GAXY Galaxy Next Generation Inc (CE)

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 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 any worsening of the global business and economic environment as a result of the pandemic. 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.

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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 37 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 continued 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.

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. The new 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. G2 is the Company’s self-branded product line. This is an important step for the Company as management strives towards profitability in the coming quarters.

During the three months ended March 31, 2021, 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. We have also continued to work on eliminating outstanding liabilities and keeping payables current and aligned with receivables and inventory. As listed in the subsequent events section of the condensed consolidated financial statements, we have eliminated approximately $1 million in liabilities as disclosed in Notes 12 and 17.

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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 strong revneues during the last three 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 negative 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 $0.0001 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 and nine months ended March 31, 2021, 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.

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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.

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.

Recent Financial Developments

The Company has approximately $6,000,000 available under a $10,000,000 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. The Company believes that 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.  During the three and nine months ended March 31, 2021, we issued approximately 135,000,000 and 377,000,000 shares of our common stock, respectively pursuant to the terms of the equity line purchase agreement and received net proceeds from such issuances of $2,534,813 and $4,851,333, respectively.

The Company has an available $1,000,000 and $1,250,000 line of credit at March 31, 2021 and June 30, 2020, respectively, bearing interest at prime plus 0.5% (3.75% at March 31, 2021 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 March 31, 2021. The outstanding balance is $991,598 and $1,236,598 at March 31, 2021 and June 30, 2020, respectively.

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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.

Net loss less stock compensation, and General and administrative expense, less stock compensation and impairment expenses, noted below, are non-GAAP measures and do not have standardized definitions under GAAP. The tables below provide a reconciliation of the non-GAAP financial measures, presented herein, to the most directly comparable financial measures calculated and presented in accordance with GAAP. These non-GAAP financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the non- GAAP financial measures provide additional perspective and insights when analyzing the core operating performance of the business. The non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented.

Revenue

Total revenues recognized were $2,754,463 and $1,850,673 for the nine months ended March 31, 2021 and 2020, respectively, an increase of approximately 49%. Additionally, deferred revenue amounted to $815,214 and $1,133,992 as of March 31, 2021 and June 30, 2020, respectively. Total revenues recognized were $777,457 and $349,247 for the three months ending March 31, 2021 and 2020, respectively, an increase of approximately 123%. Revenues increased during the three and nine months ended March 31, 2021 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 $356,731 and $130,614 for the three months ended March 31, 2021 and 2020, respectively, an increase of approximately 173%. Our cost of sales was $1,660,971 and $1,116,398 for the nine months ended March 31, 2021 and 2020, respectively, an increase of approximately 49%. 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 increased from the three and nine months ended March 31, 2020 due to increased revenues related to new products and new relationships.

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Total general and administrative expenses (including stock compensation expenses) were $1,699,760 and $3,710,670 for the three months ended March 31, 2021 and 2020, respectively, a decrease of approximately 54%.

Total general and administrative expenses (including stock compensation expenses) were $7,126,105 and $8,319,900 for the nine months ended March 31, 2021 and 2020, respectively, a decrease of approximately 14%. General and administrative expenses consist primarily of salaries and stock compensation expense, office rent, travel expense, amortization expense, impairment charges and professional fees. Of this amount, $2,350 represent consulting fees and employee compensation paid through the issuance of stock, which did not impact cash, for the three months ended March 31, 2021. Consulting fees and employee compensation paid through the issuance of stock, which did not impact cash, was $2,778,550 for the nine months ended March 31, 2021.

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Interest expense amounted to $2,095,272 and $1,860,498 for the three months ended March 31, 2021 and 2020, respectively, an increase of 13%. Interest expense of $1,805,687 during the three months ended March 31, 2021, was due to sales of our common stock to investors under the Equity Purchase Agreement in exchange for proceeds of $2,534,813. Reduced interest expense of $289,585 during the three months ended March 31, 2021, is attributed to the decrease in our overall debt.

Interest expense amounted to $13,981,366 and $3,822,927 for the nine months ended March 31, 2021 and 2020, respectively, an increase of 266%. Interest expense of $6,807,587 during the nine months ended March 31, 2021, was due to sales of our common stock to investors under the Equity Purchase Agreement in exchange for proceeds of $4,851,333.  Interest expense increased by $10,158,439 primarily due to interest on the Equity Purchase Agreement and change in overall debt during the nine months ended March 31, 2021.

The outstanding conversion features in our ‘related party’ preferred convertible notes payable meet the definition of a derivative liability instrument because the exercise price of the conversion rates. As a result, the outstanding 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 $3,376,000 and $246,612 is recorded at March 31, 2021 and June 30, 2020. During the nine months ended March 31, 2021 and 2020, we amortized $766,603 and $1,412,705 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 three months ended March 31, 2021 and 2020 was $2,890,289 and $5,261,097, respectively, a decrease of approximately 45%. Net loss incurred for the nine months ended March 31, 2021 and 2020 was $23,793,148 and $10,100,651, respectively, a increase of approximately 136%. Noncash contributing factors for the net loss incurred for the three and nine months ended March 31, 2021 and 2020 are as follows:

a) $2,350 and $48,034 represent consulting fees and employee compensation paid through the issuance of stock for the three months ended March 31, 2021 and 2020, respectively; and $2,778,550 and $2,055,726 represent consulting fees and employee compensation paid through the issuance of stock for the nine months ended March 31, 2021 and 2020, respectively

b) Interest expenses related to equity purchase agreement of $1,805,687 and $0 for the three months ended March 31, 2021 and March 31, 2020, respectively; and $6,807,587 and $0 for the nine months ended March 31, 2021 and 2020, respectively

c) Impairment charges taken of $0 and $2,000,287 for the three and nine months ended March 31, 2021 and March 31, 2020

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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 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 March 31, 2021. 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 $742,382 at March 31, 2021, as compared with $412,391 at June 30, 2020, an increase of $329,991. Net cash of $6,894,817 was used by operations for the nine months ended March 31, 2021. Net cash of $7,185,972 was provided from financing activities for the nine months ended March 31, 2021, primarily due to proceeds from the Equity Purchase Agreement and to a lesser extent convertible notes payable.

For the nine months ended March 31, 2021, we had $38,836 cash provided by investing activities, and for the nine months ended March 31, 2020, we had net cash provided by investing activities of $2,950,282 which resulted from our acquisition of Concepts and Solutions.

For the nine months ended March 31, 2021, we had $7,185,972 of cash provided by financing activities primarily related to $4,851,333 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 $544,000 of related party note proceeds offset by payments of approximately $245,000 under the line of credit. Total current liabilities are $12,047,976 and $8,962,520 as of March 31, 2021 and June 30, 2020, respectively, an increase of 34%. Our liabilities primarily consist of borrowings under a line of credit, related party notes payable, derivative liability, deferred revenue, accrued expenses and accounts payable.

To implement our business plan, we will require additional financing. 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 nine months ended March 31, 2021 and 2020.

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