Note 1 - Summary of Significant Accounting Policies
Impact of Coronavirus Aid, Relief, and Economic Security Act
The Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was enacted in March 2020, in response to the COVID-19 pandemic. The CARES Act and related rules and guidelines include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments, and estimated income tax payments that we are deferring to future periods. As a result, the Company delayed payment of certain payroll tax payments in the amount of $19,517 as of June 30, 2020.
In April 2020, the Company applied for an unsecured loan under the Paycheck Protection Program, or the PPP Loan. The Paycheck Protection Program, or PPP, was established under CARES Act and is administered by the U.S. Small Business Administration (SBA). The PPP loan was approved and funded, and the Company entered into an unsecured loan of approximately $311,000. The loan matures in April 2022 and accrues interest at an annual rate of 0.98%. The promissory note evidencing the PPP Loan contains customary events of default relating to, among other things, payment defaults and provisions of the promissory note. In accordance with the requirements of the CARES Act, the Company used the proceeds from the PPP Loan primarily for payroll costs. See Note 4.
In May 2020, the Company received a loan from the U.S. Small Business Administration under Section 7(b) of the Small Business Act. The $150,000 secured loan matures in May 2050 and accrues interest at an annual rate of 3.75%. The promissory note is collateralized by a security interest in substantially all assets of the Company. The loan proceeds are to fund working capital needs due to economic injury caused by the COVID-19 pandemic. See Note 4.
Corporate History, Nature of Business, Mergers and Acquisitions
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 companys owners. FLCRs subsidiary, FullCircle Entertainment, Inc. (Entertainment or FLCE), owns and operates Georgetown 14 Cinemas, a fourteen-theater movie complex located in Indianapolis, Indiana.
F-11
On June 22, 2018, Galaxy consummated a reverse triangular merger whereby Galaxy merged with and into Full Circle Registry, Inc.s (FLCR) as a newly formed subsidiary which was 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 Galaxys stockholders gained majority control of the outstanding voting power of FLCRs 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 Galaxys 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.
On September 4, 2019, Galaxy acquired 100% of the stock of Interlock Concepts, Inc. (Concepts) and Ehlert Solutions Group, Inc. (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 northwest 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.
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. Galaxys products include Galaxys own private-label interactive touch screen panel as well as numerous other national and international branded peripheral and communication devices. New technologies like Galaxys own touchscreen panels are sold along with renowned brands such as Google Chromebooks, Microsoft Surface Tablets, Lenovo & Acer computers, Verizon WiFi and more. Galaxys 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 Galaxys 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.
F-12
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).
The financial statements include the consolidated assets and liabilities of the combined company (collectively Galaxy Next Generation, Inc., FullCircle Registry, Inc., FullCircle Entertainment, Inc., Interlock Concepts, Inc., and Ehlert Solutions Group, Inc. referred to collectively as the Company). See Note 12.
All intercompany transactions and accounts have been eliminated in the consolidation.
The Company is an over-the-counter public company traded under the stock symbol listing GAXY (formerly FLCR).
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 product warranty liabilities, product development costs, valuation of goodwill and intangible assets, valuation of convertible notes payable and warrants, and the valuation of deferred tax assets. It is reasonably possible that the significant estimates used will change within the next year.
F-13
Capital Structure
The Company's capital structure is as follows:
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June 30, 2020
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|
|
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Authorized
|
|
Issued
|
|
Outstanding
|
|
Common stock
|
4,000,000,000
|
|
628,039,242
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|
628,000,617
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$.0001 par value, one vote per share
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Preferred stock
|
200,000,000
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|
-
|
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-
|
$.0001 par value, one vote per share
|
Preferred stock - Class A
|
750,000
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|
-
|
|
-
|
$.0001 par value; no voting rights
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Preferred stock - Class B
|
1,000,000
|
|
-
|
|
-
|
Voting rights of 10 votes for 1 Preferred B share; 2% preferred dividend payable annually
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Preferred stock - Class C
|
9,000,000
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|
-
|
|
-
|
$.0001 par value; 500 votes per share, convertible to common stock
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Preferred stock - Class D
|
1,000,000
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|
-
|
|
-
|
$.0001 par value; no voting rights, convertible to common stock, mandatory conversion to common stock 18 months after issue
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Preferred stock - Class E
|
500,000
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|
500,000
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|
500,000
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$.0001 par value; no voting rights, convertible to common stock
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|
|
|
June 30, 2019
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|
|
|
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Authorized
|
|
Issued
|
|
Outstanding
|
|
Common stock
|
4,000,000,000
|
|
11,318,901
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|
11,280,276
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$.0001 par value, one vote per share
|
Preferred stock
|
200,000,000
|
|
-
|
|
-
|
$.0001 par value, one vote per share
|
Preferred stock - Class A
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750,000
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|
-
|
|
-
|
$.0001 par value; no voting rights
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Preferred stock - Class B
|
1,000,000
|
|
-
|
|
-
|
Voting rights of 10 votes for 1 Preferred B share; 2% preferred dividend payable annually
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Preferred stock - Class C
|
9,000,000
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|
-
|
|
-
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$.0001 par value; 500 votes per share, convertible to common stock
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F-14
There is no publicly traded market for the preferred shares.
There are 3,063,998,537 common shares reserved at June 30, 2020 under terms of the convertible debt agreements and Stock Plan (see Notes 4 and 13).
There are 16,305,023 issued common shares that are restricted as of June 30, 2020. The shares will become free-trading upon satisfaction of certain terms within the convertible debt agreements.
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.
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 Companys 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 Companys 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, 2020 and 2019, the Company accrued $102,350 and $82,350, 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 $82,494 and $87,374 of warranty expense for the years ended June 30, 2020 and 2019, respectively.
F-15
The Company negotiated a warranty settlement with one of its manufacturers. At June 30, 2020 and 2019, the Company accrued $124,437 and $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 Companys 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 product sales and 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 Companys 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 Companys 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 Companys 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-16
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
Accounts receivable is recognized when the Companys right to consideration is unconditional and is presented net of 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 accounts receivable is then reduced by an allowance based on managements estimate. Management deemed no allowance for doubtful accounts was necessary at June 30, 2020 and 2019. At June 30, 2020 and 2019, $670,031 and $247,007 of total accounts receivable were considered unbilled and recorded as deferred revenue.
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, 2020 and 2019, represents goods available for sale. Galaxy inventory is primarily comprised of interactive panels, audio and related accessories. Management estimates $67,635 and $20,000 of inventory reserves at June 30, 2020 and 2019, 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-17
Property and equipment and the estimated useful lives used in computing depreciation, are as follows:
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Furniture and fixtures
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5 years
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Equipment
|
5 to 8 years
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Vehicles
|
5 years
|
Building
|
40 years
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Building improvements
|
8 years
|
|
|
Depreciation is provided using the straight-line method over the estimated useful lives of the depreciable assets. Depreciation expense was $29,795 and $221,260 for the years ended June 30, 2020 and 2019, respectively.
Long-lived Assets
Long-lived assets to be held and used are tested for recoverability whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the excess of the assets carrying amount over the fair value of the asset.
Goodwill
Goodwill is attributed to the reverse merger of FullCircle Registry and the acquisition of Concepts and Solutions. Goodwill 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.
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 units 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 the Companys consolidated statement of operations.
F-18
Management determined that a triggering event to assess goodwill impairment occurred in an interim period during the year ending June 30, 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 year 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 the Ehlert Solutions Group, Inc and Interlock Concepts, Inc acquisitions 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 2020 due to the COVID-19 pandemic. As a result of the impairment test, the audited results for the year ended 2020 included non-cash impairment losses of $2,000,287, comprised of $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 the Company expects to receive future economic benefits from these assets. The Company acquired intangible assets related to the acquisition of Concepts and Solutions. The Company impaired $1,200,000 of the intangible assets during an interim period of the year ended June 30, 2020. There were no further indicators of impairment of intangible assets as of June 30, 2020.
Goodwill and intangible assets are comprised of the following at June 30, 2020:
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Cost
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Accumulated
Amortization
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Net Book
Value
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Impairment
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Total
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Goodwill
|
$ 1,634,507
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$ -
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$1,634,507
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$ (800,287)
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$834,220
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Finite-lived assets:
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|
|
|
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Customer list
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$ 881,000
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$ (132,147)
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$ 748,853
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$ -
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$748,853
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Vendor relationships
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479,000
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(71,847)
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407,153
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-
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407,153
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Noncompete agreement
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1,600,000
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(400,000)
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1,200,000
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(1,200,000)
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-
|
Product development costs
|
81,845
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(1,536)
|
280,309
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-
|
280,309
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|
$ 3,241,845
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$ (605,530)
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$2,636,315
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$(1,200,000)
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$1,436,315
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Estimated amortization expense related to finite-lived intangible assets for the next five years is: $347,293 for fiscal year 2021, $353,660 for fiscal year 2022, $361,577 for fiscal year 2023, $290,432 for fiscal year 2024, and $288,890 for fiscal year 2025. There were no intangible assets as of June 30, 2019.
F-19
Product Development Costs
Costs incurred in designing and developing classroom technology products are expensed as research and development until technological feasibility has been established. Technological feasibility is established upon completion of a detail product design, or in its absence, completion of a working model. Upon the achievement of technological feasibility, development costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Managements judgment is required in determining whether a product provides new or additional functionality, the point at which various products enter the stages at which costs may be capitalized, assessing the ongoing value and impairment of the capitalized costs and determining the estimated useful lives over which the costs are amortized.
Annual amortization expense is calculated based on the straight-line method over the products estimated economic lives. Amortization of product development costs incurred begins when the related products are available for general release to customers. Amortization of product development costs of $1,536 and $0 for the years ended June 30, 2020 and 2019, is included in cost of revenues in the Companys consolidated statement of operations.
Research and Development
Research and development costs are expensed as incurred and totaled $90,654 for the year ended June 30, 2020. There was no research and development costs for the year ended June 30, 2019.
Warranty
The Company negotiated a warranty settlement with one of its manufacturers. At June 30, 2020, the Company accrued $124,437 payable to this manufacturer, with $0 recorded as a long-term portion of vendor payable. At June 30, 2019 the Company accrued $209,316 payable to this manufacturer to be paid over twenty-four months, with $174,703 recorded as a long-term vendor payable.
Leases
The Companys leases relate primarily to corporate offices and warehouses. Effective July 1, 2019, the Company adopted the FASB guidance on leases (Topic 842), which requires leases with durations greater than twelve months to be recognized on the balance sheet. The Company adopted Topic 842 using the modified retrospective transition approach.
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.
F-20
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).
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.
Stock-based Compensation
The Company records stock-based compensation in accordance with the provisions set forth in ASC 718, Stock Compensation. 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.
F-21
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.
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, 2020 and 2019, 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 and anti-dilution clauses in agreements.
Recent Accounting Pronouncements
In January 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2020-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impacts of adoption of the new guidance to its consolidated financial statements.
F-22
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12") by removing certain exceptions to the general principles. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. The Company is currently evaluating the impacts of adoption of the new guidance to its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which removes, modifies and adds various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. For example, disclosures around transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs determining Level 3 fair value measurements will be added. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within the fiscal year. The Company is currently evaluating the impact the new standard.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses ("ASU 2016-13"). This accounting standard update changes the accounting for recognizing impairments of financial assets. Under the update, credit losses for certain types of financial instruments will be estimated based on expected losses. The update also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of this accounting standard update.
Note 2 Property and Equipment
Property and equipment are comprised of the following at:
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2020
|
|
2019
|
Vehicles
|
$ 115,135
|
|
$ 74,755
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Equipment
|
6,097
|
|
5,000
|
Furniture and fixtures
|
24,335
|
|
12,598
|
|
145,567
|
|
92,353
|
Accumulated depreciation
|
(93,518)
|
|
(65,588)
|
|
|
|
|
Property and equipment, net
|
$ 52,049
|
|
$ 26,765
|
As disclosed in Note 12, the net assets of the Entertainment segment were sold on February 6, 2019.
F-23
Note 3 - Line of Credit
The Company has a $1,250,000 line of credit bearing interest at prime plus 0.5% (4.25% and 6.0% at June 30, 2020 and 2019, respectively) which expires October 12, 2020. 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 in 2020. The outstanding balance was $1,236,598 and $1,230,550 at June 30, 2020 and 2019, respectively.
Note 4 - Notes Payable
Long Term Notes Payable
The Company's long term notes payable obligations to unrelated parties are as follows at:
|
|
|
|
|
2020
|
|
2019
|
Note payable with a bank maturing on June 26, 2021 due to an extension, bearing interest at 3% and 4% for the years ended June 20, 2020 and 2019, respectively. Monthly interest payments of approximately $697 are due beginning July 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
|
Long term PPP loan under the CARES Act bearing interest at 0.98% and maturing in April 2022. Monthly installments of principal and interest of $13,137 begin in October 2020. The loan is subject to forgiveness by the SBA.
|
310,832
|
|
-
|
Long term loan under Section 7(b) of the Economic Injury Disaster Loan program bearing interest at 3.75% and maturing in May 2050. Monthly installments of principal and interest of $731 begin in May 2021.
|
150,000
|
|
-
|
Financing lease liabilities for offices and warehouses with monthly installments of $19,173 (ranging from $1,083 to $4,806) over two year terms, expiring through July 2022.
|
223,982
|
|
-
|
Financing leases with a related party for delivery vehicles with monthly installments totaling $813 (ranging from $352 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.
|
1,245
|
|
6,053
|
Note payable with a finance company for delivery vehicle with monthly installments totaling $679 including interest at 8.99% over a 6 year term
expiring in December 2025.
|
34,019
|
|
-
|
Total Notes Payable
|
994,978
|
|
280,953
|
Current Portion of Notes Payable
|
512,425
|
|
279,346
|
Long-term Portion of Notes Payable
|
$ 482,553
|
|
$ 1,607
|
F-24
Future minimum principal payments on the non-related party long term notes payable are as follows:
|
|
Year ending June 30,
|
|
2021
|
$ 512,425
|
2022
|
229,962
|
2023
|
93,555
|
2024
|
10,045
|
2025
|
10,807
|
Thereafter
|
138,184
|
|
$ 994,978
|
Convertible Notes Payable
|
|
|
|
|
|
June 30,2020
|
|
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.
|
|
|
|
|
|
|
|
|
|
24,150
|
|
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 note was paid in full by conversion to stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
112,500
|
F-25
|
|
|
|
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 repaid by a combination of conversion to stock and cash.
|
|
|
|
|
|
|
|
|
|
-
|
|
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 repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
-
|
|
366,120
|
|
|
|
|
F-26
|
|
|
|
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 repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
-
|
|
-
|
|
|
|
|
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. The note was repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
-
|
|
-
|
|
|
|
|
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. The note was repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
-
|
|
|
|
|
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 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. The note was partially repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
-
|
F-27
|
|
|
|
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. The note was partially repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,200
|
|
-
|
|
|
|
|
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. The note was partially repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
825,000
|
|
-
|
|
|
|
|
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. The note was increased by $25,000 due to the value of the stock price at conversion.
|
250,000
|
|
-
|
|
|
|
|
F-28
|
|
|
|
|
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. The note was repaid by conversion to stock.
|
-
|
|
-
|
|
|
|
|
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
|
|
-
|
|
|
|
|
On June 26, 2020 the Company signed a convertible promissory note with an investor. The $430,000 note was issued at a discount of $30,000 and bears interest at 8% per year. The note principal and interest are convertible into shares of common stock at the lower of (a) $0.47 per share or (b) 70% of the lowest trading price of common stock during the 10 trading days prior to conversion. The note matures in June 2021. The note has prepayment penalties between 120% and 130% of the principal and interest outstanding if repaid before 180 days from issuance.
|
430,000
|
|
-
|
|
|
|
|
|
|
|
|
Total Convertible Notes Payable
|
1,989,975
|
|
2,876,950
|
|
|
|
|
Less: Unamortized original issue discounts
|
888,075
|
|
752,126
|
|
|
|
|
Current Portion of Convertible Notes Payable
|
1,101,900
|
|
2,124,824
|
|
|
|
|
Long-term Portion of Convertible Notes Payable
|
$ -
|
|
$ -
|
F-29
The original issue discount is being amortized over the terms of the convertible notes using the effective interest method. During the years ended June 30, 2020 and 2019, the Company amortized $340,526 and $89,279 of debt discounts to interest expense and $1,825,506 and $644,055 to interest accretion.
Four convertible promissory notes were entered into during the year ended June 30, 2020, and subsequently repaid prior to June 30, 2020. The Company incurred prepayment penalties of approximately $139,000 due to the advance repayment of two of these convertible notes.
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 Companys common shares prior to the delivery to the Company of a notice of conversion, or the due date of interest, as applicable. Interest, when due, is payable either in cash or common shares.
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).
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 204,771,864 after anti-dilution protection adjustment, are outstanding at June 30, 2020. 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 below $4 per share. As of June 30, 2020, outstanding warrants expire between November 29, 2021 and November 18, 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 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-30
Note 5 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, 2020 and 2019 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value.
|
|
|
|
|
At June 30, 2020
|
|
|
|
|
Assets:
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Goodwill
|
$ 834,220
|
$ -
|
$ -
|
$ 834,220
|
Customer list
|
748,853
|
-
|
-
|
748,853
|
Vendor relationship
|
407,153
|
-
|
-
|
407,153
|
Development costs
|
280,315
|
-
|
-
|
280,315
|
|
$1,990,226
|
$ -
|
$ -
|
$1,990,226
|
Liabilities:
|
|
|
|
|
Original issue discount, convertible debt
|
$ 213,300
|
$ -
|
$ -
|
$ 213,300
|
Derivative liability, warrants
|
33,312
|
-
|
-
|
33,312
|
Total:
|
$ 246,612
|
$ -
|
$ -
|
$ 246,612
|
|
|
|
|
|
At June 30, 2019
|
|
|
|
|
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
|
F-31
As of June 30, 2020, the only asset required to be measured on a nonrecurring basis was goodwill and the fair value of the asset amounted to $834,220 using level 3 valuation techniques.
The Company measures the fair market value of the Level 3 liability components using the Monte Carlo model and projected discounted cash flows, as appropriate. These models were initially prepared by an independent third party and consider managements best estimate of the conversion price of the stock, an estimate of the expected time to conversion, an estimate of the stocks 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 0.09% and volatility of 300%.
The derivative liability was valued using the Monte Carlo pricing model with the following inputs:
|
|
At June 30, 2020
|
|
Risk-free interest rate:
|
0.09%
|
Expected dividend yield:
|
0.00%
|
Expected stock price volatility:
|
300.00%
|
Expected option life in years:
|
.089 to 1.69 years
|
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 to 3.00 years
|
The following table sets forth a reconciliation of changes in the fair value of the Companys convertible debt components classified as Level 3 in the fair value hierarchy at June 30, 2020:
|
|
Balance at June 30, 2019
|
$ 1,025,944
|
Convertible securities at inception
|
2,027,000
|
Settlement of conversion features and warrants
|
(152,374)
|
Realized
|
(240,903)
|
Unrealized
|
(2,413,055)
|
Balance at June 30, 2020
|
$ 246,612
|
|
|
Balance at June 30, 2018
|
$ -
|
Convertible securities at inception
|
1,238,359
|
Settlement of conversion features and warrants
|
(301,613)
|
Realized
|
(83,487)
|
Unrealized
|
172,685
|
Balance at June 30, 2019
|
$ 1,025,944
|
F-32
Note 6 - Related Party Transactions
Notes Payable
The Company's notes payable obligations to related parties are as follows:
|
|
|
|
|
2020
|
|
2019
|
Note payable to a stockholder in which the $200,000 principal plus $10,000 of interest was payable in December 2019. Borrowings under the note increased and the maturity was extended to November 2021. The note bears interest at 6% interest and is payable in cash or common stock, at the Company's option. If interest is paid in common stock, the conversion price will be the market price at the time of conversion. Principal on the note at maturity is convertible into 400,000 shares of Series D Preferred Stock. If principal is paid prior to maturity, the right of conversion is terminated.
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 400,000
|
|
$ 200,000
|
|
|
|
|
Fair value of unsecured notes payable to seller of Concepts and Solutions, a related party, bearing interest at 3% per year, payable in annual installments through November 30, 2021. Payments are subject to adjustment based on the achievement of minimum gross revenues and successful completion of certain pre-acquistion withholding tax issues of Concepts and Solutions.
|
1,030,079
|
|
-
|
|
|
|
|
Note payable to a stockholder in which the note principal plus 6% interest is payable in November 2021. Note was amended in March 2020 by increasing the balance by $225,000 and extending the maturity to March 2022. Interest is payable in cash or common stock, at the holders option. If interest is paid in common stock, the conversion price will be the market price at the time of conversion. Principal on the note at maturity is convertible into 1,000,000 shares of Series D Preferred Stock. If principal is paid prior to maturity, the right of conversion is terminated.
|
1,225,000
|
|
-
|
|
|
|
|
Note payable to a stockholder in which the note principal plus 6% interest is payable in November 2021. Interest is payable in cash or common stock, at the Company's option. If interest is paid in common stock, the conversion price will be the market price at the time of conversion. Principal on the note at maturity is convertible into 200,000 shares of Series D Preferred Stock. If principal is paid prior to maturity, the right of conversion is terminated.
|
200,000
|
|
-
|
F-33
|
|
|
|
Note payable to a stockholder in which the note principal plus interest at 10% is payable the earlier of 60 days after invoicing a certain customer, or August 20, 2020.
On August 20, 2020, the interest on the note was paid and the note was renewed with an extension of the maturity date to March 30, 2021.
The note is collateralized by a security interest in a certain customer purchase order.
|
385,000
|
|
-
|
|
|
|
|
Other short term payables due to stockholders and related parties
|
107,733
|
|
-
|
|
|
|
|
Total Related Party Notes Payable and Other Payables
|
3,347,812
|
|
200,000
|
|
|
|
|
Current Portion of Related Party Notes Payable and Other Payables
|
1,272,812
|
|
200,000
|
|
|
|
|
Long-term Portion of Related Party Notes Payable and Other Payables
|
$ 2,075,000
|
|
$ -
|
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 was $18,000 and $9,000 for the years ended June 30, 2020 and 2019, respectively.
The Company leases a vehicle from related parties under a financing lease (Note 4). The Company is paying the lease payments directly to the creditors, rather than the lessor. The leased vehicle is used in operations for deliveries and installations.
F-34
Other Agreements
A related party collateralizes the Companys short-term note with a certificate of deposit in the amount of $274,900, held at the same bank. The related party will receive a $7,500 collateral fee for this service (see Note 4).
Note 7 - Lease Agreements
Financing Lease Agreements
The Company leases vehicles under financing lease agreements (Note 4) requiring monthly payments totaling $813 (ranging from $263 to $461), including interest (ranging from 4.5% to 4.75%), over 5-year terms expiring through July 2020.
The Company has financing lease liabilities for offices and warehouses with monthly installments of $19,173 (ranging from $1,083 to $4,806) over 2 year terms, expiring through July 2022.
|
|
|
|
Right of use assets
|
|
|
Operating right of use assets
|
$
|
223,982
|
|
|
|
Operating lease liabilities
|
|
|
Current portion of long term notes payable
|
$
|
114,288
|
Notes payable, less current portion
|
|
109,694
|
Total operating lease liabilities
|
$
|
223,982
|
|
|
|
As of June 30, 2020, operating lease maturities are as follows:
|
|
|
Period ending June 30,
|
|
|
2021
|
$
|
114,288
|
2022
|
|
109,694
|
|
$
|
223,982
|
|
|
|
As of June 30, 2020, the weighted average remaining lease term was 1.75 years.
F-35
Note 8 Equity
In fiscal years 2020 and 2019, 642,857 and 706,618 shares were awarded under the Stock Plan (see Note 13).
In fiscal year 2020, the Company issued 525,000 common shares as consideration for convertible notes. In fiscal year 2019, the Company issued 302,271 common shares as consideration for convertible notes.
In fiscal year 2020, the Company issued 500,000 shares of Series E Preferred Stock to an investor that converts into 1,190,476 shares of common stock as consideration for a convertible note. There were no preferred shares issued in fiscal year 2019.
In fiscal years 2020 and 2019, 0 and 60,000 shares were returned and cancelled upon repayment of a convertible note prior to maturity.
During the years ended June 30, 2020 and 2019, the Company issued 7,619,912 and 346,618 common shares for professional consulting services, respectively. The shares were valued at $2,020,150 and $800,751 upon issuance, for the years ended June 30, 2020 and 2019, respectively.
In fiscal year 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.
During fiscal year 2020, investors exercised warrants in exchange for 32,052,654 common shares in cashless transactions. During fiscal year 2019, an investor exercised warrants in exchange for 381,944 common shares in a cashless transaction.
See the capital structure section in Note 1 for disclosure of the equity components included in the Companys consolidated financial statements.
Note 9 - Income Taxes
The Companys effective tax rate differed from the federal statutory income tax rate for the years ended June 30, 2020 and 2019 as follows:
|
|
Federal statutory rate
|
21%
|
State tax, net of federal tax effect
|
5.31%
|
Valuation allowance
|
-26%
|
Effective tax rate
|
0%
|
F-36
The Company had no federal or state income tax (benefit) for the years ended June 30, 2020 and 2019.
The Companys deferred tax assets and liabilities as of June 30, 2020 and 2019, are summarized as follows:
|
|
|
|
|
2020
|
|
2019
|
Federal
|
|
|
|
Deferred tax assets
|
$ 4,825,100
|
|
$ 2,980,100
|
Less valuation allowance
|
(4,825,100)
|
|
(2,980,100)
|
Deferred tax liabilities
|
-
|
|
-
|
|
|
|
|
State
|
|
|
|
Deferred tax assets
|
1,290,900
|
|
866,300
|
Less valuation allowance
|
(1,290,900)
|
|
(866,300)
|
Deferred tax liabilities
|
-
|
|
-
|
|
-
|
|
-
|
Net Deferred Tax Assets
|
$ -
|
|
$ -
|
|
|
|
|
The Companys 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 Company has not generated taxable income and has not recorded any current income tax expense at June 30, 2020 and 2019.
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.
F-37
The Companys deferred tax assets are primarily comprised of net operating losses (NOL) that give rise to deferred tax assets. The NOL carryforwards expire over a range from 2020 to 2037, with certain NOL carryforwards 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 NOL 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, 2020 and 2019, are as follows:
|
|
|
|
|
2020
|
|
2019
|
Net operating loss carryforwards
|
$ 5,767,000
|
|
$ 3,826,100
|
Valuation allowance
|
(6,116,000)
|
|
(3,846,400)
|
Property and equipment
|
(10,500)
|
|
(7,100)
|
Goodwill
|
278,900
|
|
-
|
Intangible assets
|
35,800
|
|
-
|
Inventory allowance
|
17,800)
|
|
5,400
|
Warranty accrual
|
27,000
|
|
22,000
|
Net Deferred Tax Assets
|
$ -
|
|
$ -
|
|
|
|
|
As of June 30, 2020, 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, 2020, the Companys income tax returns generally remain open for examination for three years from the date filed with each taxing jurisdiction.
F-38
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 Companys 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 Companys 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 Companys 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.
On September 4, 2019, the Company recorded a pre-acquisition liability for approximately $591,000 relative to unpaid payroll tax liabilities and associated penalties and fees of Concepts and Solutions (Note 12). The liability is included in the note payable to seller of $1,030,079 at June 30, 2020 (Note 6).
On August 14, 2020, the Company entered into a legal settlement agreement and recorded a liability for $2,000,000 related to a lawsuit by a previous creditor of Galaxy CO (Note 1). The $2,000,000 liability is included in the balance sheet at June 30, 2020.
Concentrations
Galaxy contracts the manufacturer of its products with overseas suppliers. The Companys sales could be adversely impacted by a suppliers inability to provide Galaxy with an adequate supply of inventory.
Galaxy has three customers that accounted for approximately 79% of accounts receivable at June 30, 2020 and one customer that accounted for approximately 86% of accounts receivable at June 30, 2019. Galaxy has two customers that accounted for approximately 40% of total revenue for the year ended June 30, 2020 and four customers that accounted for 79% of revenues for the year ended June 30, 2019.
Note 11 - Material Agreements
Manufacturer and Distributorship Agreement
On September 15, 2018, the Company signed an agreement with a company in China for the manufacture of Galaxys 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 manufacturers warranty from the date of shipment. The agreement renews automatically in two-year increments unless three months notice is given by either party.
F-39
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 4.5% equity interest in Galaxy. The 4.5% 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 shares of common stock upon execution of the renewal. The Company paid the consultants $15,000 and $261,000 in fees and expenses for consulting services provided during the years ended June 30, 2020 and 2019, respectively. The Company issued 450,000 shares to the consultants under the Companys Stock Plan during the year ended June 30, 2019. The Company issued 1,097,857 shares to the consultant for consulting services during the year ended June 30, 2020.
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 $16,500 and $222,500 in fees and expenses for consulting services provided during the years ended June 30, 2020 and 2019.
Agency Agreement
Effective December 11, 2018, the Company entered into a 12 month contract with an agent to raise capital. The agent receives a finders 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 $11,600 in fees and issued 212,990 shares of common stock during the year ended June 30, 2020. The Company paid $98,400 in fees and issued 46,618 shares of common stock during the year ended June 30, 2019.
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. The relationship with this advisor is continuing on an as-needed basis.
F-40
Investor Relations and Advisory Agreement
On May 1, 2019, the Company entered into an Investor Relations and Advisory Agreement. The Company pays $8,000 per month under this agreement in cash and a restricted common stock monthly fee 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 Company paid $24,000 and $4,040 in fees during years ended June 30, 2020 and 2019. The Company issued 52,508 common shares under this agreement during fiscal year 2020.
Financial Advisory Engagement
Effective June 4, 2019, the Company engaged a financial advisor to act as the Companys 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 issued 0 and 250,000 shares to the financial advisor for services in fiscal years 2020 and 2019, respectively.
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 $347,300 and $35,000 in fees during the years ended June 30, 2020 and 2019. The Company issued 5,510,000 and 60,000 shares to the consultant for consulting services during the years ended June 30, 2020 and 2019, respectively.
Consulting Agreement
Effective October 1, 2019, the Company entered into a 1 year agreement for corporate consulting services and financial advisory services. The Company will issue 50,000 shares to the consultant each quarter, up to a total of 200,000 shares for the year. The Company paid $49,800 and $0 in fees during the years ended June 30, 2020 and 2019. The Company issued 150,000 shares to the consultant for consulting services during the year ended June 30, 2020.
Purchase Agreement
On May 31, 2020, the Company entered into a 2 year Purchase Agreement with an investor, which was amended and restated on July 9, 2020. Pursuant to the terms of the Purchase Agreement, the investor agreed to purchase up to $2 million of the Companys common stock (subject to certain limitations) from time to time during the term of the Agreement. The Company issued 2,500,000 shares to the investor as consideration for its commitment to purchase shares of the Companys common stock. The Company will use proceeds from shares issued to the investor for working capital and general and administrative expenses.
F-41
Employment Agreements
On January 1, 2020, the Company entered into an employment agreement with the Chief Executive Officer (CEO) of the Company for a two-year term which was amended on September 1, 2020. Under the amended employment agreement, the CEO will receive annual compensation of $500,000, and an annual discretionary bonus based on profitability and revenue growth. The agreement includes a non-compete agreement and severance benefits of $90,000.
On January 1, 2020, the Company entered into an employment agreement with the Chief Finance Officer/Chief Operations Officer (CFO/COO) of the Company for a two-year term, which was amended on September 1, 2020. Under the amended employment agreement, the CFO/COO will receive annual compensation of $250,000, an annual discretionary bonus based on profitability and revenue growth. The agreement includes a non-compete agreement and severance benefits of $72,000.
Note 12 - Acquisitions
Reverse Acquisition
On June 22, 2018, Galaxy consummated a reverse triangular merger whereby Galaxy merged with and into FLCRs newly formed subsidiary, Galaxy MS, Inc. which was formed specifically for the transaction. Under the terms of the merger, Galaxys shareholders transferred all their outstanding shares of common stock to Galaxy MS, in return for FLCRs 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 represented 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 FLCRs convertible promissory notes were converted into FLCRs 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, 2020 and 2019.
F-42
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
|
F-43
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 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 other assets in the table above, nor incur any obligations from the corresponding liabilities.
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 income in the Consolidated Statement of Operations.
The following table presents a summary of Entertainments 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
|
$
|
60,688
|
F-44
Concepts and Solutions Acquisition
On September 4, 2019, Galaxy entered into a stock purchase agreement with Concepts and Solutions. Under the terms of the stock purchase agreement, 100% of the outstanding capital for both Concepts and Solutions was purchased by Galaxy. Concurrent with this acquisition, the Company applied pushdown accounting; therefore, the consolidated financial statements after completion of the acquisition include the assets, liabilities, and results of operations of the combined company from and after the closing date. As part of the stock purchase agreement, Galaxy issued 1,350,000 common shares to the seller with a value of $1,485,000. In addition to the issuance of common shares, the Company entered into three promissory notes with the seller for a total note payable of $3,000,000. Payments under the notes are subject to adjustment based on the achievement of minimum gross revenues and successful resolution of certain pre-acquisition payroll withholding tax issues of Concepts and Solutions. The Company believes future earnings goals will not be met and valued the note payable at $1,484,473, which includes approximately $584,000 of accrued pre-acquisition withholding tax liabilities (See Note 10).
The balance of the note payable is $1,030,079 at June 30, 2020.
Management of the Company determined that a triggering event to assess the impairment of goodwill associated with the acquisition of Concepts and Solutions occurred during the third quarter of 2020. While there was no single 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. See Notes 1 and 12.
The following table summarizes the preliminary allocation of the fair value of the assets and liabilities as of the acquisition 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.
F-45
|
|
Assets
|
|
Cash
|
$ 201,161
|
Accounts receivable
|
1,165,953
|
Inventory
|
94,360
|
Property and equipment
|
20,904
|
Other assets
|
2,800
|
Goodwill and other intangibles
|
3,760,287
|
Total Assets
|
5,245,465
|
Liabilities
|
|
Accounts payable
|
1,225,734
|
Accrued expenses
|
783,540
|
Short-term debt
|
96,941
|
Deferred revenue
|
518,900
|
Total Liabilities
|
2,625,115
|
Net Assets
|
$ 2,620,350
|
Consideration
|
|
Fair value of anti-dilution clause in employment agreement
|
$ 235,350
|
Note payable to seller
|
900,000
|
Stock
|
1,485,000
|
|
$ 2,620,350
|
F-46
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 and other intangible assets initially recognized of
$3,760,287 and reflected in the balance sheet as of September 30, 2019. Goodwill and other intangible assets recognized is primarily attributable to the amount of the consideration in excess of the fair value of Concepts and Solutions at the date of purchase.
Note 13 Stock Plan
An Employee, Directors, and Consultants Stock 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 Companys stockholders, by paying fees or salaries in the form of shares of the Companys common stock. The Plan is reviewed annually. The 2020 Plan is effective September 16, 2020 and expires December 15, 2021. The 2019 Plan is effective December 13, 2018 and expires June 1, 2020. Common shares of 2,000,000 are reserved for stock awards under the Plans. There were 965,000 and 642,857 shares awarded under the Plans as of June 30, 2020 and 2019, respectively.
Note 14 - Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As reflected in the accompanying consolidated financial statements, the Company had negative working capital of approximately $7,000,000, an accumulated deficit of approximately $23,500,000, and cash used in operations of approximately $7,400,000 at June 30, 2020.
The Companys 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 managements 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.
F-47
Note 15 - 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, 2020, the Company signed a lease agreement for a warehouse in Jacksonville, Florida. The lease expires in June 30, 2021 and requires monthly installments of $3,524. Future lease payments are approximately $43,000 per year for the year ended June 30, 2021.
On August 1, 2020, the Company signed a lease agreement for a warehouse in Peoria, Arizona. The lease expires in July 31, 2022 and requires monthly installments ranging from $1,463 to $3,012. Future escalating lease payments are approximately $29,000 and $39,000 for the years ended June 30, 2021 and 2022.
In July and August 2020, the Company issued a total of 242,000,000 shares to an investor in exchange for proceeds of $1,884,520 under the Purchase Agreement dated May 19, 2020 (Note 11).
In July 2020, the Company issued 784,966,812 common shares to investors in satisfaction of $977,350 of principal on convertible notes.
In July and August 2020, a warrant holder exercised warrants and received 204,771,864 shares in five cashless transactions.
In July and August 2020, the Company entered into new $125,000 and $500,000 convertible notes with an investor.
On July 30, 2020, the Company entered into a two year accounts receivable factoring agreement with a financial services company to provide working capital. Factoring fees are 2.5% of the face value of the account receivable sold to the factoring agent per month until collected. For collections over 90 days from the invoice date, the fee increases to 3.5%. The agreement contains a credit line of $1,000,000 and requires a minimum of $300,000 of factored receivables per calendar quarter. The agreement includes early termination fees. The Company has factored approximately $390,000 of accounts receivable as of September 25, 2020.
In August 2020, the Company issued 327,513,771 common shares to investors in satisfaction of $804,160 of principal on convertible notes.
As of September 25, 2020, the Company paid approximately $732,000 under the Settlement Agreement dated August 14, 2020 (Note 10).
Galaxy renewed a consulting agreement in April 2020 for advisory services with a stockholder. In exchange for services provided, the consultant receives consulting fees paid out in stock not resulting in a greater than 4.9% equity interest in Galaxy.
Effective September 16, 2020, the company adopted the Employee, Directors and Consultants Stock Plan 2020 and reserved 97,250,000 shares of common stock for distribution under the Plan. On September 18, 2020, the Company issued 97,250,000 shares registered under the Stock Plan 2020 to a consultant for services. The Plan expires on December 15, 2021.
In September 2020, the Company issued 6,500,000 shares for consulting services.
F-48
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table sets forth the name, age, position and office term of each executive officer and director of the Company.
|
|
|
Name
|
Age
|
Title
|
|
|
|
Gary LeCroy
|
52
|
Chief Executive Officer, President and Director
|
Magen McGahee
|
35
|
Chief Operating Officer, Chief Financial Officer, Secretary and Director
|
Carl R. Austin
|
81
|
Director
|
|
|
|
Gary LeCroy, Chief Executive Officer, President and Director
Mr. LeCroy has served as the Chief Executive Officer and President of the private company Galaxy Next Generation, Ltd since founding the company in November, 2016. Previously, Mr. LeCroy owned and operated R&G Sales, Inc. located in Toccoa, Georgia from 2004 to 2018
and has been our Chief Executive Offcier since our merger in 2018. Mr. LeCroy served as CEO and sales director for that company which was involved in the sales and distribution of educational technology. In May 1988, Mr. LeCroy graduated with an Associate degree in business from Piedmont College in Demarest, Georgia.
Magen McGahee, Chief Operating Officer, Chief Financial Officer, Secretary and Director
Ms. McGahee has served as the COO and CFO of Galaxy Next Generation, Ltd. since founding the company in November, 2016
and has acted as our Chief Operating and Finance Officer since our merger in 2018.
From 2014 to 2016, Ms. McGahee worked as Vice President of LeCroy Educational Technology located in Toccoa, Georgia. LeCroy Educational Technology sells interactive presentation panels in the educational market. From 2013 to 2014, Ms. McGahee worked with Qomo, Inc. as a Director, Strategic Partnerships, developing programs and video display models that would allow expansion into the U.S. market Ms. McGahee worked for MIMIO Corporation on its sales leadership team from 2008 to 2013. MIMIO now Boxlight Corporations, (BOXL) is a manufacturer of interactive video displays for the educational market..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.
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 worked there from its organization in 1992 to the present. Mr. Austin is an entrepreneur and he owns and operates shopping centers, car washes and residential and commercial real estate. In 1962, Mr. Austin received a Bachelor of Science degree from Indiana University, located in Bloomington, Indiana. Mr. Austin has served as a director of our company since 2014.
-38-
All Directors hold their office until the next annual meeting of shareholders or until their successors are duly elected pursuant to NRS 78.320, and qualified. Any vacancy occurring in the Board of Directors may be filled by the shareholders, or the Board of Directors.
A Director elected to fill a vacancy is elected for the unexpired term of his predecessor in office. Any Directorship filled by reason of an increase in the number of Directors shall expire at the next shareholders meeting in which Directors are elected, unless the vacancy is filled by the shareholders, in which case the term shall end on the later of (i) the next meeting of the shareholders or (ii) the term designated for the Director at the time of creation of the position being filled.
Family Relationships
There are no family relationships between any officer and director.
Code Of Ethics
The Company has adopted a code of ethics that applies to the Companys officers, and directors. Our Code of Ethics was included as an exhibit to our annual report on Form 10-K for the year ended December 31, 2004.
DELINQUENT SECTION 16(A) REPORTS
Section 16(a) of the Exchange Act requires the Company's directors and officers, and persons who beneficially own more than 10% of a registered class of the Company's equity securities, to file reports of beneficial ownership and changes in beneficial ownership of the Company's securities with the SEC on Forms 3, 4 and 5. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of the forms received by it during the fiscal year ended June 30, 2020 and written representations that no other reports were required, the Company does not believe that any persons required to make filings under Section 16(a) during such fiscal year failed to file such reports or filed such reports late other than the following:
(1) a late Form 4 filing reporting the acquisition of 500,000 share of Series E Preferred stock by Keith and Kevin Watson on November 14, 2019 that was filed with the SEC on December 23, 2019
-39-
Corporate Governance
The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the Securities and Exchange Commission (the SEC) and in other public communications made by the Company; and strives to be compliant with applicable governmental laws, rules and regulations. The Company has not formally adopted a written code of business conduct and ethics that governs the Companys employees, officers and directors as the Company is not required to do so.
In lieu of an Audit Committee, the Companys Board of Directors, is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of the Company's financial statements and other services provided by the Companys independent public accountants. The Board of Directors reviews the Company's internal accounting controls, practices and policies.
Committees of the Board
Our Company currently does not have nominating, compensation, or audit committees or committees performing similar functions nor does the Company have a written nominating, compensation or audit committee charter. The Board of Directors believes that it is not necessary to have such committees, at this time, because the functions of such committees can be adequately performed by the Board of Directors.
Audit Committee Financial Expert
Our Board of Directors has determined that we do not have a board member that qualifies as an "audit committee financial expert " as defined in Item 407(D)(5) of Regulation S-K.
We believe that our directors are capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. In addition, we believe that retaining an independent director who would qualify as an "audit committee financial expert" would be overly costly and burdensome and is not warranted in our circumstances given the stage of our development.
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Board Meetings and Annual Meeting
During the fiscal year ended June 30, 2020, our Board of Directors held one formal board meeting. We did not hold an annual meeting during that time period. All of our directors attended at least 75% of the meetings of the Board of Directors.
Code Of Business Conduct And Ethics
Each of the Companys 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.
Shareholder Proposals
Our Company does not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. The Board of Directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our Company does not currently have any specific or minimum criteria for the election of nominees to the Board of Directors and we do not have any specific process or procedure for evaluating such nominees. The Board of Directors will assess all candidates, whether submitted by management or shareholders, and make recommendations for election or appointment to the Board.
ITEM 11. EXECUTIVE COMPENSATION.
Compensation of Officers and Directors:
The following table lists the compensation received by our former and current officers over the last two years.
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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
|
$ 85,566
|
-
|
$549,022
|
$634,588
|
|
|
2019
|
$292,028
|
-
|
-
|
$292,028
|
Magen McGahee
|
COO, CFO, Sec., Director
|
2020
|
$172,500
|
-
|
-
|
$172,500
|
|
|
2019
|
$217,500
|
-
|
-
|
$217,500
|
Employment Agreements
On January 1, 2020, the Company entered into an employment agreement with Gary D. LeCroy to serve as its Chief Executive Officer (CEO) of the Company for a two-year term which was amended on September 1, 2020. Under the employment agreement, the CEO will receive annual compensation of $500,000, and an annual discretionary bonus based on profitability and revenue growth. The agreement includes a non-compete agreement and severance benefits of $90,000.
On January 1, 2020, the Company entered into an employment agreement with Magen McGahee to serve as its Chief Financial Officer/Chief Operations Officer (CFO/COO) of the Company for a two-year term was amended on September 1, 2020. Under the employment agreement, the CFO/COO will receive annual compensation of $250,000, an annual discretionary bonus based on profitability and revenue growth. The agreement includes a non-compete agreement and severance benefits of $72,000.
Outstanding Equity Awards at Fiscal Year-End
There are no outstanding equity awards held by the named executive officers at June 30, 2020.
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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.
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|
|
|
|
|
|
|
|
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.
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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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding the beneficial ownership of our common stock as of September 25, 2020 by:
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|
●
|
each of our named executive officers;
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●
|
each of our directors;
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●
|
all of our current directors and executive officers as a group; and
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●
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each stockholder known by us to own beneficially more than five percent of our common stock.
|
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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 September 25, 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 2,194,556,901 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.
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|
|
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
|
528,415
|
*
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All current executive officers and directors as a group (3 persons)
|
7,505,309
|
*
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5% or Greater Stockholders
|
|
|
* less than 1%
|
|
|
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Equity Compensation Plan Information
The following table sets forth information about the securities authorized for issuance under our equity compensation plans for the fiscal year ended June 30, 2020.
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|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
|
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options
|
|
|
Weighted-Average
Exercise Price of
Outstanding Options
|
|
|
Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans
|
Equity compensation plans approved by stockholders:
|
|
|
-
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by stockholders
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
2019 Stock Incentive Plan
|
|
|
-
|
|
|
$
|
58.15
|
|
|
|
-
|
2020 Stock Incentive Plan
|
|
|
-
|
|
|
$
|
3.46
|
|
|
|
1,503,079
|
Equity compensation plans not approved by stockholders
|
|
|
-
|
|
|
|
N/A
|
|
|
|
.
|
Total
|
|
|
-
|
|
|
|
|
|
|
|
1,303,079
|
Effective September 16, 2020 our Board of Directors approved a stock incentive plan that expires December 15, 2021 and allows for the grant of awards to employees, directors and consultants of up to 97,250,000 shares of common stock. All 97,250,000 shares of common stock available for grant were issued to a consultant on September 18, 2020.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The following includes a summary of transactions during the years ended June 30, 2020 and 2019 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."
We had a short-term note payable to a stockholder, totaling $200,000 at June 30, 2019, in which the note principal plus interest of $10,000 was payable in December 2019. Effective October 2019, the principal amount of the note was increased to $400,000 and the maturity extended to November 2021. Principal of the note is convertible into 400,000 shares of our Series D Preferred Stock at maturity. The balance of the note payable at June 30, 2020 and 2019 was $400,000 and $200,000.
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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 June 30, 2020 totaled $1,030,079 with $780,079 being considered current and the remainder as long term.
We have a note payable to a stockholder, bearing interest at 6% annually, payable in March 2022. Principal of the note is convertible into 1,225,000 shares of our Series D Preferred Stock. The balance of the note payable at June 30, 2020 and 2019 was $1,225,000 and $0.
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. The balance of the note payable at June 30, 2020 and 2019 was $200,000 and $0.
We have a note payable to a stockholder, bearing interest at 10% annually, payable August 20, 2020. The balance of the note payable at June 30, 2020 and 2019 was $385,000 and $0.
In August 2020, the note’s maturity was extended to March 2021.
We have a note payable to a stockholder, payable on demand. The balance of the note payable at June 30, 2020 and 2019 was $52,000 and $0.
We have a note payable to a stockholder, payable on demand. The balance of the note payable at June 30, 2020 and 2019 was $55,733 and $0.
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 was $18,000 and $9,000 for the years ended June 30, 2020 and 2019.
We lease vehicles from related parties (a family member of a director) under financing 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.
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A related party (a family member of a director) 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.
We have a $1,250,000 line of credit bearing interest at prime plus 0.5% (4.25% and 6.0% at June 30, 2020 and 2019, respectively) which expires October 12, 2020. 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. The outstanding balance was $1,236,598 and $1,230,550 at June 30, 2020 and 2019, respectively.
At June 30, 2018, we had outstanding a $15,000 note payable to a related party (shareholder) 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 (shareholder) 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 (shareholder) 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 (shareholder) 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 (shareholder) 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.
At June 30, 2018, we had various notes payable to a related party (shareholder) 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.
Review, Approval and Ratification of Related Party Transactions
Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification of related party transactions, with our executive officers, directors and significant stockholders. We intend to establish formal policies and procedures in the future, once we have sufficient resources and have appointed additional directors, so that such transactions will be subject to the review, approval or ratification of our Board of Directors, or an appropriate committee thereof. On a moving forward basis, our directors will continue to approve any related party transaction.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of our annual financial statements and review of financial statements included in this Annual Report and 10-Q reports and services normally provided by the accountant in connection with statutory and regulatory filings or engagements were:
- Somerset CPAs, P.C. $369,000 for year ended June 30, 2020
-Somerset CPAs, P.C. $256,200 for year ended June 30, 2019
Tax Fees:
There were no fees for tax compliance, tax advice and tax planning to our auditors for the years ended June 30, 2020 and 2019.
All Other Fees:
There were no other fees billed in either of the last two fiscal years for products and services provided by the principal accountant other than the services reported above.