize any reclassification of the Series A
Preferred Stock; provided, however, a consolidation or merger of
the Company with or into another corporation, will not be
considered a reclassification of the Series A Preferred Stock.
The
voting provisions in the immediately preceding paragraph with
respect to the Series A Preferred Stock will not apply if, at or
before a time when the act with respect to which such vote would
otherwise be required shall be effected, (i) all outstanding shares
of Series A Preferred Stock shall have been redeemed or (ii)
sufficient funds to pay in full and all accumulated and unpaid
dividends on the Convertible Preferred Stock and a sufficient
number of shares to fund such redemption of all outstanding shares
of Series A Preferred Stock shall have been deposited in trust to
effect such redemption.
No
consent or approval of the holders of shares of Series A Preferred
Stock will be required for the issuance of the Company's authorized
but unissued Preferred Stock ranking on a parity with or junior to
the Series A Preferred Stock.
Conversion Rights
Shares of Series A Preferred Stock will be convertible, in whole or
in part, at any time during the first eighteen months from the date
of issuance at the option of the holders thereof, into shares of
Common Stock at a conversion price of $1.25 per share of Common
Stock (equivalent to a Conversion Rate of four shares of Common
Stock for each share of Series A Preferred Stock), subject to the
adjustment as described below ("Conversion Price").
Thereafter and until Redemption (as described above) shares
of Series A Preferred Stock will be convertible, in whole or in
part, at the option of the holders thereof, into shares of Common
Stock at a conversion price equal to the greater of (1) the average
of the lowest seven inter-day trading prices during the twenty-one
trading days immediately prior to conversion discounted by 50% or
(ii) $0.50 per share of Common Stock. The right to convert
shares of Series A Preferred Stock called for redemption will
terminate at the close of business on the third business day
immediately preceding a redemption date. For information as
to notices of redemption, see "Redemption" above.
Conversion of shares of Series A Preferred Stock, or a specific
portion thereof, may be effected by delivering certificates
evidencing such shares, together with written notice of conversion
and a proper assignment of such certificates to the Company.
Each conversion will be deemed to have been effected immediately
prior to the close of business on the date on which the certificate
for shares of Series A Preferred Stock shall have been surrendered
and notice shall have been received by the Company as aforesaid
(and if applicable, payment of an amount equal to the dividend
payable on such shares shall have been received by the Company as
described below) and the conversion shall be at the Conversion
Price in effect at such time and on such date.
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Holders of shares of Series A Preferred Stock at the close of
business on a dividend payment record date will be entitled to
receive the dividend payable on such shares on the corresponding
dividend payment date notwithstanding the conversion of such shares
following such dividend payment record date and prior to such
dividend payment date. However, shares of Series A Preferred
Stock surrendered for conversion during the period between the
close of business on any dividend payment record date and the
opening of business on the corresponding dividend payment date
(except shares converted after the issuance of a Redemption Notice
with respect to a redemption date during such period, which will be
entitled to such dividend) must be accompanied by payment of an
amount equal to the dividend payable on such shares on such
dividend payment date. A holder of shares of Series A
Preferred Stock on a dividend payment record date who (or whose
transferee) tenders any such shares for conversion into shares of
Common Stock on such dividend payment date will receive the
dividend payable by the Company on such shares of Series A
Preferred Stock on such date, and the converting holder need not
include payment of the amount of such dividend upon surrender of
shares of Series A Preferred Stock for conversion. Except as
provided above, the Company will make no payment or allowance for
unpaid dividends, whether or not in arrears, on converted shares or
for dividends on the shares of Common Stock issued upon such
conversion.
Fractional shares of Common Stock are not to be issued upon
conversion but, the Company will pay cash adjustment for any
fractional shares based on the current market price of the Common
Stock on the day prior to the conversion date.
Conversion Price Adjustments
The
Conversion Price is subject to adjustment upon certain events,
including (i) dividends (and other distributions) on its Common
Stock, payable in shares of Common Stock or any class of capital
stock of the Company, (ii) the issuance to all holders of Common
Stock of certain rights, options or warrants entitling them to
subscribe for or purchase Common Stock at a price per share less
than the fair market value per share or Common Stock, (iii)
subdivisions, combinations and reclassifications of Common Stock
and (iv) distributions to all holders of Common Stock of cash,
evidences of indebtedness of the Company or assets (including
securities, but excluding those dividends, rights, warrants,
options and distributions referred to above and excluding any
dividend or distribution paid in cash to holders of Common Stock in
the ordinary course of the Company's business as determined in good
faith by the Board of Directors and not in excess of the
stockholders' equity of the Company). In addition to the
foregoing adjustments, the Company will be permitted to make such
reductions in the Conversion Price as it considers to be advisable
in order that any event treated for Federal income tax purposes as
a dividend of stock or stock rights will not be taxable to the
holders of the Common Stock.
In
the event the Company shall (x) effect any capital reorganization
or reclassification of its shares or (y) consolidate or merge with
or into any other corporation (other than a consolidation or merger
in which the Company is the surviving corporation and each share of
Common Stock outstanding immediately prior to such consolidation or
merger is to remain outstanding immediately after such
consolidation or merger) or (z) sell, lease or transfer
substantially all of its assets to any other person or entity for a
consideration consisting in whole or in part of equity securities
of such other corporation, the holders of shares of Series A
Preferred Stock shall receive upon conversion thereof, in lieu of
each share of Common Stock into which the Series A Preferred Stock
would have been convertible prior to such transaction, the same
kind and amount of stock and other securities, cash or property as
such holder would have been entitled to receive upon such
transaction if such holder had held the Common Stock issuable upon
conversion of the Series A Preferred Stock immediately prior to
such transaction.
No
adjustment of the Conversion Price will be required to be made in
any case until cumulative adjustments amount to 1% or more of the
Conversion Price. Any adjustments not so made will be carried
forward and taken into account in subsequent adjustments.
A
conversion price adjustment made according to the provisions of the
Series A Preferred Stock (or the absence of provision for such an
adjustment) might result in a constructive distribution to the
holders of Series A Preferred Stock or holders of Common Stock that
would be subject to taxation as a dividend.
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Transfer Restrictions
As
with the underlying shares of the Company's Common Stock, the
shares of Series A Preferred Stock offered hereby have not been
registered under any federal or state securities laws. Accordingly,
the transfer of shares of Series A Preferred stock, and of shares
of Common Stock upon conversion or redemption of such Series A
Preferred Stock, will be restricted. The Company may require
an
opinion of counsel acceptable to it to the effect that any proposed
sale, transfer or other disposition of restricted shares of Series
A Preferred Stock or Common Stock will not violate any applicable
federal or state securities laws.
Other Aspects
Because the Company has subsidiaries, its rights and the rights of
holder of its securities, including the holder of Series A
Preferred Stock, to participate in the assets of any Company
subsidiary upon the latter's liquidation or recapitalization will
be subject to the prior claim of the subsidiary's creditors and
preferred stockholders, if any, except to the extent the Company
may itself be a creditor with recognized claims against the
subsidiary or the holders of preferred shares, if any, of the
subsidiary.
Series B Preferred Stock
Ranking
The
Class B Preferred Stock will, with respect to payment of dividends
and amounts upon liquidation, dissolution or winding up, rank on a
parity with the Common Stock (except that each share of Class B
Preferred Stock shall be equal to 10 shares of Common Stock as set
forth herein) issued by the Company whether or not the dividend
rates, dividend payment dates, or redemption or liquidation prices
per share thereof shall be different from those of the Class B
Preferred Stock, if the holders of stock of such class or series
shall be entitled by the terms thereof to the receipt of dividends
or of amounts distributable upon liquidation, dissolution or
winding up, as the case may be, in proportion to their respective
dividend rates or liquidation prices, without preference or
priority of one over the other as between the holders of such stock
and the holders of shares of Class B Preferred Stock; and junior to
all other capital stock issued by the Company the terms of which
specifically provide that the shares rank senior to the Class B
Preferred Stock with respect to dividends and distributions upon
dissolution of the Company.
Dividends
Until such time that a share of Class B Preferred Stock is
converted to Class A Common Stock, each such share of Class B
Preferred Stock will yield a dividend of $.02 each year payable on
the anniversary date of its issuance until it is converted to
Common Stock, out of funds of the Company legally available for
payment. Each such dividend will be payable to holders of
record as they appear on stock records of the Company at the close
of business on such record dates, not more than 60 days nor less
than 10 days preceding the payment dates thereof, as shall be fixed
by the Board of Directors of the Company. Dividends will
accrue from the date of the original issuance of the Class B
Preferred Stock shares. Dividends will be cumulative from
such date, whether or not in the any dividend period or periods
there shall be funds of the Company legally available for the
payment of such dividends. Accumulations of dividends on
shares of Class B Preferred Tock will not bear interest.
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Redemption
Subject to applicable law, the Company may, at any time and from
time to time, purchase any shares of the Class B Preferred Stock by
tender or by private agreement.
Liquidation Preference
Prior to conversion of Class B Preferred Stock, the holders of
shares of Class B Preferred Stock will be entitled to receive in
the event of any liquidation, dissolution or winding up on the
Company, whether voluntary or involuntary, an amount per share of
Class B Preferred Stock equal to all dividends (whether or not
earned or declared) accumulated and unpaid thereon to the date of
final distribution to such holders. Each share of Class B
Preferred Stock shall be entitled to receive an amount in
liquidation equal to the amount received by 10 shares of Common
Stock. If, upon any liquidation, dissolution or winding up of
any Company, the assets of the Company, or proceeds thereof,
distributable among the holders of Class B Preferred Stock and any
such Common Stock (or other parity stock, if any) ratably in
accordance with the respective amounts which would be payable on
such Class B Preferred Stock and any such Common Stock (or other
parity stock, if any) if all amounts payable thereon were paid in
full. Neither a consolidation or merger of the Company with
or into another corporation, nor a sale, lease or transfer of all
or substantially all of the Company's assets will be considered a
liquidation, dissolution or winding up, voluntary or involuntary,
of the Company.
Voting Rights
The
holders of Class B Preferred Stock are entitled to vote on all
corporate matters on which the holders of shares of Common Stock
shall be entitled to vote. The total number of votes each
share of Class B Preferred Stock is entitled to cast is 10 votes
per share.
Conversion Rights
Shares of the Class B Preferred Stock will be convertible, in whole
or in part, at any time two years from the date of issuance at the
option of the holders thereof, or at the discretion of the Board of
Directors of the Company, into shares of the Common Stock at a
conversion rate of 10 shares of Common Stock for each share of
Class B Preferred Stock, Conversion of shares of Class B Preferred
Stock, or a specific portion thereof, may be effected by delivering
certificates to the Company. Each conversion will be deemed to have
been effected immediately prior to the close of business on the
date on which the certificate for the shares of Class B Preferred
Stock shall have been surrendered and notice shall have been
received by the Company as aforesaid. Holders of shares of
Class B Preferred Stock at the close of business on a dividend
payment record date will be entitled to receive the dividend
payable on such shares on the corresponding dividend payment date
notwithstanding the conversion of such shares following such
dividend payment record date and prior to such dividend payment
date. Except as provided above, the Company will make no
payment or allowance for unpaid dividends, whether or not in
arrears, on converted shares or for dividends on the shares of
Common Stock issued upon such conversion.
Transfer Restrictions
The
transfer of shares of Class B Preferred Stock prior to the
conversion or redemption of such Class B Preferred Stock, will be
prohibited for a period of two years following their issuance.
The Company may require an option of counsel acceptable to it
to the effect that any proposed sale, transfer or other disposition
of restricted shares of Class B Preferred Stock or Common Stock
will not violate any applicable federal or state securities
laws.
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Other Aspects
Because the Company has subsidiaries, its rights and the right of
holders of its securities, including the holder of Class B
Preferred Stock, to participate in the assets of the Company
subsidiary upon the latter's liquidation or recapitalization will
be subject to the prior claim of the subsidiary's creditors and
preferred stockholders, if any, except for the extent that the
Company may itself be a creditor with recognized claims against the
subsidiary or the holder of preferred shares, if any, of the
subsidiary.
Series C Preferred Stock
Designations and Amount
Nine Million (9,000,000) shares of the Preferred Stock of the
Corporation, $0.0001 par value per share, shall constitute a class
of Preferred Stock designated as "Series C Preferred Stock" (the
"Series C Preferred Stock") with a face value of $0.0001 per share
(the "Face Amount").
The
Series C Preferred Shares shall have the following rights,
preferences, powers, privileges, restrictions, qualifications and
limitations:
Designation, Amount and Par Value
This series of preferred stock shall be designated as this
Corporation's Series C Preferred Stock (the "Series C Stock") and
the number of shares so designated shall be up to 9,000,000.
Each share of Series C Preferred Stock shall have a par
value of $0.0001 per share and a stated value equal to $0.0001.
Dividends
The
Holders of outstanding Series C Preferred Stock shall be entitled
to receive 500 times the dividends per share of Series C Stock as
are paid for each share of the Corporation's common stock.
Voting Rights
In
addition to voting as a class as to all matters that require class
voting under the Nevada Revised Statutes, the holders of the Series
C Stock shall vote on all matters with the holders of the Common
Stock (and not as a separate class) on five hundred votes per
Series C Stock (500:1) basis.
The
holders of the Series C Stock shall be entitled to receive all
notices relating to voting as are required to be given to the
holders of the Common Stock.
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Rank
The
Series C Stock shall, with respect to the rights on liquidation be
entitled to receive 500 for 1 Share of liquidation proceeds as
compared to each share of common stock, $.001 par value per share.
Redemption
Shares of Series C Preferred Stock may not be redeemed by the
Corporation absent the consent of the holder thereof.
Conversion
(a) Each share of Series C Stock shall be convertible,
without any payment of additional consideration by the holder
thereof and at the option of the holder thereof, at any time after
the Series C Issue Date at the conversion ratio of one (1) share of
Series C Stock for five hundred (500) shares of Common Stock.
(b) The Conversion Ratio shall be subject to adjustment
in accordance with the following:
i. In case the Corporation shall have at any time
or from time to time after the Series C Issue Date, paid a
dividend, or made a distribution, on the outstanding shares of
Common Stock in shares of Common Stock, subdivided the outstanding
shares of Common Stock, combined the outstanding shares of Common
Stock into a smaller number of shares of issued by reclassification
of the shares of Common Stock any shares of capital stock of the
Corporation, then, and with respect to each such case, the
Conversion Ratio shall be adjusted so that the holder of any shares
of Series C Stock shall be entitled to receive upon conversion the
number of shares of Common Stock or other securities of the
Corporation which such holder would have owned or have been
entitled to receive immediately prior to such events or the record
date therefor, whichever is earlier, assuming the Series C Stock
had been converted into Common Stock, it being the intention of the
foregoing, to provide the holders of Series C Stock with the same
benefits and securities as such holders would have received as
holders of Common Stock if the Series C Stock had been converted
into Common Stock at the Conversion Ratio on the Series C Issue
Date and such holders had continued to hold such Common Stock.
ii. In case the Corporation shall at any time or
from time to time after the Series C Issue Date declare, order, pay
or make a dividend or other distribution (including, without
limitation, any distribution of stock or other securities or
property or rights or warrants to subscribe for securities of the
Corporation or any of its subsidiaries by way of dividend or
spin-off), on its Common Stock, other than dividends or
distributions of shares of Common Stock which are referred to in
clause (i) of this section (b), then the holders of the Series C
Stock shall be entitled to receive upon conversion their pro rata
share of any such dividend or other distribution on an as converted
basis; provided, however, that any plan or declaration of a
dividend or distribution shall not have been abandoned or
rescinded.
-81-
iii. If the Corporation shall be a party to any
transaction including without limitation, a merger, consolidation,
sale of all or substantially all of the Corporation's assets or a
reorganization, reclassification or recapitalization of the capital
stock, (such actions being referred to as a "Transaction), in each
case, as a result of which shares of Common Stock are converted
into the right to receive stock securities or other property
(including cash or any combination thereof), each share of Series C
Stock shall thereafter be convertible into the number of shares of
stock or securities or property to which a holder of the five
hundred times the number of shares of Common Stock of the
Corporation deliverable upon conversion of such Series C Stock
would have been entitled upon such Transaction; and, in any such
case, appropriate adjustment (as determined by the Board) shall be
made in the application of the provisions set forth in this
Subsection, with respect to the rights and interest thereafter of
the holders of the Series C Preferred Stock, to the end that the
provisions set forth in this Subsection shall thereafter be
applicable, as nearly as reasonably may be, in relation to any
shares of stock or other property thereafter deliverable upon the
conversion of the Series C Stock. The Corporation shall not effect
any Transaction (other than a consolidation or merger in which the
Corporation is the continuing corporation) unless prior to or
simultaneously with the consummation thereof the Corporation, or
the successor corporation or purchaser, as the case may be, shall
provide in its charter document that each share of Series C Stock
shall be converted into such shares of stock, securities or
property as, in accordance with the foregoing provisions, each such
holder is entitled to receive. The provisions of this
paragraph shall similarly apply to successive Transactions.
(c) The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization,
recapitalization, consolidation, merger, dissolution, issue or sale
of securities or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in
good faith assist in the carrying out of all the provisions of this
Section (b) and in taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the
holders of the Series C Stock against impairment.
(d) In the event of any taking by the Corporation of a
record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any
dividend or other distribution, the Corporation shall mail to each
holder of Series C Stock a notice specifying the date on which any
such record is to be taken for the purpose of such dividend or
distribution at least ten (10) day prior to such record date.
(e) The Corporation shall, at or prior to the time of any
conversion, take any and all action necessary to increase its
authorized, but unissued Common Stock and to reserve and keep
available out of its authorized, but unissued Common Stock, such
number of shares of Common Stock as shall, from time to time, be
sufficient to effect conversion of the Series C Stock Section
6.
-82-
Series D Preferred Stock
Designations and Amount
One
Million (1,000,000) shares of the Preferred Stock of the
Corporation, $0.0001 par value per share, shall constitute a class
of Preferred Stock designated as "Series D Preferred Stock" (the
"Series D Stock") with a face value of $0.0001 per share (the "Face
Amount").
The
Series D Stock shall have the following rights, preferences,
powers, privileges, restrictions, qualifications and
limitations:
Dividends
The
holders of outstanding Series D Preferred Stock shall be entitled
to receive dividends per share of Series E Stock equal to the
dividends paid for each share of the Corporation's common
stock.
Voting Rights
The
Series D Stock is non-voting.
Rank
The
Series D Stock shall, with respect to the rights on liquidation, be
entitled to liquidation proceeds equal to the proceeds paid on each
share of the Corporation's common stock.
Redemption
Shares of Series D Preferred Stock may not be redeemed by the
Corporation absent the consent of the holder thereof.
Conversion
The
Series D Stock is convertible into twenty percent (20%) of the
outstanding shares of Common Stock at the time of the conversion.
Conversion is optional during the first 18 months after
issuance and on the 18 month anniversary of issuance conversion is
mandatory.
-83-
Series E Preferred Stock
Designations and Amount
Five Hundred Thousand (500,000) shares of the Preferred Stock of
the Corporation, $0.0001 par value per share, shall constitute a
class of Preferred Stock designated as "Series E Preferred Stock"
(the "Series E Stock") with a face value of $0.0001 per share (the
"Face Amount").
The
Series E Stock shall have the following rights, preferences,
powers, privileges, restrictions, qualifications and
limitations:
Dividends
The
holders of outstanding Series E Preferred Stock shall be entitled
to receive dividends per share of Series E Stock equal to the
dividends paid for each share of the Corporation's common
stock.
Voting Rights
The
Series E Stock is non-voting.
Rank
The
Series E Stock shall, with respect to the rights on liquidation, be
entitled to liquidation proceeds equal to the proceeds paid on each
share of the Corporation's common stock.
Redemption
Shares of Series E Preferred Stock may not be redeemed by the
Corporation absent the consent of the holder thereof.
Conversion
The
Series E Stock is convertible into 1,190,476 shares of Common
Stock.
-84-
Common Stock
Subject to all of the rights of the Shares as expressly provide
herein, by law or by the Articles of Incorporation, our common
stock possesses all such rights and privileges as are afforded to
capital stock by applicable law in the absence of any express grant
of rights or privileges in the Articles of Incorporation,
including, but not limited to, the following rights and
privileges:
1. Dividends may be declared and paid or set apart for
payment upon the Common Stock out of any assets or funds of the
Corporation legally available for the payment of dividends;
2. The holders of common stock shall have the unlimited
right to vote for the election of directors and on all other
matters requiring stockholder action, each share being entitled to
one vote; and
3. Upon the voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation the net assets of the
Corporation available for distribution shall be distributed pro
rata to the holders of the common stock in accordance with their
respective rights and interests.
Board of Directors
The
governing board of the Corporation shall be styled as a "Board of
Directors", and any member of said Board shall be styled as a
"Director."
The
number of directors of the corporation may be increased or
decreased in the manner provided in the Bylaws; provided, that the
number of directors shall never be less than one. In the
interim between elections of directors by stockholders entitled to
vote, all vacancies, including vacancies caused by an increase in
the number of directors and including vacancies resulting from the
removal of directors by the stockholders entitled to vote which are
not filled by said stockholders, may be filled by the remaining
directors, though less than a quorum.
Indemnification
The
personal liability of the directors of the Corporation is hereby
eliminated to the fullest extent permitted by the General
Corporation Law of the State of Nevada, as the same may be amended
and supplemented.
We
will, to the fullest extent permitted by the General Corporation
Law of the State of Nevada, as the same may be amended and
supplemented, indemnify any and all persons whom it shall have
power to indemnify under the law from and against any and all of
the expenses, liabilities, or other matters referred to in or
covered by said Law, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another
capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee, or agent
and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
-85-
Articles of Incorporation
We
reserve the right to amend, alter, change, or repeal any provision
contained in the Articles of Incorporation in the manner now or
hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
The
Board of directors is authorized to make Non-Material changes to
the Articles of Incorporation and to take any and all actions
without shareholder approval, which are allowed by the General
Corporation Law of the state of Nevada. "Non-Material" for
the purpose of this paragraph shall be construed to mean a change
that does not affect the rights or benefits of the
shareholders.
Merger; Reverse Stock Split
In
recognition of the merger with FLCR, a holding company created for
the purpose of acquiring small profitable businesses to provide
exit plans for those company's owners, several things occurred: (1)
FLCR amended its articles of incorporation to change its name from
FullCircle Registry, Inc. to Galaxy Next Generation, Inc.; (2)
Galaxy and FLCR changed its fiscal year end to June 30, effective
June 2018; (3) FLCR authorized shares of preferred stock were
increased to 200,000,000 and authorized shares of common stock were
increased to 4,000,000,000, (prior to the reverse stock split) both
with a par value of $0.0001; and (4) the Board of Directors and
Executive Officers approved Gary LeCroy, President and Director;
Magen McGahee, Secretary and Director; and Carl Austin, Director;
and (5) the primary business operated by the combined company
became the business that was operated by Galaxy.
In
addition, in connection with this merger in September 2018, 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).
Transfer Agent
The
transfer agent and registrar for our common stock is Madison Stock
Transfer Inc. Its address is 2500 Coney Island Ave, Brooklyn,
New York 11223 and its telephone number is (718) 627-4453.
Listing
Our
common stock is traded on the OTCQB Venture Market under the symbol
GAXY.
-86-
LEGAL MATTERS
The
validity of the securities being offered by this prospectus will be
passed upon for us by Parsons Behl & Latimer, Reno, Nevada.
EXPERTS
The
financial statements of Galaxy Next Generation, Inc. for the years
ended June 30, 2019, and March 31, 2018 and three month period
ended June 30, 2018 included in this registration statement,
of which this prospectus forms a part, have been so included in
reliance on the report of Somerset CPAs PC, an independent
registered public accounting firm appearing elsewhere herein, given
on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus, which constitutes a part of the registration
statement on Form S-1 that we have filed with the SEC under the
Securities Act, does not contain all of the information in the
registration statement and its exhibits. For further information
with respect to us and the securities offered by this prospectus,
you should refer to the registration statement and the exhibits
filed as part of that document. Statements contained in this
prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and in each instance, we
refer you to the copy of the contract or other document filed as an
exhibit to the registration statement. Each of these statements is
qualified in all respects by this reference.
We
are subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, and file annual, quarterly and
current reports, proxy statements and other information with the
SEC. Our SEC filings, including the registration statement, are
publicly available through the SEC's website at www.sec.gov.
We also maintain a website at www.galaxynext.us, at which
you may access these materials free of charge as soon as reasonably
practicable after they are electronically filed with, or furnished
to, the SEC. The information contained in, or that can be accessed
through, our website is not part of this prospectus.
DISCLOSURE OF THE SECURITIES AND EXCHANGE COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our
articles of incorporation contain provisions that permit us to
indemnify our directors and officers to the fullest extent
permitted by Nevada law. Our bylaws require us to indemnify
any of our officers or directors, and certain other persons, under
certain circumstances against all expenses and liabilities incurred
or suffered by such persons because of a lawsuit or similar
proceeding to which the person is made a party by reason of a his
being a director or officer of the Company or our subsidiaries,
unless that indemnification is prohibited by law. These provisions
do not limit or eliminate our rights or the rights of any
stockholder to seek an injunction or any other non-monetary relief
in the event of a breach of a director's or officer's fiduciary
duty. In addition, these provisions apply only to claims against a
director or officer arising out of his or her role as a director or
officer and do not relieve a director or officer from liability if
he or she engaged in willful misconduct or a knowing violation of
the criminal law or any federal or state securities law.
The
rights of indemnification provided in our articles of incorporation
and bylaws are not exclusive of any other rights that may be
available under any insurance or other agreement, by vote of
stockholders or disinterested directors or otherwise.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, we have been
informed that in the opinion of the SEC this type of
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
-87-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
|
|
|
Page
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated Balance Sheets as of June 30, 2019 and 2018
|
F-4
|
Consolidated Statements of Operations for the Year Ended June 30,
2019, Three Months Ended June 30,2018 and Year Ended March 31,
2018
|
F-5
|
Consolidated Statements of Stockholders' Equity (Deficit) for the
Year Ended June 30, 2019, Three Months Ended June 30, 2018 and Year
Ended March 31, 2018
|
F-6
|
Consolidated Statements of Cash Flows for the Year Ended June 30,
2019, Three Months ended June 30, 2018 and Year Ended March 31,
2018
|
F-8
|
Notes to Consolidated Financial Statements
|
F-9-49
|
Unaudited Consolidated Financial Statements
|
|
|
Page
|
Condensed Consolidated Balance Sheets as of March 31, 2020
(unaudited) and June 30, 2019 (audited)
|
F-50
|
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended March 31, 2020 and 2019
(unaudited)
|
F-51
|
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
for the Nine Months Ended March 31, 2020 (unaudited)
|
F-52
|
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
for the Nine Months Ended March 31, 2019 (unaudited)
|
F-55
|
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2020 and 2019 (unaudited)
|
F-56
|
Notes to the Condensed Consolidated Financial Statements
|
F-58-87
|
F-1
![[REPORT001.JPG]](https://content.edgar-online.com/edgar_conv_img/2020/07/27/0001091818-20-000172_REPORT001.JPG)
F-2
![[REPORTT002.JPG]](https://content.edgar-online.com/edgar_conv_img/2020/07/27/0001091818-20-000172_REPORT002.JPG)
F-3
|
|
|
|
GALAXY NEXT GENERATION, INC.
|
Consolidated Balance
Sheets
|
June 30, 2019 and
2018
|
Assets
|
2019
|
|
2018
|
Current Assets
|
|
|
|
Cash
|
$
169,430
|
|
$
184,255
|
Accounts receivable, net
|
15,297
|
|
341,726
|
Accounts receivable -
unbilled
|
247,007
|
|
-
|
Inventories, net
|
648,715
|
|
586,764
|
Prepaid and other current
assets
|
20,898
|
|
2,764
|
|
|
|
|
Total Current Assets
|
1,101,347
|
|
1,115,509
|
|
|
|
|
Property and Equipment, net (Note
2)
|
26,765
|
|
4,254,451
|
|
|
|
|
Other Assets
|
|
|
|
Goodwill (Note 12)
|
834,220
|
|
892,312
|
Other assets (Note 12)
|
-
|
|
1,522,714
|
|
|
|
|
Total Other Assets
|
834,220
|
|
2,415,026
|
|
|
|
|
Total
Assets
|
$
1,962,332
|
|
$
7,784,986
|
|
|
|
|
Liabilities and
Stockholders' Equity (Deficit)
|
|
|
|
Current Liabilities
|
|
|
|
Line of credit (Note 3)
|
$
1,230,550
|
|
$
547,603
|
Convertible notes payable, net
of discount (Note 4)
|
2,124,824
|
|
-
|
Derivative liability,
convertible debt features and warrants
|
1,025,944
|
|
-
|
Current portion of long term
notes payable (Note 4)
|
279,346
|
|
362,181
|
Accounts payable
|
690,882
|
|
771,080
|
Accrued expenses
|
597,351
|
|
146,978
|
Advances from stockholders
|
-
|
|
260,173
|
Deferred revenue
|
247,007
|
|
219,820
|
Short term notes payable -
(Note 4)
|
-
|
|
165,000
|
Short term notes payable -
related party (Note 6)
|
200,000
|
|
485,534
|
|
|
|
|
Total
Current Liabilities
|
6,395,904
|
|
2,958,369
|
|
|
|
|
Noncurrent Liabilities
|
|
|
|
Noncurrent portion of accounts
payable
|
174,703
|
|
-
|
Notes payable, less current
portion (Note 4)
|
1,607
|
|
4,524,347
|
|
|
|
|
Total Liabilities
|
6,572,214
|
|
7,482,716
|
|
|
|
|
Stockholders' Equity (Deficit) (Notes
1, 8, and 12)
|
|
|
|
Common stock
|
1,072
|
|
965
|
Additional paid-in capital
|
4,859,731
|
|
3,108,873
|
Accumulated deficit
|
(9,470,685)
|
|
(2,807,568)
|
|
|
|
|
Total Stockholders' Equity
(Deficit)
|
(4,609,882)
|
|
302,270
|
|
|
|
|
Total Liabilities and
Stockholders' Equity (Deficit)
|
$
1,962,332
|
|
$
7,784,986
|
See
accompanying notes to the consolidated financial statements
F-4
|
|
|
|
|
|
GALAXY NEXT
GENERATION, INC.
|
Consolidated Statements of Operations
|
For
the Year Ended June 30, 2019, Three Months Ended June 30,
2018
|
and
Year Ended March 31, 2018
|
|
|
|
|
|
|
|
Year
Ended
|
|
Period Ended
|
|
Year
Ended
|
|
June
30, 2019
|
|
June
30, 2018
|
|
March 31, 2018
|
Revenues
|
|
|
|
|
|
Technology interactive panels and related
products
|
$
1,265,786
|
|
$
161,927
|
|
$
2,199,581
|
Entertainment theater ticket sales and
concessions
|
589,705
|
|
34,946
|
|
-
|
Technology office supplies
|
26,567
|
|
10,827
|
|
119,907
|
|
|
|
|
|
|
Total Revenues
|
1,882,058
|
|
207,700
|
|
2,319,488
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
Technology interactive panels and related
products
|
1,545,093
|
|
171,304
|
|
1,893,109
|
Entertainment theater ticket sales and
concessions
|
221,238
|
|
6,804
|
|
-
|
|
|
|
|
|
|
Total Cost of Sales
|
1,766,331
|
|
178,108
|
|
1,893,109
|
|
|
|
|
|
|
Gross
Profit
|
115,727
|
|
29,592
|
|
426,379
|
|
|
|
|
|
|
General and Administrative Expenses
|
|
|
|
|
|
Stock
compensation and stock issued for services
|
2,416,934
|
|
645,200
|
|
-
|
General
and administrative
|
3,421,336
|
|
726,328
|
|
1,574,808
|
|
|
|
|
|
|
Loss from Operations
|
(5,722,543)
|
|
(1,341,936)
|
|
(1,148,429)
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
Other
income
|
126,530
|
|
4,937
|
|
10,739
|
Expenses
related to convertible notes payable:
|
|
|
|
|
|
Change in fair value of
derivative liability
|
(89,198)
|
|
-
|
|
-
|
Interest accretion
|
(644,055)
|
|
-
|
|
-
|
Interest
expense
|
(333,851)
|
|
(33,124)
|
|
(40,235)
|
|
|
|
|
|
|
Total
Other Income (Expense)
|
(940,574)
|
|
(28,187)
|
|
(29,496)
|
|
|
|
|
|
|
Net Loss before Income Taxes
|
(6,663,117)
|
|
(1,370,123)
|
|
(1,177,925)
|
|
|
|
|
|
|
Income taxes (Note 9)
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
Net Loss
|
$
(6,663,117)
|
|
$
(1,370,123)
|
|
$
(1,177,925)
|
|
|
|
|
|
|
Net Basic and Fully Diluted Loss Per
Share
|
$
(0.658)
|
|
$
(0.155)
|
|
$
(0.135)
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
|
|
|
Basic and
fully diluted
|
10,128,435
|
|
8,864,480
|
|
8,757,251
|
|
|
|
|
|
|
Fully
diluted
|
10,518,750
|
|
8,864,480
|
|
8,757,251
|
See
accompanying notes to the consolidated financial statements
F-5
|
|
|
|
|
|
|
|
|
|
GALAXY
NEXT GENERATION, INC.
|
Consolidated Statements of Changes in Stockholders'
Equity (Deficit)
|
For the Year Ended June 30, 2019, Three Months Ended
June 30, 2018
|
and Year Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
Total
|
|
Common Stock
|
|
Additional
|
|
Accumulated
|
|
Stockholder's
|
|
Shares
|
|
Amount
|
|
Paid-in Capital
|
|
Deficit
|
|
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
Balance,
April 1, 2017
|
645
|
|
$ 600
|
|
$
-
|
|
$ ( 82,830)
|
|
$
(82,230)
|
|
|
|
|
|
|
|
|
|
|
Capital
contributions
|
-
|
|
-
|
|
44,226
|
|
-
|
|
44,226
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for services in May 2017
|
471,473
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued as part of the common controlled merger (Note 1)
|
8,067,889
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued as part of the private placement in March 2018 (Note 8)
|
32,226
|
|
-
|
|
60,000
|
|
-
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
-
|
|
-
|
|
-
|
|
(176,690)
|
|
(176,690)
|
|
|
|
|
|
|
|
|
|
|
Net loss for
the year ended March 31, 2018
|
-
|
|
-
|
|
-
|
|
(1,177,925)
|
|
(1,177,925)
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2018
|
8,572,233
|
|
600
|
|
104,226
|
|
(1,437,445)
|
|
(1,332,619)
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for services in April and May 2018 (Notes 8)
|
100
|
|
-
|
|
70,000
|
|
-
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued as part of the private placement from April to June 2018
(Note 8)
|
1,954
|
|
-
|
|
1,367,500
|
|
-
|
|
1,367,500
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for employee services in May 2018 (Note 8)
|
822
|
|
-
|
|
575,200
|
|
-
|
|
575,200
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued in exchange for debt reduction in June 2018 (Note 8)
|
143
|
|
-
|
|
100,000
|
|
-
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock to FullCircle Registry, Inc. common stockholders in
connection with acquisition in June 2018 (Note 12)
|
687,630
|
|
232
|
|
567,603
|
|
-
|
|
567,835
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock to FullCircle Registry, Inc. convertible debt holders
in connection with acquisition in June 2018 (Note 12)
|
392,931
|
|
133
|
|
324,344
|
|
-
|
|
324,477
|
|
|
|
|
|
|
|
|
|
|
Consolidated
net loss
|
-
|
|
-
|
|
-
|
|
(1,370,123)
|
|
(1,370,123)
|
F-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2018
|
9,655,813
|
|
965
|
|
3,108,873
|
|
(2,807,568)
|
|
302,270
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued as part of the private placement in September 2018
|
182,255
|
|
-
|
|
637,000
|
|
-
|
|
637,000
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for warrants and convertible debt in January 2019
|
242,271
|
|
24
|
|
591,859
|
|
-
|
|
591,883
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for warrants and convertible debt in February 2019
|
150,000
|
|
15
|
|
370,485
|
|
-
|
|
370,500
|
|
|
|
|
|
|
|
|
|
|
Non-cash
consideration for net assets of Entertainment in February 2019
|
-
|
|
(4)
|
|
(92,696)
|
|
-
|
|
(92,700)
|
|
|
|
|
|
|
|
|
|
|
Sale of net
assets to FCLR in February 2019
|
-
|
|
-
|
|
(1,511,844)
|
|
-
|
|
(1,511,844)
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for warrants for services in March 2019
|
100,000
|
|
10
|
|
219,990
|
|
-
|
|
220,000
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for services in May 2019
|
62,790
|
|
7
|
|
128,085
|
|
-
|
|
128,092
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for cashless exercise of warrant in May 2019
|
381,944
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Settlement
of conversion features and warrants in April and May 2019
|
-
|
|
-
|
|
301,575
|
|
-
|
|
301,575
|
|
|
|
|
|
|
|
|
|
|
Common Stock
issued under Stock Plan in May 2019
|
450,000
|
|
45
|
|
854,955
|
|
-
|
|
855,000
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for services in June 2019
|
33,828
|
|
4
|
|
90,655
|
|
-
|
|
90,659
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued under Stock Plan in June 2019
|
60,000
|
|
6
|
|
160,794
|
|
-
|
|
160,800
|
|
|
|
|
|
|
|
|
|
|
Consolidated
net loss
|
-
|
|
-
|
|
-
|
|
(6,663,117)
|
|
(6,663,117)
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2019
|
11,318,901
|
|
$ 1,072
|
|
$ 4,859,731
|
|
$ (9,470,685)
|
|
$ (4,609,882)
|
See
accompanying notes to the consolidated financial statements
F-7
|
|
|
|
|
|
GALAXY
NEXT GENERATION, INC.
|
Consolidated Statements of Cash Flows
|
For the Year Ended June 30, 2019, Three Months Ended
June 30, 2018
|
and Year Ended March 31, 2018
|
|
|
|
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
March 31, 2018
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
Net loss
|
$ (6,663,117)
|
|
$ (1,370,123)
|
|
$ (1,177,925)
|
Adjustments to reconcile net loss to net cash
used in operating activities:
|
|
|
|
|
|
Depreciation
|
221,260
|
|
5,222
|
|
17,667
|
Amortization of convertible
debt discounts
|
89,279
|
|
-
|
|
-
|
Accretion and settlement of
financing instruments and change in fair value of derivative
liability
|
733,258
|
|
-
|
|
-
|
Gain on sale of Entertainment
(Note 12)
|
(60,688)
|
|
-
|
|
-
|
Stock compensation and stock
issued for services
|
2,417,041
|
|
645,200
|
|
-
|
Changes in assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
74,922
|
|
(290,402)
|
|
166,206
|
Inventories
|
(67,561)
|
|
(225,398)
|
|
697,850
|
Prepaid expenses and other
assets (Note 12)
|
(1,566,268)
|
|
11,545
|
|
(363)
|
Accounts payable
|
175,021
|
|
(100,880)
|
|
(362,104)
|
Accrued expenses
|
712,318
|
|
(38,902)
|
|
13,958
|
Deferred revenue
|
27,187
|
|
219,820
|
|
-
|
|
|
|
|
|
|
Net cash
used in operating activities
|
(3,907,348)
|
|
(1,143,918)
|
|
(644,711)
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
Purchases of property and equipment
|
-
|
|
-
|
|
(12,049)
|
Acquisition of net assets (Note 12)
|
-
|
|
22,205
|
|
-
|
Net cash
provided by (used in) financing activities
|
-
|
|
22,205
|
|
(12,049)
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
Dividends
|
-
|
|
-
|
|
(176,690)
|
Proceeds from line of credit, net
|
682,947
|
|
19,000
|
|
528,603
|
Proceeds from convertible notes payable
|
2,495,235
|
|
-
|
|
-
|
Principal payments on mortgage and capital lease
obligations
|
(11,486)
|
|
(8,722)
|
|
(12,164)
|
Payments on advances from shareholders, net
|
(111,173)
|
|
(88,436)
|
|
(183,411)
|
Proceeds from issuance of common stock (Note
8)
|
637,000
|
|
1,367,500
|
|
60,000
|
Proceeds from notes payable
|
-
|
|
6,150
|
|
375,000
|
Capital contributions
|
-
|
|
-
|
|
44,226
|
Proceeds from notes payable - related parties
|
200,000
|
|
-
|
|
-
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
3,892,523
|
|
1,295,492
|
|
635,564
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
(14,825)
|
|
173,779
|
|
(21,196)
|
|
|
|
|
|
|
Cash,
Beginning of Period
|
184,255
|
|
10,476
|
|
31,672
|
|
|
|
|
|
|
Cash, End
of Period
|
$
169,430
|
|
$
184,255
|
|
$
10,476
|
F-8
|
|
|
|
|
|
Supplemental and Non Cash Disclosures
|
|
|
|
|
|
Non-cash consideration for sale of
Entertainment
|
$ 92,700
|
|
$
-
|
|
$
-
|
|
|
|
|
|
|
Non-cash payments from proceeds of convertible
debt for interest and fees
|
$ 134,461
|
|
$
-
|
|
$
-
|
|
|
|
|
|
|
Non-cash principal payments from proceeds of
convertible debt
|
$
602,024
|
|
$
-
|
|
$
-
|
|
|
|
|
|
|
Accretion of discount on convertible notes
payable
|
$ 644,055
|
|
$
-
|
|
$
-
|
|
|
|
|
|
|
Cash paid for interest
|
$
402,903
|
|
$
33,124
|
|
$
30,618
|
|
|
|
|
|
|
Reduction of note payable in exchange for common
stock (Note 4)
|
$
-
|
|
$
100,000
|
|
$
-
|
|
|
|
|
|
|
Sale of Entertainment
|
$ 1,511,844
|
|
$
-
|
|
$
-
|
See
accompanying notes to the consolidated financial statements
F-9
Note 1 - Summary of Significant Accounting Policies
Corporate History, Nature of Business and Mergers
Galaxy Next Generation LTD CO. ("Galaxy CO") was organized in the
state of Georgia in February 2017 while R & G Sales, Inc.
("R&G") was organized in the state of Georgia in August 2004.
Galaxy CO merged with R&G ("common controlled merger") on March
16, 2018, with R&G becoming the surviving company. R&G
subsequently changed its name to Galaxy Next Generation, Inc.
("Galaxy").
FullCircle Registry, Inc., ("FLCR") is a holding company created
for the purpose of acquiring small profitable businesses to provide
exit plans for those company's owners. FLCR's subsidiary,
FullCircle Entertainment, Inc. ("Entertainment" or "FLCE"), owns
and operates Georgetown 14 Cinemas, a fourteen-theater movie
complex located in Indianapolis, Indiana.
On
June 22, 2018, Galaxy consummated a reverse triangular merger
whereby Galaxy merged with and into Full Circle Registry, Inc.'s
(FLCR) newly formed subsidiary - formed specifically for the
transaction (Galaxy MS). The merger resulted in Galaxy MS becoming
a wholly-owned subsidiary of FLCR. For accounting purposes, the
acquisition of Galaxy by FLCR is considered a reverse acquisition,
an acquisition transaction where the acquired company, Galaxy, is
considered the acquirer for accounting purposes, notwithstanding
the form of the transaction. The primary reason the transaction is
being treated as a purchase by Galaxy rather than a purchase by
FLCR is that FLCR is a public reporting company, and Galaxy's
stockholders gained majority control of the outstanding voting
power of FLCR's equity securities. Consequently, the assets and
liabilities and the operations that are reflected in the historical
financial statements of the Company prior to the merger are those
of Galaxy. The financial statements after the completion of the
merger include the combined assets and liabilities of the combined
company (collectively Galaxy Next Generation, Inc., Full Circle
Registry, Inc. and FullCircle Entertainment, Inc., or "the
Company").
In
recognition of Galaxy's merger with FLCR, several things occurred:
(1) FLCR amended its articles of incorporation to change its name
from FullCircle Registry, Inc. to Galaxy Next Generation, Inc.; (2)
Galaxy and FLCR changed its fiscal year end to June 30, effective
June 2018; (3) FLCR authorized shares of preferred stock were
increased to 200,000,000 and authorized shares of common stock were
increased to 4,000,000,000, (prior to the Reverse Stock Split) both
with a par value of $0.0001; and (4) the Board of Directors and
Executive Officers approved Gary LeCroy, President and Director;
Magen McGahee, Secretary and Director; and Carl Austin, Director;
and (5) the primary business operated by the combined company
became the business that was operated by Galaxy.
F-10
Note 1 - Summary of Significant Accounting Policies
(Continued)
Corporate History, Nature of Business and Mergers
(Continued)
Galaxy is a manufacturer and U.S. distributor of 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. New
technologies like Galaxy's own touchscreen panels are sold along
with renowned brands such as Google Chromebooks, Microsoft Surface
Tablets, Lenovo & Acer computers, Verizon WiFi and more.
Galaxy's distribution channel consists of approximately 30
resellers across the U.S. who primarily sell its products within
the commercial and educational market. Galaxy does not control
where the resellers focus their resell efforts; however, the K-12
education market is the largest customer base for Galaxy products
comprising nearly 90% of Galaxy's sales. In addition, Galaxy also
possesses its own reseller channel where it sells directly to the
K-12 market, primarily throughout the Southeast region of the
United States.
As
disclosed in Note 12, the Entertainment segment was sold on
February 6, 2019 in exchange for 38,625 Galaxy common shares.
Basis of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America. Any reference in these footnotes to
applicable guidance is meant to refer to the authoritative U.S.
generally accepted accounting principles ("GAAP") as found in the
Accounting Standards Codification ("ASC") and Accounting Standards
Update ("ASU") of the Financial Accounting Standards Board
("FASB").
Due
to the change in year-end, the Company's fiscal year 2018 was
shortened from 12 months to 3 months and ended on June 30, 2018.
Further, the financial statements as of June 30, 2019 and 2018
represent the financial information of the Company subsequent to
the acquisition. The consolidated statement of operations, changes
in stockholder equity (deficit) and cashflows for the year ended
March 31, 2018 represent the financial results of the Company prior
to the acquisition. All intercompany transactions and accounts have
been eliminated in the consolidation.
The
Company's financial reporting segments are Technology (reflecting
the operations of Galaxy) and Entertainment (reflecting the
operations of the movie theater). The Company is an
over-the-counter public company traded under the stock symbol
listing GAXY (formerly FLCR).
F-11
Note 1 - Summary of Significant Accounting Policies
(Continued)
Segment Reporting
With the reverse merger between Galaxy and FLCR on June 22, 2018,
the Company identified two reportable segments: Technology and
Entertainment. Segment determination is based on the internal
organization structure, management of operations and performance
evaluation by management and the Company's Board of Directors.
Separate management of each segment is required because each
business unit is subject to different operational issues and
strategies.
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 focus on its primary
business plan, which is Galaxy. As disclosed in Note 12, the
Entertainment segment was sold to an entity with a common board
member on February 6, 2019.
Use of Estimates
The
preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Significant estimates used in preparing the consolidated financial
statements include those assumed in computing the allowance for
doubtful accounts, inventory reserves, product warranty
liabilities, valuation of goodwill, valuation of convertible notes
payable and related warrants, and the valuation of deferred tax
assets. It is reasonably possible that the significant estimates
used will change within the next year.
F-12
Note 1 - Summary of Significant Accounting Policies
(Continued)
Capital Structure
In
accordance with ASC 505, Equity, the Company's capital structure is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
|
|
|
|
Authorized
|
|
Issued
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
4,000,000,000
|
|
11,318,901
|
|
11,280,276
|
$.0001
par value, one vote per share
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
200,000,000
|
|
-
|
|
-
|
$.0001
par value, one vote per share
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class A
|
|
750,000
|
|
-
|
|
-
|
$.0001
par value; no voting rights
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class B
|
|
1,000,000
|
|
-
|
|
-
|
Voting
rights of 10 votes for 1 Preferred B share; 2% preferred dividend
payable annually
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class C
|
|
9,000,000
|
|
-
|
|
-
|
$.0001
par value; 500 votes per share, convertible to common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2018
|
|
|
|
|
|
Authorized
|
|
Issued
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
4,000,000,000
|
|
9,655,813
|
|
9,655,813
|
$.0001
par value, one vote per share
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
200,000,000
|
|
-
|
|
-
|
$.0001
par value, one vote per share
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class A
|
|
750,000
|
|
-
|
|
-
|
$.0001
par value; no voting rights
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class B
|
|
1,000,000
|
|
-
|
|
-
|
Voting
rights of 10 votes for 1 Preferred B share; 2% preferred dividend
payable annually
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class C
|
|
9,000,000
|
|
-
|
|
-
|
$.0001
par value; 500 votes per share, convertible to common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
|
|
|
|
Authorized
|
|
Issued
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
4,200,000,000
|
|
8,572,233
|
|
8,572,233
|
$.0001
par value, one vote per share
|
F-14
Note 1 - Summary of Significant Accounting Policies
(Continued)
There is no publicly traded market for the preferred shares.
There are 102,023,065 common shares reserved at June 30, 2019 under
terms of the convertible debt agreements and Stock Plan (see Notes
4 and 13).
There are 8,945,393 issued common shares that are restricted as of
June 30, 2019. The shares will become free-trading upon
satisfaction of certain terms within the convertible debt
agreements.
Share capital was restated as of the year ended March 31, 2018,
consistent with the accounting presentation requirement to
retroactively adjust the accounting acquirer's legal capital to
reflect the legal capital of the accounting acquiree in a reverse
acquisition.
Business Combinations
The
Company accounts for business combinations under the acquisition
method of accounting. Under this method, acquired assets, including
separately identifiable intangible assets, and any assumed
liabilities are recorded at their acquisition date estimated fair
value. The excess of purchase price over the fair value amounts
assigned to the assets acquired and liabilities assumed represents
the goodwill amount resulting from the acquisition. Determining the
fair value of assets acquired and liabilities assumed involves the
use of significant estimates and assumptions.
Concurrent with the reverse triangular merger, the Company applied
pushdown accounting. Pushdown accounting refers to the use of the
acquirer's basis in the preparation of the acquiree's separate
financial statements as the new basis of accounting for the
acquiree. See Note 12 for a discussion of the merger and the
related impact on the Company's consolidated financial
statements.
F-15
Note 1 - Summary of Significant Accounting Policies
(Continued)
Revenue Recognition
Technology Interactive Panels and Related Products
The
Company derives revenue from the sale of interactive panels and
other related products. Sales of these panels may also include
optional equipment, accessories and services (installation,
training and other services, maintenance and warranty services).
Product sales and installation revenue are recognized when all of
the following criteria have been met: (1) products have been
shipped or customers have purchased and accepted title to the
goods; service revenue for installation of products sold is
recognized as the installation services are performed, (2)
persuasive evidence of an arrangement exists, (3) the price to the
customer is fixed, and (4) collectability is reasonably
assured.
Deferred revenue consists of customer deposits and advance billings
of the Company's products where sales have not yet been recognized.
Shipping and handling costs billed to customers are included in
revenue in the accompanying statements of operations. Costs
incurred by the Company associated with shipping and handling are
included in cost of sales in the accompanying statements of
operations. Sales are recorded net of sales returns and discounts,
and sales are presented net of sales-related taxes.
Because of the nature and quality of the Company's products, the
Company provides for the estimated costs of warranties at the time
revenue is recognized for a period of five years after purchase as
a secondary warranty. The manufacturer also provides a warranty
against certain manufacturing and other defects. As of June 30,
2019 and 2018, the Company accrued $82,350 and $1,350,
respectively, for estimated product warranty claims, which is
included in accrued expenses in the accompanying consolidated
balance sheets. The accrued warranty costs are based primarily on
historical warranty claims as well as current repair costs. There
was $87,374 and $1,350 of warranty expenses for the year ended June
30, 2019 and the three months ended June 30, 2018, respectively.
There was $1,350 of warranty expense during the year ended March
31, 2018.
F-16
Note 1 - Summary of Significant Policies (Continued)
Revenue Recognition (Continued)
The
Company is negotiating a warranty settlement with one of its
manufacturers. At June 30, 2019, the Company accrued $209,316
payable to this manufacturer to be paid over 24 months.
Product sales resulting from fixed-price contracts involve a signed
contract for a fixed price or a binding purchase order to provide
the Company's interactive panels and accessories. Contract
arrangements exclude a right of return for delivered items. Product
sales resulting from fixed-price contracts are generated from
multiple-element arrangements that require separate units of
accounting and estimates regarding the fair value of individual
elements. The Company has determined that its multiple-element
arrangements that qualify as separate units of accounting are (1)
product sales and (2) installation and related services. There is
objective and reliable evidence of fair value for both the product
sales and installation services and allocation of arrangement
consideration for each of these units is based on their relative
fair values. Each of these elements represent individual units of
accounting, as the delivered item has value to a customer on a
stand-alone basis. The Company's products can be sold on a
stand-alone basis to customers which provides objective evidence of
the fair value of the product portion of the multi-element
contract, and thus represents the Company's best estimate of
selling price.
The
fair value of installation services is separately calculated using
expected costs of installation services. Many times, the value of
installation services is calculated using price quotations from
subcontractors to the Company who perform installation services on
a stand-alone basis.
The
Company sells equipment with embedded software to its customers.
The embedded software is not sold separately, and it is not a
significant focus of the Company's marketing efforts. The Company
does not provide post-contract customer support specific to the
software or incur significant costs that are within the scope of
FASB guidance on accounting for software to be leased or sold.
Additionally, the functionality that the software provides is
marketed as part of the overall product. The software embedded in
the equipment is incidental to the equipment as a whole.
Entertainment Theater Ticket Sales and Concessions
Revenues are generated principally through admissions and
concessions sales with proceeds received in cash or via credit card
at the point of sale.
F-17
Note 1 - Summary of Significant Accounting Policies
(Continued)
Cash and Cash Equivalents
The
Company considers cash and cash equivalents to be cash in all bank
accounts, including money market and temporary investments that
have an original maturity of three months or less.
From time to time, the Company has on deposit, in institutions
whose accounts are insured by the Federal Deposit Insurance
Corporation, funds in excess of the insured maximum. The at-risk
amount is subject to significant fluctuation daily throughout the
year. The Company has never experienced any losses related to these
balances, and as such, the Company does not believe it is exposed
to any significant risk.
Accounts Receivable
The
Company reports accounts receivable at invoiced amounts less an
allowance for doubtful accounts. Interest is not charged on past
due accounts. Management reviews each receivable balance and
estimates that portion, if any, of the balance that will not be
collected. The carrying amount of the accounts receivable is then
reduced by an allowance based on management's estimate. Management
deemed no allowance for doubtful accounts was necessary at June 30,
2019 and 2018. At June 30, 2019, $247,007 of total accounts
receivable were considered unbilled and recorded as deferred
revenue. There were no amounts considered unbilled at June 30,
2018.
Inventories
Inventory is stated at the lower of cost or net realizable value.
Cost is determined on a first-in, first-out (FIFO) method of
accounting. All inventory at June 30, 2019 and 2018, represents
goods available for sale. Galaxy inventory is mostly comprised of
interactive panels and accessories while FLCE inventory consists of
concession inventory such as popcorn, soft drinks, and candy.
Management estimates $20,000 and $0 of obsolete or slow-moving
inventory reserves at June 30, 2019 and 2018,
respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Expenditures for repairs and maintenance are charged
to expense as incurred and additions and improvements that
significantly extend the lives of assets are capitalized. Upon sale
or other retirement of depreciable property, the cost and
accumulated depreciation are removed from the related accounts and
any gain or loss is reflected in operations.
F-18
Note 1 - Summary of Significant Accounting Policies
(Continued)
Property and Equipment (Continued)
Property and equipment at June 30, 2019 and the estimated useful
lives used in computing depreciation, are as follows:
|
|
|
Furniture and
fixtures
|
|
5 years
|
Equipment
|
|
5 years
|
Vehicles
|
|
5 years
|
Property and equipment at June 30, 2018 and March 31, 2018, and the
estimated useful lives used in computing depreciation, are as
follows:
|
|
|
Building
|
|
40 years
|
Building
improvements
|
|
8 years
|
Vehicles
|
|
5 years
|
Equipment
|
|
5 – 8
years
|
Furniture and fixtures
|
|
5
years
|
Depreciation is provided using the straight-line method over the
estimated useful lives of the depreciable assets. Depreciation
expense was $221,260, $5,222 and $17,667 for the year ended June
30, 2019, the three months ended June 30, 2018 and the year ended
March 31, 2018, respectively.
F-19
Note 1 - Summary of Significant Accounting Policies
(Continued)
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.
F-20
Note 1 - Summary of Significant Accounting Policies
(Continued)
Goodwill (Continued)
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. If determined to be impaired, an impairment charge is
recorded as a general and administrative expense within the
Company's consolidated statement of operations.
Distinguishing Liabilities from Equity
The
Company relies on the guidance provided by ASC Topic 480,
Distinguishing Liabilities from Equity, to classify certain
convertible instruments. The Company first determines whether a
financial instrument should be classified as a liability. The
Company determines a liability classification if the financial
instrument is mandatorily redeemable, or if the financial
instrument, other than outstanding shares, embodies a conditional
obligation that the Company must or may settle by issuing a
variable number of its equity shares.
If
the Company determines that a financial instrument should not be
classified as a liability, the Company determines whether the
financial instrument should be presented between the liability
section and the equity section of the balance sheet ("temporary
equity"). The Company determines temporary equity classification if
the redemption of the financial instrument is outside the control
of the Company (i.e. at the option of the holder). Otherwise, the
Company accounts for the financial instrument as permanent
equity.
Initial Measurement
The
Company records financial instruments classified as liability,
temporary equity or permanent equity at issuance at the fair value,
or cash received.
Subsequent Measurement – Financial Instruments Classified as
Liabilities
The
Company records the fair value of financial instruments classified
as liabilities at each subsequent measurement date.
The
changes in fair value of financial instruments classified as
liabilities are recorded as other income (expense).
F-21
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 utilized.
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.
Earnings (Loss) per Share
Basic and diluted earnings (loss) per common share is calculated
using the weighted average number of common shares outstanding
during the period. The Company's convertible notes and warrants are
excluded from the computation of diluted earnings per share as they
are anti-dilutive due to the Company's losses during those periods.
Share capital was restated as of the beginning of the three month
period ended June 30, 2018, consistent with the accounting
presentation requirement to retroactively adjust the accounting
acquirer's legal capital to reflect the legal capital of the
accounting acquiree in a reverse acquisition.
F-22
Note 1 - Summary of Significant Accounting Policies
(Continued)
Fair Value of Financial Instruments
The
Company categorized its fair value measurements within the fair
value hierarchy established by generally accepted accounting
principles. The hierarchy is based on the valuation inputs used to
measure the fair value of the asset. Level 1 inputs are quoted
prices in active markets for identical assets; Level 2 inputs are
significant other observable inputs; Level 3 inputs are significant
unobservable inputs.
As
of June 30, 2019 and 2018, the Company held certain financial
assets and liabilities that are required to be measured at fair
value on a recurring basis. All such assets and liabilities are
considered to be Level 3 in the fair value hierarchy defined
above.
Derivative Liabilities
The
Company generally does not use derivative financial instruments to
hedge exposures to cash flow or market risks. However, certain
other financial instruments, such as warrants and embedded
conversion features on the convertible debt, are classified as
derivative liabilities due to protection provisions within the
agreements. Such financial instruments are initially recorded
at fair value using the Monte Carlo model and subsequently adjusted
to fair value at the close of each reporting period. The
Company accounts for derivative instruments and debt instruments in
accordance with the interpretive guidance of ASC 815, ASU 2017-11,
and associated pronouncements related to the classification and
measurement of warrants and instruments with conversion
features.
Recent Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842),
which is effective for public entities for annual reporting periods
beginning after December 15, 2018. Under ASU 2016-02, lessees will
be required to recognize the following for all leases (with the
exception of short-term leases) at the commencement date: 1) a
lease liability, which is a lessee's obligation to make lease
payments arising from a lease, measured on a discounted basis, and
2) a right-of-use asset, which is an asset that represents the
lessee's right to use, or control the use of, a specified asset for
the lease term. The Company does not expect any material impact of
ASU 2016-02 on the consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic
260), Distinguishing Liabilities from Equity (Topic 480) and
Derivatives and Hedging (Topic 815): I. Accounting for Certain
Financial Instruments with Down Round Features; II. Replacement of
the Indefinite Deferral for Mandatorily Redeemable Financial
Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Non-controlling Interests with a Scope Exception. Part I
of this update addresses the complexity of accounting for certain
financial instruments with down round features. Down round features
are features of certain equity-linked instruments (or embedded
features) that result in the strike price being reduced on the
basis of the pricing of future equity offerings. Current accounting
guidance creates cost and complexity for entities that issue
financial instruments (such as warrants and convertible
instruments) with down round features that require fair value
measurement of the entire instrument or conversion option. Part II
of this update addresses the difficulty of navigating Topic 480,
Distinguishing Liabilities from Equity, because of the existence of
extensive pending content in the FASB Accounting Standards
Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable
financial instruments of certain nonpublic entities and certain
mandatorily redeemable non-controlling interests. The amendments in
Part II of this update do not have an accounting effect. This ASU
is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2018. The Company adopted ASU
2017-11 in its consolidated financial statements and related
disclosures on January 1, 2019, the first interim period after the
effective date of the ASU.
F-23
Note 1 - Summary of Significant Accounting Policies
(Continued)
Recent Accounting Pronouncements
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 adopted during the year ended
June 30, 2019 with little impact on the consolidated financial
statements.
Note 2 - Property and Equipment
Property and equipment are comprised of the following at:
|
|
|
|
|
June
30, 2019
|
|
June
30, 2018
|
Land
and buildings
|
$ -
|
|
$
4,937,069
|
Building improvements
|
-
|
|
363,083
|
Vehicles
|
74,755
|
|
92,353
|
Equipment
|
5,000
|
|
1,470,709
|
Furniture and fixtures
|
12,598
|
|
12,598
|
|
92,353
|
|
6,875,812
|
Accumulated depreciation
|
(65,588)
|
|
(2,621,361)
|
|
|
|
|
Property and equipment, net
|
$26,765
|
|
$
4,254,451
|
As
disclosed in Note 12, the net assets of the Entertainment segment
were sold on February 6, 2019. The property and equipment related
to this segment are zero at June 30, 2019.
Note 3 - Line of Credit
The
Company has a $1,250,000 line of credit at June 30, 2019 bearing
interest at prime plus 0.05% (6.0% at June 30, 2019) which expires
December 2019. The current terms of the line of credit were
renegotiated from maximum borrowings of $750,000 at June 30, 2018
with interest at prime plus 1% (5.5% as of June 30, 2018). The line
of credit is collateralized by certain real estate owned by a
family member of a stockholder, 850,000 shares of the Company's
common stock owned by 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 may occur during 2019. The outstanding balance was
$1,230,550 and $547,603 at June 30, 2019 and 2018,
respectively.
F-24
Notes 4 - Notes Payable
Long Term Notes Payable
The Company's long term notes
payable obligations to unrelated parties are as follows at:
|
|
|
|
|
June
30, 2019
|
|
June
30, 2018
|
The
Company has a note payable with a bank. Previous terms had maturity
set at December 2018 and accrued interest at 2.10% annually. The
note agreement was amended and now bears interest at 3.10% and
matures in December 2019. The note is guaranteed by a stockholder
and collateralized by a certificate of deposit owned by a related
party. In May 2018, 50,000 shares of stock were issued to the
related party in exchange for a $100,000 reduction in the
short-term note balance.
|
|
|
|
|
|
|
|
|
|
|
|
|
$
274,900
|
|
$
275,000
|
|
|
|
|
Note
payable to an individual executed March 2018 in which the note
accrues interest on the original principal balance at a rate of
6.25% annually. Interest payments are due annually with
principal due March 2021.
|
|
|
|
-
|
|
75,000
|
|
|
|
|
Mortgage payable with interest at 4.75%, and monthly payments of
$34,435 through December 31, 2016. The note was modified during
2017. After the modification, the interest rate was 2.5% annually
with monthly payments of $15,223 through July 15, 2020, and a
balloon payment due at maturity. The mortgage payable is secured by
the building and land and guaranteed by related parties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
4,512,710
|
|
|
|
|
Note
payable to a financial institution for a vehicle with monthly
installments of $153 maturing June 2022.
|
|
|
|
-
|
|
6,150
|
|
|
|
|
Capital leases with a related party for 3 delivery vehicles
with monthly installments ranging from $253 to $461, including 4%
to 4.75% interest, maturing over 5-year terms expiring between July
2019 and July 2020. One of the capital leases was paid in full in
April 2019 leaving 2 delivery vehicle capital leases remaining.
|
6,053
|
|
17,668
|
|
|
|
|
Total
Non-Related Party Notes Payable
|
280,953
|
|
4,886,528
|
|
|
|
|
Current Portion of Non-Related Party Notes Payable
|
279,346
|
|
362,181
|
|
|
|
|
Long-term Portion of Non-Related Party Notes Payable
|
$
1,607
|
|
$
4,524,347
|
|
|
|
|
As
disclosed in Note 12, the Entertainment segment was sold effective
February 6, 2019. The notes payable related to this segment are
zero at June 30, 2019.
F-25
Note 4 - Notes Payable (Continued)
Long Term Notes Payable (Continued)
Future minimum principal payments on the non-related party long
term notes payable are as follows:
|
|
|
|
Year
ending June 30,
|
|
2020
|
$
279,346
|
2021
|
1,607
|
|
$
280,953
|
Short Term Notes Payable
The
Company's short term notes payable obligations to unrelated parties
assumed in the acquisition (Note 12) are as follows:
|
|
|
|
|
June
30, 2019
|
|
June
30, 2018
|
Note
payable to individual and bears interest at a rate of 8% annually
and is due on demand.
|
|
|
|
$
-
|
|
$
20,000
|
|
|
|
|
Note
payable to individual and bears interest at a rate of 8% annually
and is due on demand.
|
|
|
|
-
|
|
10,000
|
|
|
|
|
Notes
payable to individuals in which the notes accrue interest on the
original principal balance at a rate of 6.25% annually and are due
on demand.
|
|
|
|
|
|
|
-
|
|
60,000
|
Note
payable to an individual in which the note accrues interest on the
original principal balance at a rate of 6.25% annually and whose
original maturity of August 2018 was extended to August 2019.
|
|
|
|
|
|
|
|
|
|
-
|
|
25,000
|
Note
payable to an individual in which the note accrues interest on the
original principal balance at a rate of 6.25% annually and is due
on demand.
|
|
|
|
|
|
|
|
|
|
-
|
|
25,000
|
|
|
|
|
Note
payable to an individual in which the note accrues interest on the
original principal balance at a rate of 10% annually and is due on
demand.
|
|
|
|
|
|
|
-
|
|
25,000
|
|
|
|
|
Total
Short Term Non-Related Party Notes Payable
|
$
-
|
|
$
165,000
|
F-26
Note 4 - Notes Payable (Continued)
As
disclosed in Note 12, the Entertainment segment was sold effective
February 6, 2019. The short term notes payable obligations to
unrelated parties related to this segment are zero at June 30,
2019.
Convertible Notes Payable
|
|
|
|
|
June
30, 2019
|
|
June
30, 2018
|
On
January 16, 2019, the Company signed a convertible promissory note
with an investor. The $382,000 note was issued at a discount of
$38,200 and bears interest at 12% per year. The Company issued
92,271 common shares to the investor. The note 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 June 2019. The note matures in
July 2019 (Note 16). 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
$
382,000
|
|
$
-
|
|
|
|
|
On
February 22, 2019, the Company signed a convertible promissory note
with an investor. The $200,000 note was issued at a discount of
$20,000 and bears interest at 5% per year. The note 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 August 2019. The note matures in
November 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.
|
|
|
|
|
|
|
200,000
|
|
-
|
|
|
|
|
On
March 28, 2019, the Company signed a convertible promissory note
with an investor. The $225,000 note was issued at a discount of
$20,000 and bears interest at 10% per year. The Company issued
25,000 common shares to the investor. Two draws of $112,500 and
$56,250 were borrowed under this note. The note 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 September 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.
The note matures in March 2020. The Company has $56,250 of
available borrowings under this note on June 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
168,750
|
|
-
|
On
April 1, 2019, the Company signed a convertible promissory note
with an investor. The $225,000 note was issued at a discount of
$25,000 and bears interest at 10% per year. The Company issued
25,000 shares to the investor. An initial draw of $100,000 was
borrowed under this note. The note 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. The note
matures in April 2020. 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. The Company has
$112,500 of available borrowings under this note at June 30,
2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
112,500
|
|
-
|
F-27
|
|
|
|
|
June
30, 2019
|
|
June
30, 2018
|
On
April 29, 2019, the Company signed a convertible promissory note
with an investor. The $1,325,000 note was issued at a discount of
$92,750 and bears interest at 8% per year. The note principal and
interest are convertible into shares of common stock at the lower
of (a) 75% of the lowest traded price of the common stock during
the 10 trading days immediately preceding the notice of conversion
or (b) $2.75 per share. The note matures in April 2020. The note
has prepayment penalties of 120% of the sum of the outstanding
principal, plus accrued interest, plus defaulted interest, plus any
additional principal, plus at the holder's option, any amounts owed
to the holder pursuant to any other provision of the note.
|
|
|
|
|
|
|
|
|
|
1,325,000
|
|
-
|
|
|
|
|
On May
28, 2019, the Company signed a convertible promissory note with an
investor. The $322,580 note was issued at a discount of $22,580 and
bears interest at 8% per year. The note principal and interest are
convertible into shares of common stock at the lower of (a) 75% of
the lowest traded price of the common stock during the 10 trading
days immediately preceding the notice of conversion or (b) $2.75
per share beginning in November 2019. The note matures in May 2020.
The note has prepayment penalties of 120% of the principal and
interest outstanding if repaid before 180 days from issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
322,580
|
|
-
|
|
|
|
|
On
June 18, 2019, the Company signed a convertible promissory note
with an investor. The $366,120 note was issued at a discount of
$27,120 and bears interest at 8% per year. The note principal and
interest are convertible into shares of common stock at 75% of the
lowest traded price of the common stock during the 10 trading days
immediately preceding the notice of conversion. The note matures in
May 2020. The note has prepayment penalties of 120% of the
principal and interest outstanding if repaid before 180 days from
issuance.
|
|
|
|
|
|
|
|
|
|
366,120
|
|
-
|
|
|
|
|
Total
Convertible Notes Payable
|
2,876,950
|
|
-
|
|
|
|
|
Less:
Unamortized original issue discounts
|
752,126
|
|
-
|
|
|
|
|
Current Portion of Convertible Notes Payable
|
2,124,824
|
|
-
|
|
|
|
|
Long-term Portion of Convertible Notes Payable
|
$
-
|
|
$
-
|
F-28
Note 4 - Notes Payable (Continued)
Convertible Notes Payable (Continued)
The
original issue discount is being amortized over the terms of the
convertible notes using the effective interest method. During
the year ended June 30, 2019, the Company amortized $89,279 of debt
discounts to interest expense and $644,055 to interest accretion.
There was no amortization of debt discounts during the three months
ended June 30, 2018 or the year ended March 31, 2018.
Two
convertible promissory notes were entered into during the year
ended June 30, 2019, and subsequently repaid in advance of maturity
prior to June 30, 2019. Significant noncash transactions
involving interest expense during the year ended June 30, 2019
included prepayment penalty interest of $134,461 due to the advance
repayment of two convertible notes.
Convertible notes are subordinate to the bank debt of the
Company.
Accrued but unpaid interest on the notes is convertible by the
lender into, and payable by the Company in common shares at a price
per common share equal to the most recent closing price of the
Company's common shares prior to the delivery to the Company of a
request to convert interest, or the due date of interest, as
applicable. Interest, when due, is payable either in cash or common
shares.
The
conversion features meets the definition of a derivative liability
instrument because the conversion rate is variable and therefore
does not meet the "fixed-for-fixed" criteria outlined in ASC
815-40-15. As a result, the conversion features of the notes are
recorded as a derivative liability at fair value and
marked-to-market each period with the changes in fair value each
period charged or credited to other income (expense).
Warrants
The
Company issued common stock and warrants as consideration for the
convertible notes. The warrants contain certain anti-dilutive
clauses that are accounted for as financial derivatives. See Note 8
for common stock issued. Unexercised warrants of $277,342 are
outstanding at June 30, 2019. All outstanding warrants have
an original exercise prices of $4 per share, contain anti-dilution
protection clauses, and expire 36 months from issue date. The
anti-dilution clause was triggered for outstanding warrants, which
now have an exercise price of $1.325 per share. As of June 30,
2019, outstanding warrants expire between November 29, 2021 and
April 17, 2022.
The
warrants meet the definition of a derivative liability instrument
because the exercise price is variable and therefore does not meet
the "fixed-for-fixed" criteria outlined in ASC 815-40-15. As
a result, the value of the unexercised warrants are recorded as a
derivative liability at fair value and marked-to-market each period
with the changes in fair value each period charged or credited to
other income (expense).
F-29
Note 5 – Fair Value Measurements
The
Company classifies financial assets and liabilities as
held-for-trading, available-for-sale, held-to-maturity, loans and
receivables or other financial liabilities depending on their
nature. Financial assets and financial liabilities are recognized
at fair value on their initial recognition.
The
Company measures the fair value of financial assets and liabilities
based on U.S. GAAP guidance which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about
fair value measurements.
The
following table presents information about the assets and
liabilities that are measured at fair value on a recurring basis at
June 30, 2019 and indicates the fair value hierarchy of the
valuation techniques the Company utilized to determine such fair
value. In general, fair values determined by Level 1 inputs utilize
quoted prices (unadjusted) in active markets for identical
instruments. Fair values determined by Level 2 inputs utilize data
points that are observable such as quoted prices, interest rates,
and yield curves. Fair values determined by Level 3 inputs are
unobservable data points for the financial instrument, and included
situations where there is little, if any, market activity for the
instrument:
|
|
|
|
|
Liabilities:
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Original issue discount, convertible debt
|
$ 979,569
|
$ -
|
$ -
|
$ 979,569
|
Derivative liability, warrants
|
46,375
|
-
|
-
|
46,375
|
|
|
|
|
|
Total:
|
$ 1,025,944
|
$ -
|
$ -
|
$ 1,025,944
|
There were no assets or liabilities that required fair value
measurement at June 30, 2018.
The
Company measures the fair market value of the Level 3 components
using the Monte Carlo model and projected discounted cash flows, as
appropriate. These models were initially prepared by an independent
third party and take into account management's best estimate of the
conversion price of the stock, an estimate of the expected time to
conversion, an estimate of the stock's volatility, and the
risk-free rate of return expected for an instrument with a term
equal to the duration of the convertible note.
The
significant unobservable valuation inputs for the convertible notes
include an expected rate of return of 0%, a risk free rate of 2.61%
and volatility of 180%.
F-30
Note 5 – Fair Value Measurements (Continued)
The
derivative liability was valued using the Monte Carlo pricing model
with the following inputs at June 30, 2019:
|
|
|
Risk-free interest rate:
|
|
1.72
-2.83%
|
Expected dividend yield:
|
|
0.00%
|
Expected stock price volatility:
|
|
180.00%
|
Expected option life in years: |
|
2.80 -3.00 years
|
The
following table sets forth a reconciliation of changes in the fair
value of the Company's convertible debt components classified as
Level 3 in the fair value hierarchy at June 30, 2019:
|
|
|
Beginning balance
|
$ |
-
|
Convertible Securities at inception
|
|
1,238,359
|
Settlement of conversion features and warrants
|
|
(301,613)
|
Realized |
|
(83,487)
|
Unrealized |
|
172,685
|
|
|
|
Ending balance
|
$ |
1,025,944
|
F-31
Note 6 - Related Party Transactions
Notes Payable
The
Company's notes payable obligations to related parties are as
follows:
|
|
|
|
June
30, 2019
|
June 30, 2018
|
Note payable to a related party in
which the notes accrues interest on the original principal balance
at a rate of 8% annually and is due on demand. |
-
|
$15,000
|
|
|
|
Note
payable to a stockholder in which the note principal plus interest
of $10,000 is payable in December 2019.
|
200,000
|
-
|
|
|
|
Various notes payable to a related party in which the note accrues
interest on the original principal balance at a rate of 6.25%
annually and is due on demand.
|
-
|
91,000
|
|
|
|
Note
payable to a related party in which the note accrues interest on
the original principal balance at a rate of 6.25% annually and is
due in August 2019.
|
-
|
8,000
|
|
|
|
Notes
payable to a related party in which the note bears no interest and
is due on demand.
|
-
|
25,000
|
|
|
|
Note
payable to a related party in which the note accrues interest on
the original principal balance at a rate of 9% annually and matures
in October 2019.
|
-
|
125,000
|
|
|
|
Note
payable to an individual executed February 2018 in which the note
accrues interest on the original principal balance at a rate of 18%
annually and is due on demand.
|
|
|
-
|
10,000
|
|
|
|
Various notes payable to a related party in which the note accrues
interest on the original principal balance at a rate of 10%
annually through December 31, 2016 at which time the interest rate
was reduced to 6.25% interest annually. The notes are scheduled to
mature at various dates through July 2021.
|
|
|
|
|
-
|
211,534
|
Total
Related Party Notes Payable
|
200,000
|
485,534
|
Current Portion of Related Party Notes Payable
|
200,000
|
485,534
|
Long-term Portion of Related Party Notes Payable
|
$
-
|
$
-
|
F-32
Note 6 - Related Party Transactions (Continued)
As
disclosed in Note 12, the Entertainment segment was sold effective
February 6, 2019. The notes payable obligations to related parties
for this segment are zero at June 30, 2019.
Advances
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 attain 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 June 30, 2019 and 2018 are
$0 and $260,173, respectively.
Leases
The
Company leases property used in operations from a related party
under terms of an operating lease. The term of the lease expires on
December 31, 2021. 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 operating leases,
totaled $18,000, $5,150, and $35,583 for the year ended June 30,
2019, the three months ended June 30, 2018, and the year ended
March 31, 2018, respectively
The
Company leases two 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
related party collateralizes the Company's short-term note with a
CD in the amount of $274,900, held at the same bank. The related
party will receive a $7,500 collateral fee for this service (Note
4). In May 2018, 50,000 shares of stock were issued to the
related party 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 12.
F-33
Note 7 - Lease Agreements
Capital Lease Agreements
Capital lease agreements for vehicles (disclosed in Note 4) require
monthly payments totaling $813 (ranging from $263 to $461),
including interest (ranging from 4.5% to 4.75%), over 5-year terms
expiring between July 2019 and July 2020.
Operating Lease Agreements
The
Company leases office, retail shop and warehouse facilities under
operating leases from a related party (Note 6) which requires
monthly payments of $1,500 and expires on December 31, 2021. Rent
expense for this lease, as well as other month-to-month leases,
totaled $18,000, $5,150 and $35,583 for the year ended June 30,
2019, the three months ended June 30, 2018, and the year ended
March 31, 2018, respectively.
Note 8 - 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
(Note 12). 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 ( 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).
F-34
Note 8 – Equity (Continued)
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 910 and 3,018 shares (post-Reverse Stock Split)
and 32,226 (pre-Reverse Stock Split) to new investors resulting in
proceeds of $637,000, $1,367,500, and $60,000 during the year ended
June 30, 2019, the three months ended June 30, 2018, and the year
ended June 30, 2018, respectively.
In
April and May 2018, the Company issued 100 shares of common stock
at $0.0001 par value to various consultants as compensation. The
shares were valued at $70,000 (Note 10) on issuance.
In
May 2018, the Company issued 822 shares of common stock at $0.0001
par value to various employees, management, and former members of
the Board of Directors by board authorization as compensation in
the regular course of business as well as upon contemplation of the
reverse triangular merger (Note 12). The shares were valued at
$575,200 on issuance and were recognized as stock compensation
expense.
In
May 2018, 143 shares of stock (post-Reverse Stock Split) were
issued to the related party in exchange for a $100,000 reduction in
the short-term note balance (Note 4).
In
May and June 2019, a total of 510,000 shares were awarded under the
Stock Plan (Note 13).
During the year ended June 30, 2019, the Company issued 302,271
common shares as consideration for convertible notes. During May
2019, 60,000 shares were returned and cancelled upon repayment of a
convertible note prior to maturity. There were no shares issued as
consideration for convertible notes during the three months ended
June 30, 2018.
During the year ended June 30, 2019 and three months ended June 30,
2018, the Company issued 346,618 shares and 100 shares for
professional consulting services, respectively. The shares were
valued at $800,751 and $70,000 upon issuance, for the year ended
June 30, 2019 and three months ended June 30, 2018, respectively.
On
February 6, 2019, the Company repurchased 38,625 shares from an
entity with a common board member under a Share Purchase Agreement
related to the sale of Entertainment. These shares are issued but
not outstanding at June 30, 2019.
In
May 2019, an investor exercised a warrant and was issued 381,944
shares in a cashless transaction.
See
the capital structure section in Note 1 for disclosure of the
equity components included in the Company's consolidated financial
statements.
F-35
Note 9 - Income Taxes
The
Company's effective tax rate differed from the federal statutory
income tax rate for the year ended June 30, 2019, and the three
months ended June 30, 2018, and the year ended March 31,2018 as
follows:
|
|
|
Federal statutory rate
|
|
21%
|
State
tax, net of federal tax effect
|
|
5.75%
|
Valuation allowance
|
|
-27%
|
Effective tax rate
|
|
0%
|
The
Company had no federal or state income tax (benefit) for the year
ended June 30, 2019, the three months ended June 30, 2018, and the
year ended March 31, 2018.
The
Company's deferred tax assets and liabilities as of June 30, 2019
and 2018, are summarized as follows:
|
|
|
|
|
|
|
|
|
June
30, 2019
|
|
June
30, 2018
|
Federal
|
|
|
|
|
Deferred tax assets
|
$
2,980,100
|
|
$
2,205,200
|
|
Less
valuation allowance
|
(2,980,100)
|
|
(2,205,200)
|
|
Deferred tax liabilities
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
|
|
State
|
|
|
|
|
Deferred tax assets
|
866,300
|
|
595,600
|
|
Less
valuation allowance
|
(866,300)
|
|
(595,600)
|
|
Deferred tax liabilities
|
-
|
|
-
|
|
|
-
|
|
-
|
|
Net
Deferred Tax Assets
|
$
-
|
|
$
-
|
F-36
Note 9 - Income Taxes (Continued)
The
Company's policy is to provide for deferred income taxes based on
the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates that will be in
effect when the differences are expected to reverse. The U.S. Tax
Cuts and Jobs Act (TCJA) legislation reduces the U.S. federal
corporate income tax rate from 35.0% to 21.0% and is effective June
22, 2018 for the Company. The Company is recognizing the effect of
the Tax Cuts and Job Acts on the Company's deferred income tax
assets and liabilities. The Company has not generated any taxable
income and has not recorded any current income tax expense at June
30, 2019. 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.
In
assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred taxes is dependent upon the generation of
future taxable income during the periods in which those temporary
differenced become deductible. Management considers projected
future taxable income and tax planning strategies in making this
assessment.
The
Company's deferred tax assets are primarily comprised of net
operating losses ("NOL") that give rise to deferred tax assets. The
net operating loss carryforwards expire over a range from 2020 to
2038, with certain that have no expiration. 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 significant components of
deferred tax assets as of June 30, 2019 and 2018, are as
follows:
|
|
|
|
|
|
|
June 30, 2019
|
|
June
30, 2018
|
Net
operating loss carryforwards
|
$ 3,811,900
|
|
$ 2,727,900
|
Valuation allowance
|
(3,846,400)
|
|
(2,800,800)
|
Property and equipment
|
7,100
|
|
72,500
|
Inventory allowance
|
5,400
|
|
-
|
Warranty accrual
|
22,000
|
|
400
|
|
|
|
|
|
|
Net
Deferred Tax Assets
|
$ -
|
|
$
-
|
As
of June 30, 2019, 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 June 30, 2019, the Company's
income tax returns generally remain open for examination for three
years from the date filed with each taxing jurisdiction.
There was no provision for federal and state income taxes at March
31, 2018, since Galaxy was a Subchapter S Corporation prior to the
reverse triangular merger, becoming a C Corporation on June 22,
2018.
F-37
Note 10 - 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 one customer that accounted for approximately 86% of
accounts receivable at June 30, 2019 and three customers that
accounted for approximately 87% of accounts receivable at June 30,
2018.
Galaxy has four customers that accounted for approximately 79% of
total revenue for the year ended June 30, 2019, three customers
that accounted for 61% of revenues for the three months ended June
30, 2018, and three customers that accounted for 43% of revenues
for the year ended March 31, 2018, respectively.
F-38
Note 11 - Material Agreements
Manufacturing and Distributorship Agreement
In
December 2016, Galaxy executed an agreement with a company in South
Korea. Pursuant to the 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 submits a three-month
rolling sales forecast (which acts as a purchase order) to the
manufacturer, updated monthly. Upon acceptance of the order by the
manufacturer, the Company pays 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.
There is a minimum annual purchase commitment under the agreement.
The minimum purchase was not met; therefore, the manufacturer can
require the Company to establish a performance improvement plan,
and the manufacturer has the right to terminate the agreement. The
agreement expired December 31, 2018.
Consulting Agreement
Galaxy entered into a 26 month consulting agreement in May 2017 for
advisory services. In exchange for services provided, the
consultants receive consulting fees of $15,000 per month and a 5.5%
equity interest in Galaxy. The 5.5% equity interest was converted
to common stock upon the Common Controlled Merger of R&G and
Galaxy CO (as described in Note 1). The consulting agreement was
renewed in May 2019 with monthly payment terms of $15,000 and
450,000 share of common stock upon execution of the renewal. In
addition, it was noted that the Company owed the consultant 210,000
shares under the May 2017 consulting agreement due to an
anti-dilution clause in the agreement. The Company paid the
consultants $261,000, $95,000, and $157,000 in fees and expenses
for consulting services provided during the year ended June 30,
2019, the three months ended June 30, 2018, and the year ended
March 31, 2018, respectively. The 450,000 shares were issued under
the Company's Stock Plan in May 2019. The Company issued 210,000
shares for services in July 2019 (Note 16) in satisfaction of the
$400,000 accrued liability for the consulting services per the
anti-dilution provision of the agreement recorded at June 30,
2019.
Consulting Agreement
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, 10,000 shares of common
stock and $4,000 monthly through April 2019. The contract
renews automatically each year. The Company paid the consultants
$222,500 and $27,000 in fees and expenses for consulting services
provided during the year ended June 30, 2019 and the three months
ended June 30, 2018. No consulting fees were paid during the year
ended March 31, 2018.The Company issued 10,000 shares of common
stock for consulting services provided during the three months
ended June 30, 2018.
F-39
Note 11 - Material Agreements (Continued)
Consulting Agreement
The
Company entered into a consulting agreement in April 2018 for a
period of six months for investor relations services such as blogs
and newsletters, introduction to investment banks and online CEO
quarterly conferences. In exchange for these consulting services
provided, the advisor received $25,000 per month for four months
and 25,000 shares of common stock. The Company paid the consultants
$60,000 and $100,000 for the year ended June 30, 2019 and the three
months ended June 30, 2018. No consulting fees were paid during the
year ended March 31, 2018. The Company issued 25,000 shares of
common stock for consulting services provided during the three
months ended June 30, 2018. The agreement expired in October
2018.
Manufacturer and Distributorship Agreement
On
September 15, 2018, the Company signed an agreement with a company
in China for the manufacture of Galaxy's SLIM series of interactive
panels, a new Galaxy product. 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 two
years. The agreement includes a commitment by Galaxy to purchase $2
million of product during the first year beginning September 2018.
If the minimum purchase is not met, the manufacturer can require
the Company to establish a performance improvement plan, and the
manufacturer has the right to terminate the agreement. The payment
terms are 20% in advance, 30% after the product is ready to ship,
and the remaining 50% 45 days after receipt. The manufacturer
provides 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 12 month
contract with an agent to raise capital. The agent receives a
finder's fee ranging from 4 to 8% relative to the amount of capital
raised, plus restricted shares in an amount equal to 4% of capital
raised, if successful. The Agreement contains an option to extend
the contract term for an additional six months. The Company paid
$98,400 in fees and issued 46,618 shares of common stock during the
year ended June 30, 2019. No fees were paid under this agreement
during the three months ended June 30, 2018 and year ended March
31, 2018.
Master Service Agreement
Effective January 2, 2019, the Company entered into a 3 month
contract with a business for advisory services including among
other services, presenting and introducing the Company to the
financial community of investors. The Company paid $300,000
and issued 300,000 common stock shares under this agreement during
the year ended June 30, 2019. No advisory fees were paid under this
agreement during the three months ended June 30, 2018 and year
ended March 31, 2018. The relationship with this advisor is
continuing on an as-needed basis.
F-40
Note 11 - Material Agreements (Continued)
Financial Advisory Engagement
Effective June 4, 2019, the Company engaged a financial advisor to
act as the Company's exclusive financial advisor, lead managing
underwriter and sole book running manager and investment banker in
connection with a proposed offering. The engagement period of the
agreement is June 4, 2019 to May 31, 2020. The Company is proposing
a follow-on public offering of securities. The Company paid $0 in
fees during the year ended June 30, 2019. No fees were paid under
this agreement during the three months ended June 30, 2018 and year
ended March 31, 2018. The Company issued 250,000 shares to the
financial advisor for services in July 2019 (Note 16).
Business Development and Marketing Agreement
Effective June 10, 2019, the Company entered into a three-month
contract for certain advisory and consulting services. The Company
will issue 15,000 shares and pay $20,000 per month under the terms
of the agreement. The Company paid $35,000 in fees during the year
ended June 30, 2019. No fees were paid under this agreement during
the three months ended June 30, 2018 and year ended March 31, 2018.
The Company issued 60,000 shares to the consultant for consulting
services in July and September 2019 (Note 16).
Capital Transaction Services Agreement
Effective June 28, 2019, the Company entered into a three-month
contract for capital raise advisory and consulting services.
The Company pays $3,500 per month under the terms of this
agreement, which is payable upon the successful closing of a
capital raise. The Company paid $3,500 upon signing of the
agreement. The agreement renews automatically unless either party
provided notice of cancellation. The Company paid $3,500 in fees
during the year ended June 30, 2019. No fees were paid under this
agreement during the three months ended June 30, 2018 and year
ended March 31, 2018.
F-41
Note 12 - 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 at
June 30, 2019 and 2018.
F-42
Note 12 - Reverse Acquisition (Continued)
The
following table summarizes the preliminary allocation of the fair
value of the assets and liabilities as of the merger date through
pushdown accounting. The preliminary allocation to certain assets
and/or liabilities may be adjusted by material amounts as the
Company finalizes fair value estimates.
|
|
|
|
Assets
|
|
|
Cash
|
$
22,205
|
|
Property and equipment
|
4,209,995
|
|
Other
|
20,716
|
|
Other
assets
|
1,511,844
|
|
Goodwill
|
892,312
|
|
|
|
|
Total
Assets
|
6,657,072
|
|
|
|
Liabilities
|
|
|
Accounts payable
|
208,763
|
|
Long-term debt
|
4,593,851
|
|
Short-term debt
|
799,534
|
|
Accrued interest
|
78,948
|
|
Other
|
83,664
|
|
|
|
|
Total
Liabilities
|
5,764,760
|
|
|
|
|
Net
Assets
|
$
892,312
|
|
|
|
|
Consideration
|
$
58,092
|
|
Fair
value of noncontrolling Interest
|
834,220
|
|
|
$
892,312
|
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 of
$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 differences
between the acquired assets and liabilities of Full Circle
Entertainment to be distributed to pre-acquisition FLCR
shareholders. The Company sold the Entertainment subsidiary on
February 6, 2019 to focus on its primary business plan. As a
result, the Company did not receive any economic benefit from the
related assets in the table above, nor incur any obligations from
the corresponding liabilities.
F-43
Note 12 - Reverse Acquisition (Continued)
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, or $92,700. The fair value of the Galaxy common shares
received offset the assets and liabilities of Entertainment, with
the difference recorded as a gain on the sale for the year ended
June 30, 2019. The gain on the sale has been recorded in other
expense in the Consolidated Statement of Operations.
The
following table presents a summary of Entertainment's identifiable
assets and liabilities at February 6, 2019, the date of the
sale:
|
|
Assets |
|
|
Cash
|
$
36,290
|
|
Property and equipment, net
|
4,006,426
|
|
Receivables
|
4,500
|
|
Inventories
|
5,610
|
|
Other
assets
|
1,522,714
|
|
|
|
|
Total
Assets
|
5,575,540
|
|
|
|
Liabilities
|
|
|
Accounts payable
|
22,424
|
|
Debt
|
5,393,623
|
|
Accrued expenses
|
127,481
|
|
|
|
|
Total
Liabilities
|
5,543,528
|
|
|
|
|
Net
Assets
|
32,012
|
|
|
|
|
Noncash consideration for net assets of Entertainment
|
92,700
|
|
|
|
|
Gain
on Sale
|
$
60,668
|
F-44
Note 13 – 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 interest 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
510,000 shares awarded under the Plan as of June 30, 2019.
Note 14 - 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 contemplated in the merger agreement, the parties
have the right to spinout the Entertainment segment so that
management can focus on its primary business plan, which is Galaxy.
As disclosed in Note 12, the Entertainment segment was sold
effective February 6, 2019 to an entity owned by former majority
shareholders of FLCR. There was no Entertainment segment during the
year ended March 31, 2018.
The
following table summarizes operating results for the year ended
June 30, 2019 for Technology and the period from July 1, 2018 to
February 6, 2019 for Entertainment:
|
|
|
Revenues
|
Technology
|
Entertainment
|
Technology
|
$ 1,292,353
|
$
-
|
Entertainment
|
-
|
589,705
|
|
|
|
Cost of Sales
|
|
|
Technology
|
1,545,093
|
-
|
Entertainment
|
-
|
221,238
|
|
|
|
Gross Profit
|
(252,740)
|
368,467
|
|
|
|
General and Administrative Expenses
|
|
|
Technology
|
5,410,650
|
-
|
Entertainment
|
-
|
427,620
|
|
|
|
Other Income (Expense)
|
|
|
Technology
|
(966,279)
|
-
|
Entertainment
|
-
|
25,705
|
|
|
|
Net
Loss
|
$ (6,629,669)
|
$
(33,448)
|
F-45
Note 14 - Segment Reporting (Continued)
|
|
|
Assets
|
Technology
|
Entertainment
|
|
|
|
Cash
|
$
151,853
|
$
32,402
|
Property and equipment, net
|
45,059
|
4,209,392
|
Receivables
|
326,183
|
15,543
|
Inventory
|
580,756
|
6,008
|
Prepaid and other current assets
|
1,184
|
12,450
|
Other assets
|
-
|
1,511,844
|
Goodwill
|
58,092
|
589,705
|
Total Assets
|
$ 1,163,127
|
$ 6,621,859
|
|
|
|
Liabilities
|
|
|
Accounts payable
|
$ 570,069
|
$ 201,011
|
Debt
|
951,453
|
5,393,385
|
Accrued expenses
|
22,495
|
124,483
|
Deferred revenue
|
219,820
|
-
|
Total Liabilities
|
1,763,837
|
$ 5,718,879
|
F-46
Note 14 - Segment Reporting (Continued)
The
following table presents a summary of operating information for the
three months ended June 30, 2018:
|
|
|
Revenues
|
Technology
|
Entertainment
|
Technology
|
$ 172,754
|
$
-
|
Entertainment
|
-
|
34,946
|
|
|
|
Cost of Sales
|
|
|
Technology
|
171,304
|
-
|
Entertainment
|
-
|
6,804
|
|
|
|
Gross Profit
|
1,450
|
28,142
|
|
|
|
General and Administrative Expenses
|
|
|
Technology
|
1,364,124
|
-
|
Entertainment
|
-
|
7,404
|
|
|
|
Other Income (Expense)
|
|
|
Technology
|
(4,521)
|
-
|
Entertainment
|
-
|
(23,666)
|
|
|
|
Net
Loss
|
$ (1,367,195)
|
$
(2,928)
|
F-47
Note 15 - 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
$4,600,000, an accumulated deficit of approximately $9,500,000, and
cash used in operations of approximately $3,900,000 at June 30,
2019.
The
Company's operational activities has primarily been funded through
issuance of common stock for services, 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.
Note 16 - Subsequent Events
The
Company has evaluated subsequent events through the date on which
the consolidated financial statements were available to be
issued.
On
July 1, 2019, the Company signed a lease agreement for certain
property. The lease expires in June 2021 and requires a deposit of
$10,000 and monthly installments of $3,000. Future lease payments
are $36,000 for the years ended June 30, 2020 and 2021.
On
July 3, 2019, the Company entered into a new $165,000 convertible
note with an investor.
The
Company issued 250,000 shares to a financial advisor for services
in July 2019, under terms of a Financial Advisory Agreement dated
June 4, 2019.
The
Company issued 60,000 shares to a consultant for services in July
and September 2019, under terms of a Business Development and
Marketing Agreement dated June 10, 2019.
On
July 22, 2019, the Company issued 210,000 common shares for
services. The shares were issued in satisfaction of an accrued
expense at June 30, 2019 for consulting services under an
anti-dilution provision in the May 2017 Consulting Agreement (Note
11). The shares were issued to a related party of the
consultant.
F-48
Note 16 - Subsequent Events (Continued)
On
August 8, 2019, the Company entered into a new $200,000 convertible
note with an investor and issued 50,000 shares to the investor
under terms of the convertible note.
On
August 20, 2019, the Company entered into a new $225,000
convertible note with an investor.
During August and September 2019, the Company issued 527,632 common
shares to an investor in full satisfaction of a $382,000
convertible note.
During August and September 2019, convertible note holders
converted $70,000 of principal on the February 22, 2018 $200,000
convertible note in exchange for 96,200 shares. The
outstanding principal balance of the convertible note is $130,000
after the conversions. The remaining balance of the note was
assumed by a different investor who invested an additional $145,000
and combined the assumed note and additional investment into a new
$234,000 convertible note.
On
September 3, 2019, the Company acquired 100% of the stock of
Interlock Concepts, Inc. and Ehlert Solutions, Inc. The purchase
price for the acquisition was 1,350,000 shares of common stock and
a 2 year note payable to the seller for $3,000,000. The purchase
price is subject to adjustment based on the achievement of certain
earnings goals.
On
September 4, 2019, a warrant holder exercised warrants and received
375,975 shares in a cashless transaction.
On
September 10, 2019, the Company issued 35,000 shares to a software
developer as compensation for a research and development
project.
F-49
Galaxy Next Generation, Inc.
Consolidated Financial Statements
March 31, 2020
|
|
|
|
|
|
|
|
|
GALAXY NEXT GENERATION, INC.
|
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
March 31, 2020
|
|
June
30, 2019
|
Assets
|
(Unaudited)
|
|
(Audited)
|
Current Assets
|
|
|
|
Cash
|
$
194,702
|
|
$
169,430
|
Accounts receivable, net
|
599,146
|
|
262,304
|
Inventories, net
|
929,210
|
|
648,715
|
Prepaid and other current
assets
|
4,900
|
|
20,898
|
Total Current Assets
|
1,727,958
|
|
1,101,347
|
|
|
|
|
Property and Equipment, net (Note 2)
|
62,194
|
|
26,765
|
|
|
|
|
Intangibles, net (Notes 1 and 12)
|
1,224,000
|
|
-
|
|
|
|
|
Goodwill (Notes 1 and 12)
|
834,220
|
|
834,220
|
|
|
|
|
Operating right of use asset (Note 7)
|
95,426
|
|
-
|
Total
Assets
|
$
3,943,798
|
|
$
1,962,332
|
|
|
|
|
Liabilities and Stockholders' Equity (Deficit)
|
|
|
|
Current Liabilities
|
|
|
|
Line of credit (Note 3)
|
$
1,236,598
|
|
$
1,230,550
|
Convertible notes payable, net
of discount (Note 4)
|
1,354,133
|
|
2,124,824
|
Derivative liability,
convertible debt features and warrants (Note 5)
|
179,013
|
|
1,025,944
|
Current portion of long term
notes payable (Note 4)
|
338,434
|
|
279,346
|
Accounts payable
|
1,891,348
|
|
655,941
|
Accrued expenses
|
259,179
|
|
597,351
|
Deferred revenue
|
926,358
|
|
247,007
|
Short term portion of vendor
payable
|
146,069
|
|
34,941
|
Short term portion of related
party notes and payables (Note 6)
|
1,278,169
|
|
200,000
|
Total
Current Liabilities
|
7,609,301
|
|
6,395,904
|
Noncurrent Liabilities
|
|
|
|
Long term portion of vendor
payable
|
97,379
|
|
174,703
|
Long term portion of related
party notes payable (Note 6)
|
2,075,000
|
|
-
|
Notes payable, less current
portion (Note 4)
|
69,915
|
|
1,607
|
Total
Liabilities
|
9,851,595
|
|
6,572,214
|
|
|
|
|
Stockholders' Equity (Deficit)
|
|
|
|
Common stock
|
11,186
|
|
1,072
|
Preferred stock - Series E,
non-redeemable
|
50
|
|
-
|
Additional paid-in-capital
|
13,652,303
|
|
4,859,731
|
Accumulated deficit
|
(19,571,336)
|
|
(9,470,685)
|
Total
Stockholders' Equity (Deficit)
|
(5,907,797)
|
|
(4,609,882)
|
|
|
|
|
Total Liabilities and
Stockholders' Equity (Deficit)
|
$
3,943,798
|
|
$
1,962,332
|
See accompanying notes to the condensed consolidated
financial statements (unaudited)
F-50
|
|
|
|
|
GALAXY NEXT GENERATION, INC.
|
Condensed Consolidated Statements of Operations
|
(Unaudited)
|
|
|
|
|
|
|
For the
Three Months
|
For the
Nine Months
|
|
Ended
March 31,
|
Ended
March 31,
|
|
2020
|
2019
|
2020
|
2019
|
Revenues
|
|
|
|
|
Technology interactive
panels and related products
|
$
345,956
|
$
261,712
|
$
1,837,354
|
$
1,106,540
|
Entertainment theater
ticket sales and concessions
|
-
|
78,661
|
-
|
589,705
|
Technology office
supplies
|
3,291
|
8,350
|
13,319
|
21,108
|
Total
Revenues
|
349,247
|
348,723
|
1,850,673
|
1,717,353
|
Cost of Sales
|
|
|
|
|
Technology interactive
panels and related products
|
130,614
|
230,833
|
1,116,398
|
948,073
|
Entertainment theater
ticket sales and concessions
|
-
|
54,315
|
-
|
217,638
|
Total
Cost of Sales
|
130,614
|
285,148
|
1,116,398
|
1,165,711
|
|
|
|
|
|
Gross Profit
|
218,633
|
63,575
|
734,275
|
551,642
|
General and
Administrative Expenses
|
|
|
|
|
Stock compensation and
stock issued for services
|
48,034
|
-
|
2,055,726
|
-
|
Asset imparment expense
(Note 1)
|
2,000,287
|
-
|
2,000,287
|
-
|
General and
administrative
|
1,662,359
|
2,043,181
|
4,263,887
|
4,408,951
|
|
|
|
|
|
Loss from
Operations
|
(3,492,047)
|
(1,979,606)
|
(7,585,625)
|
(3,857,309)
|
Other Income
(Expense)
|
|
|
|
|
Other income
|
-
|
97,471
|
3,049
|
151,289
|
Expenses related to
convertible notes payable:
|
|
|
|
|
Change in
fair value of derivative liability
|
695,300
|
-
|
2,717,557
|
-
|
Interest
accretion
|
(603,852)
|
-
|
(1,412,705)
|
-
|
Interest expense
|
(1,860,498)
|
(100,893)
|
(3,822,927)
|
(163,258)
|
|
|
|
|
|
Total
Other Income (Expense)
|
(1,769,050)
|
(3,422)
|
(2,515,026)
|
(11,969)
|
|
|
|
|
|
Net Loss before Income
Taxes
|
(5,261,097)
|
(1,983,028)
|
(10,100,651)
|
(3,869,278)
|
|
|
|
|
|
Income taxes (Note 9)
|
-
|
-
|
-
|
-
|
|
|
|
|
|
Net Loss
|
$
(5,261,097)
|
$
(1,983,028)
|
$ (10,100,651)
|
$
(3,869,278)
|
|
|
|
|
|
Net Basic and Fully
Diluted Loss Per Share
|
$
(0.15)
|
$
(0.20)
|
$
(0.47)
|
$
(0.42)
|
|
|
|
|
|
Weighted average common
shares outstanding
|
|
|
|
|
Basic
|
35,520,434
|
10,105,121
|
21,547,126
|
9,154,161
|
Fully
diluted
|
585,972,958
|
10,105,121
|
339,856,357
|
9,154,161
|
See accompanying notes to the condensed consolidated
financial statements (unaudited)
F-51
|
|
|
|
|
|
|
|
|
|
|
|
|
GALAXY NEXT GENERATION, INC.
|
Consolidated Statement of Changes in
Stockholders' Equity (Deficit)
|
Nine Month Period Ended March 31, 2020
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Common Stock
|
|
Preferred Stock - Class E
|
|
Additional
|
|
Accumulated
|
|
Stockholders'
|
|
Shares
|
|
Amount
|
|
Shares
|
Amount
|
|
Paid-in Capital
|
|
Deficit
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019
|
11,318,901
|
|
$ 1,072
|
|
-
|
$
-
|
|
$ 4,859,731
|
|
$ (9,470,685)
|
|
$ (4,609,882)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services in
|
|
|
|
|
|
|
|
|
|
|
|
|
July and August 2019
|
475,000
|
|
48
|
|
-
|
-
|
|
1,203,252
|
|
-
|
|
1,203,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in exchange for debt reduction
|
|
|
|
|
|
|
|
|
|
|
|
|
in August 2019
|
347,397
|
|
35
|
|
-
|
-
|
|
619,068
|
|
-
|
|
619,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of conversion features in August and
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2019
|
-
|
|
-
|
|
-
|
-
|
|
149,374
|
|
-
|
|
149,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
holders in September 2019
|
644,709
|
|
-
|
|
-
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued as compensation in
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2019
|
44,511
|
|
4
|
|
-
|
-
|
|
44,507
|
|
-
|
|
44,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services in
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2019
|
80,000
|
|
9
|
|
-
|
-
|
|
79,991
|
|
-
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in acquisition of Ehlert Solutions, Inc. and
Interlock Concepts, Inc. (Note 12)
|
1,350,000
|
|
135
|
|
-
|
-
|
|
1,720,216
|
|
-
|
|
1,720,351
|
F-52
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in exchange for debt reduction
|
|
|
|
|
|
|
|
|
|
|
|
|
in September 2019
|
397,864
|
|
40
|
|
-
|
-
|
|
408,622
|
|
-
|
|
408,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services in
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2019
|
521,557
|
|
52
|
|
-
|
-
|
|
403,550
|
|
-
|
|
403,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in exchange for debt reduction
|
|
|
|
|
|
|
|
|
|
|
|
|
in October 2019
|
833,572
|
|
83
|
|
-
|
-
|
|
478,651
|
|
-
|
|
478,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to warrant holders
|
|
|
|
|
|
|
|
|
|
|
|
|
in October 2019
|
583,670
|
|
-
|
|
-
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of conversion features in October 2019
|
-
|
|
-
|
|
-
|
-
|
|
3,000
|
|
-
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services in November 2019
|
45,000
|
|
5
|
|
-
|
-
|
|
19,795
|
|
-
|
|
19,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in exchange for debt reduction
|
|
|
|
|
|
|
|
|
|
|
|
|
in November 2019
|
1,194,157
|
|
119
|
|
-
|
-
|
|
429,396
|
|
-
|
|
429,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
in November 2019
|
500,000
|
|
50
|
|
-
|
-
|
|
219,950
|
|
-
|
|
220,000
|
F-53
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services in December2019
|
908,355
|
|
91
|
|
-
|
-
|
|
256,387
|
|
-
|
|
256,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment shares issued in December 2019
|
25,000
|
|
3
|
|
-
|
-
|
|
6,997
|
|
-
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Preferred Stock - Class E in November 2019
|
-
|
|
-
|
|
500,000
|
50
|
|
499,950
|
|
-
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued in exchange for debt reduction in January 2020
(Note 8)
|
2,514,782
|
|
251
|
|
-
|
-
|
|
436,629
|
|
-
|
|
436,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued for services in January 2020 (Note 8)
|
100,000
|
|
10
|
|
-
|
-
|
|
13,990
|
|
-
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for compensation in January 2020 (Note 8)
|
100 ,000
|
|
10
|
|
-
|
-
|
|
14,990
|
|
-
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in exchange for debt reduction in February 2020
(Note 8)
|
5,113,855
|
|
511
|
|
-
|
-
|
|
243,169
|
|
-
|
|
243,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in exchange for services in February 2020 (Note
8)
|
100,000
|
|
10
|
|
-
|
-
|
|
6,990
|
|
-
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in exchange for debt reduction in March 2020
(Note 8)
|
85,586,940
|
|
8,559
|
|
-
|
-
|
|
1,522,153
|
|
-
|
|
1,530,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services in March 2020 (Note 8)
|
890,000
|
|
89
|
|
-
|
-
|
|
11,945
|
|
-
|
|
12,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for cashless exercise of warrants in March 2020
(Note 8)
|
21,914,415
|
|
-
|
|
-
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss
|
-
|
|
-
|
|
-
|
-
|
|
-
|
|
(10,100,651)
|
|
(10,100,651)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020
|
35,589,685
|
|
$ 11,186
|
|
500,000
|
$
50
|
|
$ 13,652,303
|
|
$ (19,571,336)
|
|
$ (5,907,797)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial statements
(unaudited)
F-54
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Changes in Stockholders' Equity
(Deficit)
|
Nine
Month Period Ended March 31, 2019
|
(Unaudited)
|
|
|
|
|
|
|
< |