Item 1 Unaudited Condensed Consolidated Financial Statements
The following unaudited condensed consolidated financial statements are included herein:
|
|
Condensed Consolidated Balance Sheets as of December 31, 2020 (unaudited) and June 30, 2020 (audited)
|
3
|
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2020 and 2019 (unaudited)
|
4
|
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the Six Months Ended December 31, 2020 (unaudited)
|
5
|
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the Six Months Ended December 31, 2019 (unaudited)
|
6
|
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2020 and 2019 (unaudited)
|
7
|
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
8
|
-2-
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GALAXY NEXT GENERATION, INC.
|
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
December 31, 2020
|
|
June 30, 2020
|
Assets
|
(Unaudited)
|
|
(Audited)
|
Current Assets
|
|
|
|
Cash
|
$ 372,591
|
|
$ 412,391
|
Accounts receivable, net
|
1,231,807
|
|
798,162
|
Inventories, net
|
1,473,749
|
|
738,091
|
Prepaid and other current assets
|
3,950
|
|
2,800
|
Total Current Assets
|
3,082,097
|
|
1,951,444
|
|
|
|
|
Property and Equipment, net (Note 3)
|
62,931
|
|
52,049
|
|
|
|
|
Intangibles, net (Notes 4 and 14)
|
1,432,707
|
|
1,436,315
|
|
|
|
|
Goodwill (Notes 4 and 14)
|
834,220
|
|
834,220
|
|
|
|
|
Operating right of use asset (Note 9)
|
212,917
|
|
223,982
|
Total Assets
|
$ 5,624,872
|
|
$ 4,498,010
|
|
|
|
|
Liabilities and Stockholders' Equity (Deficit)
|
|
|
|
Current Liabilities
|
|
|
|
Line of credit (Note 5)
|
$ 991,598
|
|
$ 1,236,598
|
Convertible notes payable, net of discount (Note 6)
|
110,000
|
|
1,101,900
|
Derivative liability, convertible debt features and warrants (Note 7)
|
3,719,000
|
|
246,612
|
Current portion of long-term notes payable (Note 6)
|
561,981
|
|
512,425
|
Accrued legal settlement payable (Note 12)
|
600,000
|
|
1,282,000
|
Accounts payable
|
1,372,219
|
|
1,804,269
|
Accrued expenses
|
196,528
|
|
371,912
|
Deferred revenue
|
972,771
|
|
1,133,992
|
Short term portion of related party notes and payables (Note 8)
|
2,771,043
|
|
1,272,812
|
Total Current Liabilities
|
11,295,140
|
|
8,962,520
|
Noncurrent Liabilities
|
|
|
|
Long term portion of related party notes payable
|
1,225,000
|
|
2,075,000
|
(Note 8)
|
Long term portion of accrued legal settlement payable
|
368,240
|
|
718,000
|
(Note 12)
|
Notes payable, less current portion (Note 6)
|
419,079
|
|
482,553
|
Total Liabilities
|
13,307,459
|
|
12,238,073
|
|
|
|
|
Stockholders' Equity (Deficit)
|
|
|
|
Common stock
|
238,845
|
|
59,539
|
Preferred stock - Series E, non-redeemable
|
50
|
|
50
|
Additional paid-in-capital
|
36,478,169
|
|
15,697,140
|
Accumulated deficit
|
(44,399,651)
|
|
(23,496,792)
|
Total Stockholders' Equity (Deficit)
|
(7,682,587)
|
|
(7,740,063)
|
|
|
|
|
Total Liabilities and Stockholders' Equity (Deficit)
|
$ 5,624,872
|
|
$ 4,498,010
|
See accompanying notes to the condensed consolidated financial statements (unaudited).
-3-
GALAXY NEXT GENERATION, INC.
Condensed Consolidated Statements of Operations (Unaudited)
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For the Three Months
|
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For the Six Months
|
|
|
Ended December 31,
|
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Ended December 31,
|
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2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
798,793
|
$
|
876,529
|
$
|
1,977,006
|
$
|
1,501,426
|
Cost of Sales
|
|
471,063
|
|
492,105
|
|
1,304,240
|
|
985,784
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
327,730
|
|
384,424
|
|
672,766
|
|
515,642
|
|
|
|
|
|
|
|
|
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General and Administrative Expenses
|
|
|
|
|
|
|
|
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Stock compensation and stock issued for services
|
|
13,200
|
|
679,881
|
|
2,776,200
|
|
2,007,692
|
General and administrative
|
|
1,257,918
|
|
1,805,480
|
|
2,650,145
|
|
2,601,528
|
Total General and Administrative Expenses
|
|
1,271,118
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|
2,485,361
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|
5,426,345
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|
4,609,220
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Loss from Operations
|
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(943,388)
|
|
(2,100,937)
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|
(4,753,579)
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|
(4,093,578)
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|
|
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|
|
|
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|
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Other Income (Expense)
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|
|
|
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Other income
|
|
-
|
|
-
|
|
-
|
|
3,049
|
Expenses related to convertible notes payable:
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liability
|
|
(2,442,688)
|
|
1,219,289
|
|
(3,496,583)
|
|
2,022,257
|
Interest accretion
|
|
(366,667)
|
|
(579,920)
|
|
(766,603)
|
|
(808,853)
|
Interest expense related to Equity Purchase Agreement (Note 13)
|
|
(995,000)
|
|
-
|
|
(5,001,900)
|
|
-
|
Interest expense
|
|
(3,020,338)
|
|
(1,360,639)
|
|
(6,884,194)
|
|
(1,962,429)
|
|
|
|
|
|
|
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|
|
Total Other Income (Expense)
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|
(6,824,693)
|
|
(721,270)
|
|
(16,149,280)
|
|
(745,976)
|
|
|
|
|
|
|
|
|
|
Net Loss before Income Taxes
|
|
(7,768,081)
|
|
(2,822,207)
|
|
(20,902,859)
|
|
(4,839,554)
|
|
|
|
|
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|
|
|
|
Income Taxes (Note 11)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
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Net Loss
|
$
|
(7,768,081)
|
$
|
(2,822,207)
|
$
|
(20,902,859)
|
$
|
(4,839,554)
|
|
|
|
|
|
|
|
|
|
Net Basic and Fully Diluted Loss Per Share
|
$
|
(0.003)
|
$
|
(0.161)
|
$
|
(0.011)
|
$
|
(0.331)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
2,314,084,953
|
|
17,531,574
|
|
1,978,500,180
|
|
14,636,414
|
Fully diluted
|
|
2,776,901,944
|
|
27,349,020
|
|
3,205,073,044
|
|
31,849,788
|
See accompanying notes to the condensed consolidated financial statements (unaudited).
-4-
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GALAXY NEXT GENERATION, INC.
|
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit)
|
Six Months Ended December 31, 2020
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
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|
|
Total
|
|
Common Stock
|
|
Preferred Stock - Class E
|
|
Additional
|
|
Accumulated
|
|
Stockholders'
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-in Capital
|
|
Deficit
|
|
Deficit
|
Balance, July 1, 2020
|
628,039,242
|
|
$ 59,539
|
|
500,000
|
|
$50
|
|
$15,697,140
|
|
$(23,496,792)
|
|
$ (7,740,063)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
105,750,000
|
|
10,375
|
|
-
|
|
-
|
|
2,765,625
|
|
-
|
|
2,776,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in exchange for debt reduction
|
1,382,812,744
|
|
138,281
|
|
-
|
|
-
|
|
12,892,954
|
|
-
|
|
13,031,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to warrant holders
|
249,792,217
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment shares issued
|
52,500,000
|
|
5,250
|
|
-
|
|
-
|
|
1,044,750
|
|
-
|
|
1,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued under Equity Purchase Agreement
|
242,000,000
|
|
24,200
|
|
-
|
|
-
|
|
3,927,000
|
|
-
|
|
3,951,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued as collateral
|
50,000,000
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Common stock issued in acquisition
|
10,000,000
|
|
1,000
|
|
-
|
|
-
|
|
150,000
|
|
|
|
151,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(20,902,859)
|
|
(20,902,859)
|
Balance December 31, 2020
|
2,720,894,203
|
|
$238,845
|
|
500,000
|
|
$50
|
|
$36,478,169
|
|
$(44,399,651)
|
|
$ (7,682,587)
|
See accompanying notes to the condensed consolidated financial statements (unaudited).
-5-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GALAXY NEXT GENERATION, INC.
|
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit)
|
Six Months Ended December 31, 2019
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Common Stock
|
|
Preferred Stock - Class E
|
|
Additional
|
|
Accumulated
|
|
Stockholders'
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-in Capital
|
|
Deficit
|
|
Deficit
|
Balance, July 1, 2019
|
11,318,901
|
|
$ 1,072
|
|
-
|
|
$ -
|
|
$ 4,859,731
|
|
$ (9,470,685)
|
|
$ (4,609,882)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
2,029,912
|
|
205
|
|
-
|
|
-
|
|
1,962,975
|
|
-
|
|
1,963,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for debt reduction
|
2,772,990
|
|
277
|
|
-
|
|
-
|
|
1,935,737
|
|
-
|
|
1,936,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of conversion features
|
-
|
|
-
|
|
-
|
|
-
|
|
152,374
|
|
-
|
|
152,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to warrant holders
|
1,228,379
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued as compensation
|
44,511
|
|
4
|
|
-
|
|
-
|
|
44,507
|
|
-
|
|
44,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in acquisition of Ehlert Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Interlock Concepts, Inc.
|
1,350,000
|
|
135
|
|
-
|
|
-
|
|
1,720,216
|
|
-
|
|
1,720,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for convertible notes
|
500,000
|
|
50
|
|
-
|
|
-
|
|
219,950
|
|
-
|
|
220,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment shares issued
|
25,000
|
|
3
|
|
-
|
|
-
|
|
6,997
|
|
-
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Preferred Stock- Class E
|
-
|
|
-
|
|
500,000
|
|
50
|
|
499,950
|
|
-
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(4,839,554)
|
|
(4,839,554)
|
Balance December 31, 2019
|
19,269,693
|
|
$ 1,746
|
|
500,000
|
|
$ 50
|
|
$ 11,402,437
|
|
$ (14,310,239)
|
|
$ (2,906,006)
|
See accompanying notes to the condensed consolidated financial statements (unaudited).
-6-
|
GALAXY NEXT GENERATION, INC.
|
Condensed Consolidated Statements of Cash Flows
|
(Unaudited)
|
|
|
|
|
|
|
|
Six Months Ended December 31,
|
|
|
2020
|
|
2019
|
Cash Flows from Operating Activities
|
|
|
|
|
Net loss
|
|
$(20,902,859)
|
|
$ (4,839,554)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
177,529
|
|
285,844
|
Amortization of convertible debt discounts
|
|
247,702
|
|
216,724
|
Accretion and settlement of financing instruments
|
|
|
|
|
and change in fair value of derivative liability
|
|
4,126,813
|
|
536,339
|
Stock compensation and stock issued for services
|
|
2,786,775
|
|
-
|
Non-cash interest expense
|
|
11,893,497
|
|
-
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
Accounts receivable
|
|
(401,935)
|
|
75,339
|
Inventories
|
|
(526,227)
|
|
315,734
|
Intangibles
|
|
(120,404)
|
|
-
|
Accounts payable
|
|
(1,463,810)
|
|
(54,573)
|
Accrued expenses
|
|
(175,384)
|
|
(950,480)
|
Deferred revenue
|
|
(161,221)
|
|
(173,380)
|
Net cash used in operating activities
|
|
(4,519,524)
|
|
(4,588,007)
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
Acquisition of business, net of cash
|
|
38,836
|
|
2,967,918
|
Purchases of property and equipment
|
|
-
|
|
(17,636)
|
Net cash provided by investing activities
|
|
38,836
|
|
2,950,282
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
Principal payments on financing lease obligations
|
|
-
|
|
(3,449)
|
Principal payments on notes payable
|
|
(932)
|
|
(35,431)
|
Payments on advances from stockholder, net
|
|
(121,663)
|
|
-
|
Payments on convertible notes payable
|
|
-
|
|
(159,983)
|
Proceeds from convertible notes payable
|
|
1,956,000
|
|
1,923,684
|
Proceeds from notes payable related parties
|
|
535,963
|
|
400,000
|
Payments on notes payable related parties
|
|
-
|
|
(411,006)
|
Payments on line of credit, net
|
|
(245,000)
|
|
(100)
|
Proceeds from sale of common stock under Equity
|
|
2,316,520
|
|
-
|
Purchase Agreement
|
Net cash provided by financing activities
|
|
4,440,888
|
|
1,713,715
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
(39,800)
|
|
75,990
|
|
|
|
|
|
Cash, Beginning of Period
|
|
412,391
|
|
169,430
|
|
|
|
|
|
Cash, End of Period
|
|
$ 372,591
|
|
$ 245,420
|
|
|
|
|
|
Supplemental and Non-Cash Disclosures
|
|
|
|
|
Noncash additions related to convertible debt
|
|
$ 210,520
|
|
$ 206,600
|
Cash paid for interest
|
|
$ 35,888
|
|
$ 161,944
|
Interest on shares issued under Equity Purchase Agreement
|
|
$5,001,900
|
|
$ -
|
Related party note payable issued for acquisition of business
|
|
$ 194,526
|
|
$1,484,473
|
Acquisition of goodwill and intangibles
|
|
$ 46,869
|
|
$ -
|
Stock compensation and stock issued for services
|
|
$2,776,200
|
|
$2,007,692
|
Property leased with financing lease
|
|
$ 25,317
|
|
$ -
|
Accretion of discount and change in fair value of derivatives
|
|
$4,238,991
|
|
$ -
|
Common stock issued in exchange for convertible debt reduction
|
|
$4,117,650
|
|
$ -
|
See accompanying notes to the condensed consolidated financial statements (unaudited).
-7-
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 December 31, 2020 and June 30, 2020, respectively.
In April 2020, the Company applied for an unsecured loan (the "PPP Loan") under the Paycheck Protection Program (PPP). The PPP was established under The 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 PPP 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 6.
In May 2020, the Company received a loan from the SBA 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 6.
Corporate History, Nature of Business, Mergers and Acquisitions
Galaxy is a manufacturer and U.S. distributor of interactive learning technology hardware and software that allows the presenter and participant to engage in a fully collaborative instructional environment. Galaxy's products include Galaxy's own private-label interactive touch screen panel as well as numerous other national and international branded peripheral and communication devices. New technologies like Galaxy's own touchscreen panels are sold along with renowned brands such as Google Chromebooks, Microsoft Surface Tablets, Lenovo and Acer computers, Verizon WiFi and more. Galaxy's distribution channel consists of approximately 30 resellers across the U.S. who primarily sell its products within the commercial and educational market. Galaxy does not control where the resellers focus their resell efforts; however, the K-12 education market is the largest customer base for Galaxy products comprising nearly 90% of Galaxy's sales. In addition, Galaxy also possesses its own reseller channel where it sells directly to the K-12 market, primarily throughout the Southeast region of the United States.
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. These 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.
On October 15, 2020, the Company entered into an Asset Purchase Agreement (AP), to acquire the assets of Classroom Technologies Solutions, Inc. ("Classroom Tech") for consideration of (a) paying off a secured Classroom Tech loan, not to exceed the greater of 50% of the value of the Classroom Tech assets acquired or $120,000; (b) the issuance of a promissory note in the amount of $44,526 to a Classroom Tech designee; and (c) the issuance of 10 million shares of common stock to the seller of Classroom Tech. Classroom Tech provides cutting-edge presentation products to schools, training facilities, churches, corporations and retail establishments. Their high quality solutions are customized to meet a variety of needs and budgets in order to provide the best in education and presentation technology. Classroom Tech direct-sources and imports many devices and components which allows the Company to be innovative, nimble and capable of delivering a broad range of cost-effective solutions. Classroom Tech also offers in-house service and repair facilities and carries many top brands.
Basis of Presentation and Interim Financial Information
The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission (the "SEC") pertaining to interim financial information. Accordingly, these interim financial statements do not include all information or footnote disclosures required by GAAP for complete financial statements and, therefore, should be read in conjunction with the Consolidated Financial Statements and notes thereto in our June 30, 2020 Annual Report on Form 10-K and other current filings with the SEC. In the opinion of management, all adjustments, consisting of those of a normal recurring nature, necessary to present fairly the results of the periods presented have been included. The results of operations for the interim periods presented may not necessarily be indicative of the results to be expected for the full year.
-8-
Principles of Consolidation
The financial statements include the consolidated assets and liabilities of the combined company (collectively Galaxy Next Generation, Inc., Classroom Technology Solutions Inc., Interlock Concepts, Inc., and Ehlert Solutions Group, Inc. referred to collectively as the "Company"). See Note 14.
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.
Capital Structure
In accordance with ASC 505, Equity, the Company's capital structure is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
Authorized
|
|
Issued
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
4,000,000,000
|
|
2,720,894,203
|
|
2,670,855,578
|
|
$.0001 par value, one vote per share
|
|
Preferred stock
|
|
200,000,000
|
|
-
|
|
-
|
|
$.0001 par value, one vote per share
|
|
Preferred stock - Class A
|
|
750,000
|
|
-
|
|
-
|
|
$.0001 par value; no voting rights
|
|
Preferred stock - Class B
|
|
1,000,000
|
|
-
|
|
-
|
|
Voting rights of 10 votes for
Preferred B share; 2% preferred dividend payable annually
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class C
|
|
9,000,000
|
|
-
|
|
-
|
|
$.0001 par value; 500 votes per share, convertible to common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class D
|
|
1,000,000
|
|
-
|
|
-
|
|
$.0001 par value; no voting
rights, convertible to common stock, mandatory conversion to common stock 18 months after issue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class E
|
|
500,000
|
|
500,000
|
|
500,000
|
|
$.0001 par value; no voting
rights, convertible to common
stock
|
-9-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
Authorized
|
|
Issued
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
4,000,000,000
|
|
628,039,242
|
|
628,000,617
|
|
$.0001 par value, one vote per share
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
200,000,000
|
|
-
|
|
-
|
|
$.0001 par value, one vote per share
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class A
|
|
750,000
|
|
-
|
|
-
|
|
$.0001 par value; no voting rights
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class B
|
|
1,000,000
|
|
-
|
|
-
|
|
Voting rights of 10 votes for 1 Preferred B share; 2% preferred dividend payable annually
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class C
|
|
9,000,000
|
|
-
|
|
-
|
|
$.0001 par value; 500 votes per share, convertible to common stock
|
Preferred stock - Class D
|
|
1,000,000
|
|
-
|
|
-
|
|
$.0001 par value; no voting
rights, convertible to common stock, mandatory conversion to common stock 18 months after issue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class E
|
|
500,000
|
|
500,000
|
|
500,000
|
|
$.0001 par value; no voting rights, convertible to common stock
|
There is no publicly traded market for the preferred shares.
There are 392,143 common shares reserved at December 31, 2020 under terms of the convertible debt agreements, Stock Plan and Equity Purchase Agreement (see Notes 6, 13 and 15).
There are 165,680,020 issued common shares that are restricted as of December 31, 2020. The shares may become free-trading upon satisfaction of certain terms and regulatory conditions.
-10-
Accounts Receivable
Management deemed no allowance for doubtful accounts was necessary at December 31, 2020 and June 30, 2020. At December 31, 2020 and June 30, 2020, $836,819 and $670,031 of total accounts receivable were considered unbilled and recorded as deferred revenue.
The Company factored approximately $487,000 and $0 of accounts receivable as of December 31, 2020 and June 30, 2020, respectively. For the three months and six months ended December 31, 2020, expenses on sale of trade receivables was inconsequential. For the three and six months ended December 31, 2019, the Company did not factor accounts receivable.
Inventories
Management estimates $67,635 of inventory reserves at December 31, 2020 and June 30, 2020.
Goodwill and Intangible Assets
Management of the Company determined that a triggering event to assess goodwill impairment occurred during the year ended June 30, 2020 due to the separation of a key executive associated with their acquisition of Concepts and Solutions. While there was no single determinative event, the consideration in totality of several factors that developed led management to conclude that it was more likely than not that the fair values of certain intangible assets and goodwill acquired as part of that acquisition were below their carrying amounts. These factors included: a) former key executive separating from the Company; b) respective former key executive violating his noncompete changing the use and value of it; c) sustained decrease in the Company's share price which reduced market capitalization; and d) uncertainty in the United States and global economies due to Covid-19. As a result, the Company recorded a non-cash impairment loss of approximately $2,000,000, including $800,287 related to goodwill and $1,200,000 related to finite-lived intangible assets. No such impairment charge was recorded during the three or six months ended December 31, 2020 and 2019.
Recent Accounting Pronouncements
In January 2020, the FASB issued 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, 2021, 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.
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 2020, the FASB issued ASU 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity", which simplifies the accounting for certain convertible instruments, amends guidance on derivative scope exceptions for contracts in an entity's own equity and modifies the guidance on diluted EPS calculations as a result of these changes. The guidance in this ASU can be adopted using either a full or modified retrospective approach and becomes effective for annual reporting periods beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
The Company has implemented all new applicable accounting pronouncements that are in effect. These pronouncements did not have any material impact on the consolidated financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
-11-
Note 2 - Contract Balances
Contract assets and contract liabilities are as follows:
|
|
|
|
|
December 31, 2020
|
|
June 30, 2020
|
Contract assets
|
$ 756,800
|
|
$ -
|
Contract liabilities
|
892,752
|
|
463,961
|
For the three and six months ended December 31, 2020, the Company recognized $445,136 and $500,075 of revenue that was included in contract liabilities as of June 30, 2020.
Note 3 - Property and Equipment
Property and equipment are comprised of the following at:
|
|
|
|
|
December 31, 2020
|
|
June 30, 2020
|
Vehicles
|
$ 115,135
|
|
$ 115,135
|
Equipment
|
22,877
|
|
6,097
|
Furniture and fixtures
|
25,085
|
|
24,335
|
|
163,097
|
|
145,567
|
Accumulated depreciation
|
(100,166)
|
|
(93,518)
|
|
|
|
|
Property and equipment, net
|
$ 62,931
|
|
$ 52,049
|
|
|
|
|
|
|
|
|
Depreciation expense was $2,220 and $10,012 for the three months ended December 31, 2020 and 2019, respectively. Depreciation expense was $6,648 and $17,844 for the six months ended December 31, 2020 and 2019, respectively.
|
Note 4 - Intangible Assets
Intangible assets are stated at the lower of cost or fair value. Customer lists and vendor relationships are amortized on a straight-line basis over five years, representing the period over which the Company expects to receive future economic benefits from these assets.
Annual amortization expense is calculated based on the straight-line method over the product's estimated economic life. Amortization of product development costs incurred begins when the related products are available for sale to customers. Amortization of product development costs was $20,416 and $0 for the three months ended December 31, 2020 and 2019, respectively. Amortization of product development costs was $32,927 and $0 for the six months ended December 31, 2020 and 2019, respectively. Amortization of these costs are included in cost of sales in the Company's condensed consolidated statements of operations.
The following tables shows goodwill, finite-lived intangible assets, accumulated amortization, and the impairment charges:
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
Impairment
|
|
Total
|
Goodwill
|
$ 834,220
|
|
$ -
|
|
$ 834,220
|
|
$ -
|
|
$ 834,220
|
Finite-lived assets:
|
|
|
|
|
|
|
|
|
|
Customer list
|
$ 922,053
|
|
$ (221,961)
|
|
$ 700,092
|
|
$ -
|
|
$ 700,092
|
Vendor relationships
|
484,816
|
|
(119,992)
|
|
364,824
|
|
-
|
|
364,824
|
Capitalized product development costs
|
402,255
|
|
(34,464)
|
|
367,791
|
|
-
|
|
367,791
|
|
$ 1,809,124
|
|
$ (376,417)
|
|
$ 1,432,707
|
|
$ -
|
|
$1,432,707
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
Impairment
|
|
Total
|
Goodwill
|
$ 1,634,507
|
|
$ -
|
|
$ 1,634,507
|
|
$ (800,287)
|
|
$ 834,220
|
Finite-lived assets:
|
|
|
|
|
|
|
|
|
|
Customer list
|
$ 881,000
|
|
$ (132,147)
|
|
$ 748,853
|
|
$ -
|
|
$ 748,853
|
Vendor relationships
|
479,000
|
|
(71,847)
|
|
407,153
|
|
-
|
|
407,153
|
Noncompete agreements
|
1,600,000
|
|
(400,000)
|
|
1,200,000
|
|
(1,200,000)
|
|
-
|
Capitalized product development costs
|
281,845
|
|
(1,536)
|
|
280,309
|
|
-
|
|
280,309
|
|
$ 3,241,845
|
|
$ (605,530)
|
|
$ 2,636,315
|
|
$(1,200,000)
|
|
$1,436,315
|
-12-
Estimated amortization expense related to intangible assets for the next five years is as follows:
|
|
|
|
Period ending December 31,
|
|
2021
|
$ 387,118
|
2022
|
387,118
|
2023
|
363,406
|
2024
|
255,885
|
2025
|
39,181
|
|
$ 1,432,707
|
Note 5 - Lines of Credit
The Company has an available $1,000,000 and $1,250,000 line of credit at December 31, 2020 and June 30, 2020, respectively, bearing interest at prime plus 0.5% (3.75% at December 31, 2020 and 4.25% at June 30, 2020). The line of credit was renewed in October 2020 at a reduced available credit line, change in collateral, and now expires on October 29, 2021. The renewed line of credit is collateralized by certain real estate owned by a family member of a stockholder, 50,000,000 shares of the Company's common stock par value $0.0001 per share (the "Common Stock") and the personal stock of two stockholders, and a key man life insurance policy. A minimum average bank balance of $50,000 was required on the line of credit agreement at June 30, 2020, but this requirement was removed as of December 31, 2020. The outstanding balance is $991,598 and $1,236,598 at December 31, 2020 and June 30, 2020, respectively.
The Company has a $1,000,000 available credit line under an accounts receivable factoring agreement through July 30, 2022. No amounts were outstanding as of December 31, 2020. See Note 13.
Note 6 - Notes Payable
Long Term Notes Payable
|
|
|
|
Note payable with a bank bearing interest at 4% and maturing on June 26, 2020. The note was renewed by the lender with a revised maturity of June 26, 2021 and a lowered interest rate to 3%. The renewal provides for monthly interest payments and a balloon payment of outstanding principal and interest at maturity. The note is collateralized by a certificate of deposit owned by a related party.
|
December 31, 2020
|
|
June 30, 2020
|
|
|
|
$274,539
|
|
$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
|
|
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
|
|
150,000
|
Financing lease liabilities for offices and warehouses with monthly installments of $12,449 (ranging from $1,083 to $3,524) over terms expiring through July 2023.
|
212,962
|
|
223,982
|
Financing leases with a related party for delivery vehicles with monthly installments totaling $813, including interest, over 5-year terms expiring through July 2020.
|
-
|
|
1,245
|
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.
|
32,727
|
|
34,019
|
|
|
|
|
Total Notes Payable
|
981,060
|
|
994,978
|
|
|
|
|
Current Portion of Notes Payable
|
561,981
|
|
512,425
|
|
|
|
|
Long-term Portion of Notes Payable
|
$ 419,079
|
|
$ 482,553
|
-13-
Future minimum principal payments on the long-term notes payable to unrelated parties are as follows:
|
|
Period ending December 31,
|
|
2021
|
$ 561,981
|
2022
|
230,506
|
2023
|
31,473
|
2024
|
10,418
|
2025
|
11,213
|
Thereafter
|
135,469
|
|
$ 981,060
|
Convertible Notes
|
|
|
|
|
December 31, 2020
|
|
June 30, 2020
|
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 were 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 had prepayment penalties ranging from 110% to 125% of the principal and interest outstanding if repaid within 60 to 180 days from issuance. The note matured in three intervals in March 2020, June 2020, and November 2020. The note was repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
$ -
|
|
$24,150
|
|
|
|
|
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 bore interest at 8% per year. The note principal and interest were 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 had 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
1,000
|
|
|
|
|
On December 11, 2019, the Company signed a convertible promissory note with an investor. The $220,430 note was issued at a discount of $15,430 and bore interest at 8% per year. The note principal and interest were 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 matured in December 2020. The note had prepayment penalties between 120% and 130% of the principal and interest outstanding if repaid before 180 days from issuance. The note was repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
121,200
|
-14
|
|
|
|
|
|
|
|
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 bore interest at 8% per year. The note principal and interest up to $250,000 every 30-day calendar period were 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 matured in November 2020. The note had a redemption premium of 115% of the principal and interest outstanding if repaid before maturity. The note was 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 bore interest at 8% per year. The note principal and interest were 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 matured in October 2020. The note had prepayment penalties of 110% to 125% of the principal and interest outstanding if repaid before 180 days from issuance. The principal amount of the note was increased by $25,000 due to the value of the stock price at conversion. The note was repaid by conversion to stock.
|
-
|
|
250,000
|
|
|
|
|
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 were 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 had a maturity date of March 2021. The note had prepayment penalties between 120% and 130% of the principal and interest outstanding if repaid before 180 days from issuance. The note was repaid by conversion to stock.
|
-
|
|
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 were 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 had a maturity date of June 2021. The note had prepayment penalties between 120% and 130% of the principal and interest outstanding if repaid before 180 days from issuance. The note was repaid by conversion to stock.
|
-
|
|
430,000
|
|
|
|
|
-15
|
|
|
|
On July 20, 2020, the Company signed a convertible promissory note with an investor. The $125,000 note was issued at a discount of $8,750 and bears interest at 8% per year. The note principal and interest were convertible into shares of common stock at the lower of (a) 80% of the lowest traded price of the common stock during the 10 trading days immediately preceding the notice of conversion or (b) $0.47 per share. The note matured in July 2021. The note had a redemption premium of 115% of the principal and interest outstanding if repaid before maturity. The note is secured by a security interest in all assets of the Company. The note was repaid by conversion to stock as of December 31, 2020.
|
-
|
|
-
|
|
|
|
|
On August 18, 2020, the Company signed a convertible promissory note with an investor. The $500,000 note was issued at a discount of $35,000 and bears interest at 8% per year. The note principal and interest were convertible into shares of common stock at the lower of (a) 80% of the lowest traded price of the common stock during the 10 trading days immediately preceding the notice of conversion or (b) $0.47 per share. The note had a maturity date of August 2021. The note has a redemption premium of 115% of the principal and interest outstanding if repaid before maturity. The note is secured by a security interest in all assets of the Company. The note was repaid by conversion to stock as of December 31, 2020.
|
-
|
|
-
|
|
|
|
|
On July 20, 2020, the Company signed a convertible promissory note with an investor. The $134,375 note was issued at a discount of $9,375 and bears interest at 8% per year. The note principal and interest were 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 had a maturity date of July 2021. The note contained a price protection clause where if the share price falls below $0.01 per share after six months, the conversion price discount increases by 5%. The note had prepayment penalties between 120% and 130% of the principal and interest outstanding if repaid before 180 days from issuance. The note was repaid by conversion to stock as of December 31, 2020.
|
-
|
|
-
|
|
|
|
|
On July 24, 2020, the Company entered into a $168,300 convertible note. The note was issued at a discount of $15,300 and bears interest at 12% per year. The note principal and interest are convertible into shares of common stock at 71% of the average of the lowest 2 trading prices during 15 trading days prior to conversion. The note matures in July 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 partially repaid by conversion to stock. The note was paid off in full on January 1, 2021.
|
110,000
|
|
-
|
-16
|
|
|
|
|
|
|
|
On October 16, 2020, the Company entered into a $1,200,000 convertible note. The note was issued at a discount of $84,000 and bears interest at 8% per year. The note principal and interest are convertible into shares of common stock at lower of (a) $0.47 per share or (b) 80% of the lowest trading price of the common stock during the 10 trading days immediately preceding the notice of conversion. The Company, at its option, may redeem principal and interest on this note prior to maturity by paying a 15% redemption premium on principal being redeemed. The investor has 15 days to elect to convert the note upon notice of an intent to redeem by the Company. The investor may convert at its option up to $350,000 of the outstanding principal and accrued interest per month. The note matures in October 2021. The note was repaid by conversion to stock.
|
-
|
|
-
|
|
|
|
|
Total Convertible Notes Payable
|
110,000
|
|
1,989,975
|
Less: Unamortized original issue discounts
|
-
|
|
888,075
|
Current Portion of Convertible Notes Payable
|
110,000
|
|
1,101,900
|
|
|
|
|
Long-term Portion of Convertible Notes Payable
|
$ -
|
|
$ -
|
The original issue discount is being amortized over the terms of the convertible notes using the effective interest method. During the three months ended December 31, 2020 and 2019, the Company amortized $172,927 and $156,456, respectively, of debt discounts to interest expense and $366,667 and $579,920, respectively, to interest accretion. During the six months ended December 31, 2020 and 2019, the Company amortized $247,703 and $216,724, respectively, of debt discounts to interest expense and $766,603 and $808,853, respectively, to interest accretion.
Convertible notes are subordinate to the bank debt of the Company.
Accrued but unpaid interest on the notes is convertible by the lender into, and payable by the Company in common shares at a price per common share equal to the most recent closing price of the Company's common shares prior to the delivery to the Company of a request to convert interest, or the due date of interest, as applicable. Interest, when due, is payable either in cash or common shares.
The conversion features 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).
-17-
Note 7 - Fair Value Measurements
The following table presents information about the assets and liabilities that are measured at fair value on a recurring basis at December 31, 2020 and June 30, 2020 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2020
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets
|
|
|
|
|
|
|
Customer List
|
$700,092
|
-
|
-
|
$700,092
|
|
Vendor Relationship
|
364,824
|
-
|
-
|
364,824
|
|
Development Costs
|
367,791
|
-
|
-
|
367,791
|
|
|
|
|
|
|
|
|
$1,432,707
|
-
|
-
|
$1,432,707
|
Liabilities
|
|
|
|
|
|
|
Original Issue discount, convertible debt
|
$3,719,000
|
-
|
-
|
$3,719,000
|
|
|
|
|
|
|
At June 30, 2020
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets
|
|
|
|
|
|
|
Customer list
|
$748,847
|
-
|
-
|
$748,847
|
|
Vendor relationship
|
407,153
|
-
|
-
|
407,153
|
|
Development costs
|
280,315
|
-
|
-
|
280,315
|
|
|
|
|
|
|
|
|
$1,436,315
|
-
|
-
|
$1,436,315
|
Liabilities
|
|
|
|
|
|
|
Original issue discount, convertible debt
|
$213,300
|
-
|
-
|
$213,300
|
|
Derivative liability warrants
|
33,312
|
-
|
-
|
33,312
|
Total
|
|
$246,612
|
-
|
-
|
$246,612
|
-18-
As of December 31, 2020, and 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 prepared by an independent third party and consider management's best estimate of the conversion price of the stock, an estimate of the expected time to conversion, an estimate of the stock's volatility, and the risk-free rate of return expected for an instrument with a term equal to the duration of the convertible note.
The derivative liability was valued using the Monte Carlo pricing model with the following inputs:
|
|
|
|
At December 31, 2020
|
|
|
|
Risk-free interest rate:
|
|
0.10%
|
|
Expected dividend yield:
|
|
0.00%
|
|
Expected stock price volatility:
|
|
315.00%
|
|
Expected option life in years:
|
|
0.87 to 1.19 years
|
|
|
|
|
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:
|
|
.085 to 1.69 years
|
The following table sets forth a reconciliation of changes in the fair value of the Company's convertible debt components classified as Level 3 in the fair value hierarchy at December 31, 2020 and June 30, 2020:
|
|
|
|
Balance at June 30, 2020
|
|
$ 246,612
|
Additional convertible securities at inception
|
|
2,000
|
Realized
|
|
(55,612)
|
Unrealized
|
|
3,526,000
|
Ending balance at December 31, 2020
|
|
$ 3,719,000
|
|
|
|
Balance at June 30, 2019
|
|
$ 1,025,944
|
Additional convertible securities at inception
|
|
2,027,000
|
Settlement of conversion features and warrants
|
|
(152,374)
|
Realized
|
|
(240,903)
|
Unrealized
|
|
(2,413,055)
|
Ending balance at June 30, 2020
|
|
$ 246,612
|
-19-
Note 8 - Related Party Transactions
Notes Payable
|
|
|
|
|
December 31, 2020
|
|
June 30, 2020
|
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 to $400,000 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
|
|
$400,000
|
|
|
|
|
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-acquisition withholding tax issues of Concepts and Solutions.
|
1,030,079
|
|
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 available borrowings to $1,225,000 and extending the maturity to March 2022. Interest is payable in cash or common stock, at the holder'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 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
|
|
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
|
|
200,000
|
-20-
|
|
|
|
|
|
|
|
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 April 2021, due to an extension granted by the lender. The note is collateralized by a security interest in a certain customer purchase order.
|
385,000
|
|
385,000
|
|
|
|
|
Note payable to a stockholder which is, upon the option of the stockholder, immediately convertible into restricted common shares.
|
500,000
|
|
-
|
|
|
|
|
Note payable related to acquisition of Classroom Tech in which the note principal is payable in 2021 with no interest obligations, upon the shareholder's resolution of a pre-acquisition liability with a bank.
|
111,164
|
|
-
|
|
|
|
|
Note payable related to the acquisition of Classroom Tech in which the note principal is payable in 2021 with no interest obligations.
|
44,526
|
|
-
|
Other short-term payables due to stockholders and related parties
|
100,274
|
|
107,733
|
|
|
|
|
|
|
|
|
Total Related Party Notes Payable and Other Payables
|
3,996,043
|
|
3,347,812
|
Current Portion of Related Party Notes Payable and Other Payables
|
2,771,043
|
|
1,272,812
|
|
|
|
|
Long-term Portion of Related Party Notes Payable and Other Payables
|
$1,225,000
|
|
$2,075,000
|
|
|
|
|
Future maturities of related party notes payable are as follows:
|
|
|
|
|
|
Period ending December 31,
|
|
|
2021
|
$2,771,043
|
|
2022
|
1,225,000
|
|
|
$3,996,043
|
Leases
The Company leases property used in operations from a related party under terms of a financing 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 $4,500 and $9,000 for the three and six months ended December 31, 2020 and 2019, respectively.
Other Agreements
A related party collateralizes the Company's 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 6).
-21-
Note 9 - Lease Agreements
The Company has financing lease liabilities for offices and warehouses with monthly installments of $12,449 (ranging from $1,083 to $3,524) including imputed interest (ranging from 0% to 2%), over 2-year terms plus extensions, expiring through July 2023.
|
|
|
|
|
|
Right-of-use assets:
|
|
|
Operating right-of-use assets
|
$212,917
|
Operating lease liabilities:
|
|
|
Current portion of long term payable
|
124,849
|
|
Financing leases payable, less current portion
|
88,113
|
|
|
|
|
Total financing lease liabilities
|
$212,962
|
As of December 31, 2020, financing lease maturities are as follows:
|
|
|
|
Period ending December 31,
|
|
2021
|
$124,849
|
2022
|
66,328
|
2023
|
21,785
|
|
|
|
$212,962
|
As of December 31, 2020, the weighted average remaining lease term was 1.4 years.
Note 10 - Equity
During the six months ended December 31, 2020, the Company issued 105,750,000 shares of common stock for professional consulting services. These shares were valued at $2,776,200 upon issuance during the six months ended December 31, 2020.
During the six months ended December 31, 2020, the Company issued 1,382,812,744 shares of common stock for debt reduction. These shares were valued at $13,031,235 upon issuance during the six months ended December 31, 2020.
During the six months ended December 31, 2020, the Company issued 249,792,217 shares of common stock to warrant holders in six cashless transactions.
During the six months ended December 31, 2020, the Company issued 52,500,000 shares of common stock for commitment shares under a two-year purchase agreement entered into on May 31, 2020, between the Company and the investor, as amended and restated on July 9, 2020 and December 29, 2020 (the "Equity Purchase Agreement"). These shares were valued at $1,050,000 upon issuance during the six months ended December 31, 2020.
-22-
During the six months ended December 31, 2020, the Company issued 242,000,000 shares of common stock in exchange for proceeds under the Equity Purchase agreement. These shares were valued at $3,951,900 upon issuance during the six months ended December 31, 2020.
During the six months ended December 31, 2020, the Company issued 50,000,000 shares of common stock as collateral for the line of credit. The shares are held in the Company's name and serve as collateral.
During the six months ended December 31, 2020, the Company issued 10,000,000 shares of common stock for the acquisition of Classroom Technology Solutions, Inc. These shares were valued at $151,000 upon issuance during the six months ended December 31, 2020.
See the capital structure section in Note 1 for disclosure of the equity components included in the Company's consolidated financial statements.
Note 11 - Income Taxes
The Company's effective tax rate differed from the federal statutory income tax rate for the six months ended December 31, 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%
|
The Company had no federal or state income tax (benefit) for the six months ended December 31, 2020 or 2019.
The Company's deferred tax assets and liabilities as of December 31, 2020 and June 30, 2020, are summarized as follows:
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
June 30, 2020
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
Deferred tax assets
|
$ 9,081,800
|
|
$ 4,825,100
|
|
|
Less valuation allowance
|
(9,081,800)
|
|
(4,825,100)
|
|
|
Deferred tax liabilities
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
State
|
|
|
|
|
|
|
Deferred tax assets
|
2,425,100
|
|
1,290,900
|
|
|
Less valuation allowance
|
(2,425,100)
|
|
(1,290,900)
|
|
|
Deferred tax liabilities
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
Net Deferred Tax Assets
|
$ -
|
|
$ -
|
-23-
The Company's policy is to provide for deferred income taxes based on the difference between the financial statement and tax basis 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 December 31, 2020 and 2019, respectively.
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 differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment.
The Company's deferred tax assets are primarily comprised of net operating losses ("NOL") that give rise to deferred tax assets. The 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 December 31, 2020 and June 30, 2020, are as follows:
|
|
|
|
|
|
|
|
December 31, 2020
|
|
June 30, 2020
|
|
|
|
|
|
Net operating loss carryforwards
|
$ 11,152,400
|
|
$ 5,767,000
|
Valuation allowance
|
(11,506,900)
|
|
(6,116,000)
|
Goodwill
|
262,100
|
|
278,900
|
Property and equipment
|
(13,700)
|
|
(10,500)
|
Intangible assets
|
61,300
|
|
35,800
|
Inventory allowance
|
17,800
|
|
17,800
|
Warranty accrual and other
|
27,000
|
|
27,000
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
$ -
|
|
$ -
|
As of December 31, 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 December 31, 2020, the Company's income tax returns generally remain open for examination for three years from the date filed with each taxing jurisdiction.
Note 12 - Commitments, Contingencies, and Concentrations
Contingencies
Certain conditions may exist as of the date the condensed consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company's management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company's legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company's condensed 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. The liability is included with the seller note payable.
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. The liability of $968,240 and $2,000,000 is included in the consolidated balance sheets at December 31, 2020 and June 30, 2020.
-24-
Concentrations
Galaxy contracts the manufacturer of its products with overseas suppliers. The Company's sales could be adversely impacted by a supplier's inability to provide Galaxy with an adequate supply of inventory.
Galaxy has one customer that accounted for approximately 63% of accounts receivable at December 31, 2020, and three customers that accounted for approximately 79% of accounts receivable at June 30, 2020. Galaxy has two customers that accounted for approximately 69% and three customers that accounted for 51% of total revenue for the three and six months ended December 31, 2020, respectively. Galaxy had two customers that accounted for approximately 81% and 40% of total revenue for the three and six months ended December 31, 2019, respectively.
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 daily fluctuation. 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.
Note 13 - Material Agreements
Consulting Agreement
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. On September 18, 2020, the Company issued 97,250,000 shares of common stock registered under the Stock Plan 2020 to the consultant for services.
Equity Purchase Agreement
On May 31, 2020, the Company entered into a two-year purchase agreement (the "Equity Purchase Agreement") with an investor, which was amended and restated on July 9, 2020 and then again on December 29, 2020. Pursuant to the terms of the Equity Purchase Agreement, the investor agreed to purchase up to $10 million of the Company's common stock (subject to certain limitations) from time to time during the term of the Equity Purchase Agreement. The Company issued a total of 50,000,000 shares of common stock to the investor as consideration for its commitment to purchase shares of the Company's common stock. Pursuant to the terms and conditions of the second amended and restated agreement on December 29, 2020, the Company sold, and the investor purchased 100 million shares of the Company's common stock for an aggregate purchase price of $500,000. These shares are not yet issued and therefore, the purchase price is recorded as a related party payable to the investor (Note 8). The Company will use proceeds from shares issued to the investor for working capital and general and administrative expenses.
Accounts Receivable Factoring Agreement
On July 30, 2020, the Company entered into a two-year accounts receivable factoring agreement with a financial services company to provide working capital. Pursuant the agreement, the financial services company will pay the Company as the purchase price for the purchased accounts, an amount up to eighty percent (80%). 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 and is guaranteed by the Company and the by two of the stockholders individually. The Company factored approximately $487,000 and $0 of accounts receivable as of December 31, 2020 and June 30, 2020, respectively.
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 (CFO) of the Company, who then also served as our Chief Operating Officer,
for a two-year term, which was amended on September 1, 2020. Under the amended employment agreement, the CFO will receive annual compensation of $250,000, and an annual discretionary bonus based on profitability and revenue growth. The agreement includes a non-compete agreement and severance benefits of $72,000.
Supply Agreement
The Company is party to a one-year supplier agreement to manufacture and sell audio products to a buyer that is effective until July 2021. The initial order under this supplier agreement is for 4,000 units, at a discounted total price of $3,488,000, to be delivered over the agreement period. If the buyer does not meet the minimum floor of 4,000 units, then the contract becomes void and the buyer must pay the difference between the units sold and the total floor pricing of the $3,488,000. The buyer will pay tooling costs of $25 per unit shipped to them. The Company supplied 739 units as of December 31, 2020. The agreement was extended in July 2020 for a one-year term. The agreement can be extended for one additional year.
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Note 14 - Acquisition
Concepts and Solutions
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 shares of common stock to the seller with a value of $1,485,000. In addition to the issuance of shares of common stock, 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. The balance of the note payable is $1,030,079 at December 31, 2020 and 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 year ended June 30, 2020. While there was no single event, the consideration in totality of several factors that developed during this year 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 Note 4.
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.
|
|
|
|
|
|
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
|
Classroom Technologies Solutions, Inc.
On October 15, 2020, the Company entered into an Asset Purchase Agreement (AP), to acquire the assets of Classroom Technologies Solutions, Inc. ("Classroom Tech") for consideration of (a) paying off a secured Classroom Tech loan, not to exceed the greater of 50% of the value of the Classroom Tech assets acquired or $120,000; (b) the issuance of a promissory note in the amount of $44,526 to a Classroom Tech designee; and (c) the issuance of 10 million shares of common stock to the seller of Classroom Tech.
-26-
The following table summarizes the allocation of the fair value of the assets as of the acquisition date through pushdown accounting.
|
|
|
|
|
|
|
|
Assets
|
|
|
|
Cash
|
$ 38,836
|
|
|
Accounts receivable
|
31,710
|
|
|
Inventory
|
209,431
|
|
|
Property and equipment
|
17,530
|
|
|
Other assets
|
1,150
|
|
|
Goodwill and other intangibles
|
46,869
|
|
|
|
|
|
|
Total Assets
|
$ 345,526
|
Consideration
|
|
|
Notes payable to seller and related party of seller
|
$ 164,526
|
|
Bonus program
|
30,000
|
|
Stock
|
151,000
|
|
|
$ 345,526
|
Note 15 - Stock Plan
An Employee, Directors, and Consultants Stock Plan was established by the Company (The "Plan"). The Plan is intended to attract and retain employees, directors and consultants by aligning the economic interest of such individuals more closely with the Company's stockholders by paying fees or salaries in the form of shares of the Company's common stock. The Plan is renewed annually or earlier. 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. 99,250,000 Shares of Common Stock are reserved for stock awards under the Plans. There were 98,857,857 and 965,000 shares awarded under the Plans as of December 31, 2020 and June 30, 2020, respectively.
Note 16 - 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 $8,213,000, an accumulated deficit of approximately $44,400,000, and cash used in operations of approximately $4,520,000 at December 31, 2020.
The Company's operational activities has primarily been funded through issuance of common stock for services, related party advances, equity purchase agreement transactions for proceeds, accounts receivable factoring, debt financing 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 investors and possibly from related and nonrelated parties who may in fact lend to the Company on reasonable terms. Management believes that its actions to secure additional funding will allow the Company to continue as a going concern. There is no guarantee the Company will be successful in achieving any of these objectives. These sources of working capital are not assured, and consequently do not sufficiently mitigate the risks and uncertainties disclosed above. The ability of the Company to continue as a going concern is dependent upon management's ability to raise capital from the sale of its equity and, ultimately, the achievement of operating revenues. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 17 - Subsequent Events
On January 1, 2021, the Company paid cash to investors in satisfaction of $110,000 of principal on a convertible note.
On January 13, 2021, the Company entered into a twelve month structured loan agreement for $385,000 with equal installment payments due each month starting in month five. The loan bears 10% annual interest and has a convertible default provision in the event the company does not make the monthly payments. 5,000,000 shares of common stock were issued to the lender as commitment shares for the transaction.
On February 1, 2021, the Company entered into an employment agreement with the new Chief Operations Officer (COO) of the Company for a one-year term. Under the employment agreement, the COO will receive annual compensation of $140,000, and quarterly and annual discretionary bonus based on profitability and revenue growth. The agreement also includes an initial issuance of common stock in the form of Rule 144 stock. Subsequent stock issuances to be available on an annual basis upon renewal of agreement.
On February 4, 2021, the Company issued 50,000,000 shares of common stock under the amended and restated Equity Purchase Agreement dated December 29, 2020.
On January 4, 2021, the Company entered into an agreement with a consultant for the period January 4, 2021 through April 3, 2021 with monthly compensation of $5,000 and 2,500,000 shares of restricted common stock
-27-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Note on Forward Looking Statements
This Quarterly Report on Form 10-Q (this "Report"), including, but not limited to, the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") statements regarding future events and the future results of Galaxy Next Generation, Inc., which we refer to as "we," "us,""our", "Galaxy," or the "Company," that are based on our current expectations, estimates, forecasts, and projections about our business, economic and market outlook, our results of operations, the industry in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "would," "will," "could," "may," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including the duration, extent, and impact of the COVID-19 pandemic, and our ability to successfully manage the demand, supply, and operational challenges associated with the COVID-19 pandemic. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled "Risk Factors" in Item 1A of Part II, Part I Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2020 (as amended, the "Annual Report"), and in other reports we file with the U.S. Securities and Exchange Commission (the "SEC"). In addition, many of the foregoing risks and uncertainties are, and could be, exacerbated by the COVID-19 pandemic and the U.S. election and any worsening of the global business and economic environment as a result of the pandemic or the U.S. election. While forward-looking statements are based on reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason, except as required by applicable law. We cannot at this time predict the extent of the impact of the COVID-19 pandemic and any resulting business or economic impact, but it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The following discussion is based upon our unaudited condensed consolidated financial statements included in Part 1, Item I, of this Report, which were prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In the course of operating our business, we routinely make decisions as to the timing of the payment of invoices, the collection of receivables, the manufacturing and shipment of products, the fulfillment of orders, the purchase of supplies, and the building of inventory, among other matters. In making these decisions, we consider various factors, including contractual obligations, customer satisfaction, competition, internal and external financial targets and expectations, and financial planning objectives. Each of these decisions has some impact on the financial results for any given period. To aid in understanding our operating results for the periods covered by this Report, we have provided an executive overview, which includes a summary of our business and market environment along with a financial results and key performance metrics overview. These sections should be read in conjunction with the more detailed discussion and analysis of our condensed consolidated financial condition and results of operations in this Item 2, our "Risk Factors" section included in Item 1A of Part II of this Report, and our unaudited condensed consolidated financial statements and notes thereto included in Item 1 of Part I of this Report, as well as our audited consolidated financial statements and notes included in Item 8 of Part II of our Annual Report.
Business and Market Environment
Galaxy works hand-in-hand with educators to help them evolve how teaching and learning happens in their 21st century classroom. This new approach leverages digital content, learning data, and one-of-a-kind technologies in order to create an immersive and interactive experience.
We help the administrators, teachers, students, and the IT staff incorporate meaningful digital content, leverage learning data, and creatively use our products to create an immersive and interactive experience.
Galaxy's products include Galaxy's own private-label interactive touch screen panel as well as numerous other national and international branded peripheral and communication devices. Galaxy's distribution channel consists of approximately 30 resellers across the U.S. who primarily sell the Company's products within the commercial and educational market. Galaxy does not control where resellers focus their resell efforts, although generally, the K-12 education market is the largest customer base for Galaxy products - comprising nearly 90% of Galaxy's sales.
Our acquisition of Interlock Concepts, Inc. ("Concepts") and Ehlert Solutions Group, Inc. ("Solutions") in September 2019 increased our line of product offerings. Concepts and Solutions provide fundamental tools and products for building notification systems primarily to K-12 education market customers located primarily in the north and northwest United States. These 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, 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 network, which minimizes infrastructure requirements and reduces costs by combining systems.
In fiscal year 2021, we continue to execute on our product and solutions strategy and closed on an asset purchase of Classroom Technology Solutions ("CTS"), a designer, manufacturer, importer and integrator of audio-visual products, with headquarters in Jacksonville, Florida.
-28-
We expect the purchase of CTS's assets will prove to be accretive to Galaxy's bottom line. As part of the purchase agreement, Galaxy is gaining access to not only years of customer support to the CTS brands, but also years of buying power from the CTS president, Cy Marshall. Cy will be joining the Galaxy team as part of the acquisition as Galaxy's Product Officer. His relationships with global vendors have already proven to be helpful to Galaxy's import activity by decreasing Galaxy's cost of goods, by an average of 50%, on several products sold under the G2 brands. This is an important step for the Company as management strives towards profitability in the coming quarters.
During the three months ended December 31, 2020, we continued to experience strong demand for our products and services. We remain confident in our strategy and we are executing against our innovation roadmap. We believe our understanding of high-performance interactive technology products position us to effectively capitalize on the industry transition to remote classrooms.
COVID-19 Pandemic Update
The ongoing outbreak of Coronavirus (COVID-19) has caused significant disruptions to national and global economies and government activities. However, during this time, we have continued to conduct our operations to the fullest extent possible, while responding to the outbreak with actions that include:
● coordinating closely with our suppliers and customers;
● instituting various aspects of our business continuity programs;
● planning for and working aggressively to mitigate disruptions that may occur; and
● supporting our communities and schools in addressing the challenges of the pandemic, such as the production and installation of COVID shields and providing products that allow educators to operate in a remote teaching environment.
As such, we have experienced quarter-over-quarter revenue increases during the last 3 quarters as our customers face a greater need and willingness to spend on information technology. While we cannot guarantee this trend will continue, we believe our education customers have prioritized their budgets towards IT spending creating a more robust customer demand for remote enablement.
The pandemic has not had a substantial net impact to our consolidated operating results or our liquidity position so far in fiscal year 2021. However, we have experienced supply chain delays due to the pandemic. In addition, increased product demand has resulted in our increased need for additional funding. We continue to meet our short-term liquidity needs from revenue derived from product sales supplemented with proceeds from issuances of debt and equity, and we expect to maintain access to the capital markets. To date in fiscal year 2021, we have not observed any impairments of our assets or a significant change in the fair value of assets due to the pandemic. We intend to continue to work with our employees and customers to implement safety measures to ensure that we are able to continue manufacturing and installing our products.
However, given the global economic slowdown, and the other risks and uncertainties associated with the pandemic, our business, financial condition, results of operations and growth prospects could be materially adversely affected. The extent to which the COVID-19 pandemic impacts our business, the business of our suppliers and other commercial partners, our corporate development objectives, our ability to access capital and the value of and market for our common stock par value $0.001 per share (the "Common Stock"), will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States and other countries, and the effectiveness of actions taken globally to contain and treat the disease.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the unaudited condensed consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates and assumptions. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenues, and expenses that are not readily apparent from other sources.
During the three months ended December 31, 2020, there were no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report.
Recent Accounting Pronouncements and Accounting Policies
See Note 1, Basis of Presentation and Summary of Significant Accounting Policies, in the notes to the unaudited condensed consolidated financial statements in Item 1 of Part I of this Report, for a full description of the recent accounting standards not yet adopted, including the actual and expected dates of adoption and estimated effects on our consolidated results of operations and financial condition, which is incorporated herein by reference.
-29-
Recent Business Developments
On October 15, 2020, we continued to execute on our product and solutions strategy and entered into an Asset Purchase Agreement (APA), to acquire the assets of Classroom Technologies Solutions, Inc. ("Classroom Tech"), for consideration of (a) paying off a secured Classroom Tech loan, not to exceed the greater of 50% of the value of the Classroom Tech assets acquired or $120,000; (b) the issuance a promissory note in the amount of $44,526 to a Classroom Tech designee; and (c) the issuance of 10 million shares of our common stock to the seller of Classroom Tech.
By January 1, 2021, we have eliminated all of the Company's convertible debt excluding notes payable to related parties. This was an important step with the Company to ensure that we did not have sellers in the market outside of the routine market trading. The one note remaining on the December 31, 2020 financial statements was paid and eliminated on January 1, 2021 as noted in the subsequent events section of the statements.
On January 4, 2021, the Company entered into an agreement with a consultant for the period January 4, 2021 through April 3, 2021 with monthly compensation of $5,000 and 2,500,000 shares of restricted common stock.
On February 1, 2021 the Company entered into an employment agreement with the new Chief Operations Officer (COO) of the Company for a one-year term. Under the employment agreement, the COO will receive annual compensation of $140,000, and quarterly and annual discretionary bonus based on profitability and revenue growth. The agreement also includes an initial issuance of common stock in the form of Rule 144 stock. Subsequent stock issuances to be available on an annual basis upon renewal of agreement.
On February 4, 2021, the Company issued 50,000,000 shares of common stock under the Amended and Restated Put Purchase Agreement dated December 29, 2020.
Recent Financial Developments
The Company has an available $10,000,000 on an Equity Line of Credit that was registered under Form S-1 in January 2021. The equity line is with an institutional investor and allows the Company to draw equity down at the amount and time of the Company's discretion. This will be a great back stop for the Company and will eliminate the need to raise money from multiple investors in the convertible debt market.
Convertible Debt
Pursuant to the terms of a Securities Purchase Agreement, initially dated as of August 18, 2020 and amended and restated as of October 9, 2020 (the "Securities Purchase Agreement"), between us and YA II PN, LTD. (the "Selling Stockholder"), we issued and sold a Convertible Debenture (the "Initial Convertible Debenture") to Selling Stockholder in the aggregate principal amount of $500,000. The Initial Convertible Debenture was issued with a 7.0% original issue discount, resulting in net proceeds to us of $465,000. Pursuant to the Securities Purchase Agreement, the Selling Stockholder agreed to purchase an additional $1,200,000 Convertible Debenture (the "Second Convertible Debenture"; and together with the Initial Convertible Debenture, the "Convertible Debentures") from us upon the same terms as the Initial Convertible Debenture (subject to there being no event of default under the Initial Convertible Debenture or other customary closing conditions upon a registration statement registering the shares of our common stock, par value $0.0001 per share (the "Common Stock") issuable under the Convertible Debentures (the "Conversion Shares") being declared effective by the Securities and Exchange Commission, which registration statement was declared effective on October 29, 2020. The net proceeds to us from the sale of the Second Convertible Debentures after a 7.0% original issue discount will be $1,116,000. The Convertible Notes bear interest at a rate of 8% per annum.
The Convertible Debentures were secured by a security interest in all of our assets and each of our subsidiaries as evidenced by the Securities Purchase Agreement and subject to the security agreement executed by the Company and each of the Company's subsidiaries, initially dated as of August 18, 2020 and amended and restated as of October 9, 2020 (the "Security Agreement").
The holder of the Convertible Debentures, had the right, subject to certain limitations, at any time to convert all or a portion of the Convertible Debentures, up to $350,000 of the outstanding and unpaid Conversion Amount (as defined below) in any 30 day calendar period, into fully paid and non-assessable shares of Common Stock, below an initial price of $0.47 (subject to adjustment, the "Fixed Conversion Price"), provided however that the Holder was not limited to conversions in the aggregate of $350,000 for conversions at the Fixed Conversion Price. The number of shares of Common Stock issuable upon conversion of any Conversion Amount will be determined by dividing (x) such Conversion Amount by (y) the Fixed Conversion Price or (z) the Market Conversion Price, as applicable (the "Conversion Rate"). The "Conversion Amount" means the portion of the principal and accrued interest to be converted, redeemed or otherwise with respect to which this determination is being made. The "Market Conversion Price" means, as of any conversion date or other date of determination, 80% of the lowest VWAP (as defined in the Convertible Debentures) of the Common Stock during the 10 Trading Days immediately preceding the Conversion Date as defined in the Convertible Debentures. During the quarter ended December 31, 2020, we issued [ ]] shares of our common stock upon conversion of the Convertible Debentures, which have all been extinguished.
-30-
Equity Line
On December 29, 2020, we and Tysadco Partners LLC, a Delaware limited company (the "Investor"), entered into an Amended and Restated Purchase Agreement between us and the Investor (the "Amended Purchase Agreement"), which amends and restates the Purchase Agreement entered into with the Investor on May 31, 2020, as amended on July 9, 2020 between us and the Investor. Also, on December 29, 2020, we executed a Registration Rights Agreement (the "Registration Rights Agreement"), and a Securities Purchase Agreement (the "SPA") with the Investor.
Pursuant to the Amended Purchase Agreement, the Investor committed to purchase, subject to certain restrictions and conditions, up to $10.0 million worth (the "Commitment") of our common stock over a period of 24 months from the effectiveness of the registration statement registering the resale of shares purchased by the Investor pursuant to the Amended Purchase Agreement. We issued 50.0 million shares of our common stock (the "Commitment Shares") to the Investor as a commitment fee. Pursuant to the Registration Rights Agreement we filed a Registration Statement on Form S-1 with the SEC on January 19, 2021, as amended on January 28, 2021 (File No. 333-252183) that registered the resale of 500,000,000 shares of the Company's common stock.
The Amended Purchase Agreement provides that at any time after the effective date of the Registration Statement, from time to time on any business day selected by the Company, the Company shall have the right, but not the obligation, to direct the Investor to buy the lesser of 500,000 shares of its common stock per sale or 300% of the average shares traded for the 10 days prior to the closing request date, at a purchase price of 85% of the lowest average daily traded price during the ten trading days commencing on the first trading day following delivery and clearing of the delivered shares, with a minimum request of $200,000. The payment for the shares covered by each request notice will occur on the business day the Investor receives the trade settlement for the purchased shares.
In addition, the Investor will not be obligated to purchase shares if the Investor's total number of shares beneficially held at that time would exceed 9.99% of the number of shares of our common stock as determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended. In addition, we are not permitted to draw on the facility unless there is an effective registration statement to cover the resale of the shares.
During the quarter ended December 31, 2020, we sold -0- shares of our common stock for gross proceeds of $-0- pursuant to the Registration Statement. Subsequent to the end of the quarter, we sold 50,000,000 shares of our common stock for gross proceeds of $1,030,000 pursuant to the Registration Statement
The Company has an available $1,000,000 and $1,250,000 line of credit at December 31, 2020 and June 30, 2020, respectively, bearing interest at prime plus 0.5% (3.75% at December 31, 2020 and 4.25% at June 30, 2020). The line of credit was renewed in October 2020 at a reduced available credit line and change in collateral, and now expires on October 29, 2021. The renewed line of credit is collateralized by certain real estate owned by a family member of a stockholder, 50,000,000 shares of the Company's common stock, the personal stock of two stockholders, and a key man life insurance policy. A minimum average bank balance of $50,000 was required on the line of credit agreement at June 30, 2020, but requirement was removed as of December 31, 2020. The outstanding balance is $991,598 and $1,236,598 at December 31, 2020 and June 30, 2020, respectively.
Financial Results and Performance Metrics Overview
The table below presents an analysis of selected line items period-over-period in our interim Condensed Consolidated Statements of Operations for the periods indicated.
|
|
|
|
Three months ended
|
March 31, 2020
|
September 30, 2020
|
December 31, 2020
|
|
|
|
|
Revenue
|
$ 349,247
|
$ 1,178,213
|
$ 798,793
|
|
|
|
|
Gross margin
|
218,633
|
345,036
|
327,730
|
|
|
|
|
General and administrative expense, less stock compensation and impairment expenses
|
1,662,359
|
1,392,227
|
1,257,918
|
|
|
|
|
Net Loss less stock compensation and expenses related to convertible notes payable
|
(1,443,726)
|
$(1,047,191)
|
$(930,188)
|
-31-
Revenue
Total revenues recognized were $1,977,006 and $1,501,426 for the six months ended December 31, 2020 and 2019, respectively, an increase of approximately 32%. Additionally, deferred revenue amounted to $972,771 and $1,133,992 as of December 31, 2020 and June 30, 2020, respectively. Total revenues recognized were $798,793 and $876,529 for the three months ending December 31, 2020 and 2019, respectively, a decrease of approximately 9%. The 3 months ending December 31, 2020 is typically our lowest revenue quarter due to seasonal impacts on education. Revenues increased during the six months ended December 31, 2020 due to the increase in the customer base for interactive panels and related products as well as additional revenues from OEM customers and Covid related new products.
Cost of Sales and Gross Margin
Our cost of sales was $471,063 and $492,105 for the three months ended December 31, 2020 and 2019, respectively, a decrease of approximately 4%. Cost of sales consists primarily of manufacturing, freight, and installation costs. There are no significant overhead costs which impact cost of sales. Cost of sales decreased from the three months ended December 31, 2019 due to increased profit margins related to new products and new relationships through the purchase of Classroom Tech.
General and Administrative
|
|
|
|
Six months ended
|
December 31, 2019
|
|
December 31, 2020
|
Stock compensation and stock issued for services
|
$ 2,007,692
|
|
$ 2,776,200
|
General and administrative
|
2,601,528
|
|
2,650,145
|
|
|
|
|
Total General and Administrative Expenses
|
$ 4,609,220
|
|
$ 5,426,345
|
Total general and administrative expenses (including stock compensation expenses) were $5,426,345 and $4,609,220 for the six months ended December 31, 2020 and 2019, respectively, an increase of approximately 18%. General and administrative expenses consist primarily of salaries and stock compensation expense, office rent, travel expense, amortization expense, impairment charges and professional fees.
Of the general and administrative expenses for the six months ended December 31,
2020, $2,776,200 represent consulting fees and employee compensation paid through the issuance of stock, which did not impact cash, for the six months ended December 31, 2020.
Other Income (Expense)
|
|
|
|
|
Six months ended
|
December 31, 2019
|
|
|
December 31, 2020
|
Expenses related to convertible notes payable:
|
|
|
|
|
Change in fair value of derivative liability
|
$ 2,022,257
|
|
|
$ (3,496,583)
|
Interest accretion
|
(808,853)
|
|
|
(766,603)
|
Interest expenses related to equity purchase agreement
|
-
|
|
|
(5,001,900)
|
Interest expense
|
(1,962,429)
|
|
|
(6,884,194)
|
|
|
|
|
|
Total Other Income (Expense)
|
$ (745,976)
|
|
|
$ (16,149,280)
|
Interest expense amounted to $11,886,094 and $1,962,429 for the six months ended December 31, 2020 and 2019, respectively. Interest expense of $5,001,900
for the six months ended December 31,2020
was due to sales of our common stock to investors under the Equity Purchase Agreement in exchange for proceeds of $2,316,520. Interest expense of $6,884,194
for the six months ended December 31,2020
is attributed to the
increase in our debt.
The outstanding warrants and conversion features in convertible notes meet the definition of a derivative liability instrument because the exercise price of the warrants and the conversion rates are variable. As a result, the outstanding warrants and conversion features of the notes are recorded as a derivative liability at fair value and marked-to-market each period with the change in fair value charged or credited to income. A derivative liability of $3,719,000 and $246,612 is recorded at December 31, 2020 and June 30, 2020. During the six months ended December 31, 2020 and 2019, we amortized $766,603 and $808,853 of original issue debt discount on derivative instruments to interest accretion, respectively. Changes in these amounts do not impact cash.
Net Loss for the Period
Net loss incurred for the six months ended December 31, 2020 and 2019 was $20,902,859 and $4,839,554, respectively, an increase of approximately 332%. Noncash contributing factors for the net loss incurred for the six months ended December 31, 2020 and 2019 are as follows:
a) $2,776,200 and $2,007,692 represent consulting fees and employee compensation paid through the issuance of stock for the six months ended December 31, 2020 and 2019, respectively;
b) amortization of intangible assets for the six months ended December 31, 2020 totaling $170,880; and
c) change in fair value of the derivative liability related to convertible notes payable of $(3,496,583) and $2,022,257 for the six months ended December 31, 2020 and 2019.
-32-
Liquidity and Capital Resources
Our revenues generated from operations have been insufficient to support our operational activities and have been supplemented by the proceeds from the issuance of securities, including equity and debt issuances. As stated in Note 16 to the notes to the unaudited condensed consolidated financial statements included in this Report, our ability to continue as a going concern is dependent upon management's ability to raise capital from the sale of its equity and, ultimately, the achievement sufficient of operating revenues. If our revenues continue to be insufficient to support our operational activities, we intend to raise additional capital through the sale of equity securities or borrowings from financial institutions and possibly from related and nonrelated parties who may in fact lend to us on reasonable terms and ultimately generating sufficient revenue from operations. Management believes that its actions to secure additional funding will allow us to continue as a going concern. We currently do not have any committed sources of financing other than our line of credits, our Equity Purchase Agreement, and accounts receivable factoring agreement, each of which requires us to meet certain requirements to utilize. Under the Amended and Restated Equity Purchase Agreement, we can issue up to an aggregate of $10 million worth of shares of our common stock at December 31, 2020. There can be no assurance that we will meet all or any of the requirements pursuant to our line of credit, our Equity Purchase Agreement, and accounts receivable factoring agreement, and therefore those financing options may be unavailable to us. There is no guarantee we will be successful in raising capital outside of our current sources, and if so, that we will be able to do so on favorable terms.
Our cash totaled $372,591 at December 31, 2020, as compared with $412,391 at June 30, 2020, a decrease of $39,800. Net cash of $4,519,524 was used by operations for the six months ended December 31, 2020. Net cash of $4,440,888 was provided from financing activities for the six months ended December 31, 2020, primarily due to proceeds from convertible notes payable and the Equity Purchase Agreement.
For the six months ended December 31, 2020, we had $38,836 cash provided by investing activities, and for the six months ended December 31, 2019, we had net cash provided by investing activities of $2,950,282 which resulted from our acquisition of Concepts and Solutions.
For the six months ended December 31, 2020, we had $4,440,888 of cash provided by financing activities primarily related to $2,316,520 of proceeds from the sale of common stock under the Equity Purchase Agreement, $1,956,000 of proceeds from the sale of convertible notes, and approximately $536,000 of related party note proceeds offset by payments of approximately $367,000 under the line of credit and related party payables. Total current liabilities of $11,295,140 and $8,962,520 as of December 31, 2020 and June 30, 2020, respectively, an increase of 26%. Our liabilities primarily consist of borrowings under a line of credit, convertible notes payable, related party notes payable, derivative liability, deferred revenue, accrued expenses and accounts payable.
To implement our business plan, we will require additional financing. Additional financing has already been put in place by the Equity Line of Credit described above. Further, current or future adverse capital and credit market conditions could limit our access to capital. We may be unable to raise capital or bear an unattractive cost of capital that could reduce our financial flexibility.
Our long-term liquidity requirements will depend on many factors, including the rate at which we grow our business and footprint in the industries. To the extent that the funds generated from operations are insufficient to fund our activities in the long term, we may be required to raise additional funds through public or private financing. No assurance can be given that additional financing will be available or that, if it is available, it will be on terms acceptable to us.
Off-Balance Sheet Arrangements
The Company did not have off-balance sheet arrangements or transactions as of and for the three and six months ended December 31, 2020 and 2019.