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") 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"). In particular 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,"
including but not limited to, statements regarding the sufficiency of our cash, our ability to finance our operations and business initiatives
and obtain funding for such activities and the timing of any such financing, our future results of operations and financial position,
business strategy and plan prospects are forward-looking statements. These forward-looking statements 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, 2021 (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.
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and notes thereto and the other financial data appearing elsewhere in this Quarterly Report.
-26-
Business Overview
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 product offerings include Galaxy's own private-label interactive touch screen panel, its own Intercom, Bell, and Paging solution,
as well as an audio amplification line of products that is currently supported by OEM relationships. Galaxy's distribution channel consists
of a direct sales model, as well as approximately 37 resellers across the U.S. who primarily sell the products offered by Galaxy within
the commercial and educational market. Galaxy does not control where the resellers focus their reselling 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’s OEM division
also manufacturers products for other vendors in its industry and white labels the products under other brands.
We believe the market space for interactive technology in the classroom
is a perpetual highway of business opportunity, especially in light of the COVID-19 pandemic as school systems have sought to expand their
ability to operate remotely. Public and private school systems are in a continuous race to modernize their learning environments. Our
goal is to be an early provider of the best and most modern technology available.
We are striving to become the leader in the market for interactive flat
panel technology, associated software, and peripheral devices for classrooms. Our goal is to provide an intuitive system to enhance the
learning environment and create easy to use technology for the teacher, increasing student engagement and achievement. Our products are
developed and backed by a management team with more than 30 combined years in the classroom technology space.
We were originally organized as a corporation in 2001. Our principal
executive offices are located at 285 Big A Road Toccoa, Georgia 30577, and our telephone number is (706) 391-5030. Our website address
is www.galaxynext.us. Information contained in our website does not form part of this Quarterly Report and is intended for informational
purposes only.
On June 22, 2018, we consummated a reverse triangular merger whereby
Galaxy Next Generation, Inc., a private company (co-founded by our now executives, Gary LeCroy (CEO) and Magen McGahee (CFO)), merged
with and into our newly formed subsidiary, Galaxy MS, Inc. (Galaxy MS or Merger Sub), which was formed specifically for the transaction.
Under the terms of the merger, the private company shareholders transferred all their outstanding shares of common stock to Galaxy MS,
in return for shares of our Series C Preferred Stock. Prior to the merger, we operated under the name Full Circle Registry, Inc.’s
(FLCR) and our operations were based upon our ownership of Georgetown 14 Cinemas, a fourteen-theater movie complex located on approximately
seven acres in Indianapolis, Indiana. Prior to the merger, our sole business and source of revenue was from the operation of the theater,
and as part of the merger agreement, we had the right to spinout the theater to the prior shareholders of FLCR. Effective February 6,
2019, we sold our interest in the theater to focus our resources on our technology operations.
On September 3, 2019, we acquired 100% of the outstanding capital stock
of both Interlock Concepts, Inc. (Concepts) and Ehlert Solutions Group, Inc. (Solutions) pursuant to the terms of a stock purchase
agreement that we entered into with Concepts and Solutions. The purchase price for the acquisition was 1,350,000 shares of common stock
and a two year note payable to the seller in the principal amount of $3,000,000. The note payable to the seller is subject to adjustment
based on the achievement of certain future earnings goals and successful completion of certain pre-acquisition withholding tax issues
of Concepts and Solutions.
Solutions and Concepts are Arizona-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.
-27-
On October 15, 2020, we acquired 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 us 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.
This Report contains references to our trademarks and to trademarks belonging
to other entities. Solely for convenience, trademarks and trade names referred to in this Report, including logos, artwork and other visual
displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not
assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade
names. We do not intend our use or display of other companies' trade names or trademarks to imply a relationship with, or endorsement
or sponsorship of us by, any other companies.
The financial statements after the completion of the merger and acquisition
include the consolidated assets and liabilities of the combined company (collectively Galaxy Next Generation, Inc., Interlock Concepts,
Inc., Ehlert Solutions Group, Inc. and Classroom Tech referred to collectively as the “Company”).
All intercompany transactions and accounts have been eliminated in the
consolidation.
Galaxy’s common stock is traded on over-the-counter markets under
the stock symbol GAXY.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis discusses our consolidated financial
statements which have been prepared in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP). The preparation
of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and reported amounts of revenue and expenses
during the reporting period. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates and judgments on historical
experience and on various other factors that are reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The critical accounting policies and estimates that affect the condensed
consolidated financial statements and the judgments and assumptions used are consistent with those described in Note 1 to our audited
consolidated financial statements contained in our Annual Report.
-28-
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.
Revenue
Total revenues recognized were $904,055 and $798,793 for the three months
ended December 31, 2021 and 2020, respectively, an increase of approximately 13%. Total revenues recognized were $2,588,826 and $1,977,006
for the six months ended December 31, 2021 and 2020 respectively, an increase of approximately 31%. Additionally, deferred revenue amounted
to $137,351 and $453,862 as of December 31, 2021 and June 30, 2021, respectively. Revenues increased during the three months and six months
ended December 31, 2021 due to the increase in the customer base for interactive panels and related products as well as additional revenues
from OEM customers.
Cost of Sales and Gross Margin
Our cost of sales was $848,099 and $471,063 for the three months ended
December 31, 2021 and 2020, respectively, an increase of approximately 80%. Our cost of sales was $1,866,862 and $1,304,240 for the six
months ended December 31, 2021 and 2020, respectively, an increase of approximately 43%. 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 six months ended December 31, 2021 due to increased cost incurred to support revenues related to new products and new relationships
as well as an increase in freight cost.
General and Administrative
|
|
|
|
|
|
Six months ended
|
December 31, 2021
|
|
December 31, 2020
|
|
Stock compensation and stock issued for services
|
$ 32,750
|
|
$ 2,776,200
|
|
Impairment
|
46,869
|
|
-
|
|
General and administrative
|
2,548,117
|
|
2,650,145
|
|
Total General and Administrative Expenses
|
$ 2,627,736
|
|
$ 5,426,345
|
Total general and administrative expenses (including stock compensation
expenses) were $1,096,862 and $1,271,118 for the three months ended December 31, 2021 and 2020, respectively. General and administrative
expenses (including stock compensation expenses) were $2,627,736 and $5,426,345 for the six months ended December 31, 2021 and 2020, respectively,
a decrease of approximately 52%.
-29-
Other Income (Expense)
|
|
|
|
|
|
|
Six months ended
|
December 31, 2021
|
|
|
December 31, 2020
|
|
Other Income
|
$ 5,878
|
|
|
$ -
|
|
Expenses related to convertible notes payable:
|
|
|
|
|
|
Change in fair value of derivative
liability
|
1,842,000
|
|
|
(3,496,583)
|
|
Interest accretion
|
(24,290)
|
|
|
(766,603)
|
|
Interest related to equity purchase agreement
|
(2,143,500)
|
|
|
(5,001,900)
|
|
Interest expense
|
(622,363)
|
|
|
(6,884,194)
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
$ (942,275)
|
|
|
$ (16,149,280)
|
Interest expense amounted to $622,363 and $6,884,194 for the six months
ended December 31, 2021 and 2020, respectively, a decrease of 90%. Interest expense of $2,143,500 during the six months ended December
31, 2021, was due to sales of our common stock to investors under the Equity Purchase Agreement in exchange for proceeds of $1,633,700.
Reduced interest expense of $9,120,231 during the six months ended December 31, 2021, is attributed to the decrease in our overall debt.
The conversion features in our related party preferred convertible notes
payable meet the definition of a derivative liability instrument because the conversion feature is for a variable number of shares at
a variable price. 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 $0 and $1,842,000
is recorded at December 31, 2021 and June 30, 2021. The derivative liability was reduced due to the extinguishment of the related party
preferred convertible notes by the agreed upon exchange for Series F Preferred Stock in December, 2021.
Net Loss for the Period
Net loss incurred for the three months ended December 31, 2021 and 2020
was $2,462,020 and $7,768,081, respectively, a decrease of approximately 68%. Net loss incurred for the six months ended December 31,
2021 and 2020 was $2,848,047 and $20,902,859, respectively, a decrease of approximately 86%. Noncash contributing factors for the net
loss incurred for the three months ended December 31, 2021 and 2020 are as follows:
a). $13,200 and $2,776,000 represent consulting fees paid through the
issuance of stock for the three months ended December 31, 2021 and 2020, respectively. $32,750 and $2,776,200 represent consulting fees
paid through the issuance of stock for the six months ended December 31, 2021 and 2020, respectively.
b). Interest expenses related to the equity purchase agreement of $1,890,600
and $995,000 for the three months ended December 31, 2021 and 2020, respectively. Interest expense related to the equity purchase agreement
of $2,143,500 and $5,001,900 for the six months ended December 31, 2021 and 2020, respectively.
c). Depreciation and amortization expenses related to intangibles and
capitalized development costs of $92,661 and $90,369 for the three months ended December 31, 2021 and 2020, respectively. Depreciation
and amortization expenses related to intangibles and capitalized development costs of $233,377 and $170,880 for the six months ended December
31, 2021 and 2020, respectively.
-30-
Liquidity and Capital Resources
Although our revenues generated from operations have become more sufficient,
in order to support our operational activities our revenues we may still need to be supplemented by the proceeds from the issuance of
securities, including equity and debt issuances. At December 31, 2021, we had a working capital deficit of $1,761,132 and an accumulated
deficit of $50,779,175. As stated in Note 14 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 sufficient operating revenues. We anticipate that our current cash and revenue generated from operations
will be sufficient for day-to-ay operations; however, we anticipate that we will need additional capital for business expansion and new
product development. 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. Our operating loss continues
to shrink, and investments will allow us to continue for several months until sufficient revenue is met. 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 accounts receivable factoring agreement, each of which requires us to meet certain requirements to utilize. 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 $354,727 at December 31, 2021, as compared with $541,591
at June 30, 2021, a decrease of $186,864. Net cash of $1,312,346 and $415,756 was used in operations and investing activities, respectively,
for the six months ended December 31, 2021. Cash used in operating activities for the six months ended December 31, 2021 was $1,312,346
as compared to $4,519,524 for the six month ended December 31, 2020. The decrease was primarily due to a decrease in inventories, accounts
receivables, derivative liabilities and an overall decrease in operational expenses.
Net cash of $1,541,238 was provided from financing activities for the
six months ended December 31, 2021, primarily due to proceeds from the Equity Purchase Agreement of $1,633,700 and proceeds of $1,075,000
from notes issued.
To implement our business plan, we may 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.
-31-
Off-Balance Sheet Arrangements
The Company did not have off-balance sheet arrangements or transactions
as of and for the six months ended December 31, 2021 and 2020.
Non-GAAP Disclosure
To provide investors with additional insight and allow for a more comprehensive
understanding of the information used by management in its financial and decision-making surrounding pro forma operations, Galaxy supplements
its consolidated financial statements presented on a basis consistent with U.S. generally accepted accounting principles, or GAAP, Adjusted
EBITDA as a non-GAAP financial measures of earnings. 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. Adjusted EBITDA represents
EBITDA (earnings before income taxes depreciation and amortization) . Galaxy management uses Adjusted EBITDA as financial measures to
evaluate the profitability and efficiency of the business model. The Company uses these non-GAAP financial measures to assess the strength
of the underlying operations of the business. These adjustments, and the non-GAAP financial measures that are derived from them, provide
supplemental information to analyze our operations between periods and over time. Galaxy finds this especially useful when reviewing pro
forma results of operations, which include large non-cash expenses including interest on the Equity Purchase Agreement, amortization of
intangible assets and capitalized development costs and stock-based compensation. Investors should consider its non-GAAP financial measures
in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. 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.
Non-GAAP Adjusted EBITDA financial results for the three months ended
December 31, 2021 and 2020:
During the three and six months ended December 31, 2021, we issued 135,000,000
and 225,000,000 shares of common stock respectively, in exchange for proceeds under the Equity Purchase Agreement. We received proceeds
of $1,633,700 and recorded additional paid in capital of $2,121,000 upon issue.
These sales were made pursuant to an exemption from the registration
requirements under Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"). The shares have not been
registered under the Securities Act and may not be offered or sold in the United States in the absence of an effective registration statement
or exemption from the registration requirements of the Securities Act.
|
|
|
|
|
|
Three months ended
|
December 31, 2021
|
|
December 31, 2020
|
|
|
|
|
|
|
Revenue
|
$ 904,055
|
|
$ 798,793
|
|
Gross Profit
|
55,956
|
|
327,730
|
|
General and Administrative Expenses
|
1,096,862
|
|
1,271,118
|
|
Loss from Operations
|
(1,040,906)
|
|
(943,388)
|
|
Other Income (Expense)
|
(1,421,114)
|
|
(6,824,693)
|
|
Net Loss
|
(2,462,020)
|
|
(7,768,081)
|
|
Interest, Taxes, Depreciation, Stock Compensation and Amortization
|
2,005,260
|
|
1,109,539
|
|
Non-GAAP Adjusted EBITDA
|
$ (456,760)
|
|
$ (6,658,542)
|
Non-GAAP Adjusted EBITDA was a loss of $456,760 for the three months
ended December 31, 2021 compared to the loss of $6,658,542 for the three months ended December 31, 2020.
-32-