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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No.1 to Form 10-Q)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-56006

GALAXY NEXT GENERATION, INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada

 

61-1363026

(State of Incorporation)

 

(IRS Employer Identification No.)

285 N Big A Road Toccoa, Georgia

 

30577

(Address of Principal Executive Offices)

 

(Zip Code)

(706) 391-5030

(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: (None)

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer  ☐

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The number of shares outstanding of the issuer's Common Stock, as of February 11, 2022 was 3,492,086,272.

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $19,833,487 as of December 31, 2021, based upon the average bid and asked price on the OTCQB.

EXPLANATORY NOTE

The Amendment no. 1 to Form 10-Q is being file to include the iXBRL InteractiveTable Exhibits

-i-

FORM 10-Q

GALAXY NEXT GENERATION, INC.

Table of Contents

 

 Page 

PART I. Financial Information

Item 1.Unaudited Condensed Consolidated Financial Statements and Footnotes

2

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.Quantitative and Qualitative Disclosures about Market Risk

33

Item 4.Controls and Procedures

33

PART II. Other Information

 

Item 1.Legal Proceedings

34

Item 1A.Risk Factors

34

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.Defaults Upon Senior Securities

36

Item 4.Mine Safety Disclosures

36

Item 5.Other Information

36

Item 6.Exhibits

37

Signatures

38

 

The accompanying unaudited interim condensed consolidated financial statements included herein, have been prepared by Galaxy Next Generation, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated statements have been prepared in accordance with the Company's accounting policies described in the Company's Annual Report on Form 10-K for the year ended June 30, 2021 and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in that report. Unless the context indicates otherwise, references to the "Company," "we, " "us," "our" or "Galaxy" means Galaxy Next Generation, Inc. and its subsidiaries.

 

-1-

PART I – FINANCIAL INFORMATION

Item 1 – Unaudited Condensed Consolidated Financial Statements and Footnotes

The following unaudited condensed consolidated financial statements are included herein:

 

Condensed Consolidated Balance Sheets as of December 31, 2021 (unaudited) and June 30, 2021 (audited)

 

3

Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2021 and 2020 (unaudited)

 

4

Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the Six Months Ended December 31, 2021 (unaudited)

 

5

Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the Six Months Ended December 31, 2020 (unaudited)

 

6

Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2021 and 2020 (unaudited)

 

7-8

Notes to the Condensed Consolidated Financial Statements (unaudited)

 

9-25

-2-

GALAXY NEXT GENERATION, INC.

Condensed Consolidated Balance Sheets

December 31, 2021

June 30, 2021

Assets

(Unaudited)

(Audited)

Current Assets

Cash

$

354,727

$

541,591

Accounts receivable, net

305,810

866,091

Inventories, net

1,379,853

3,267,667

Other current assets

3,950

3,950

Total Current Assets

2,044,340

4,679,299

 

Property and Equipment, net (Note 2)

370,057

86,812

Intangibles, net (Notes 1 and 12)

1,471,142

1,516,815

Goodwill (Note 1)

834,220

834,220

Operating right of use asset (Note 7)

222,336

208,051

Total Assets

$

4,942,095

$

7,325,197

 

Liabilities and Stockholders' Equity (Deficit)

Current Liabilities

Line of credit (Note 3)

$

-

$

991,598

Derivative liability, convertible debt features (Note 5)

-

1,842,000

Current portion long term notes payable (Note 4)

1,147,856

552,055

Accounts payable

634,057

830,433

Accrued expenses

589,898

213,772

Deferred revenue

137,351

453,862

Short term portion of related party notes and payables (Note 6)

1,296,310

3,471,755

Total Current Liabilities

3,805,472

8,355,475

Noncurrent Liabilities

Related party notes payable, less current portion (Note 6)

287,947

-

Notes payable, less current portion (Note 4)

774,558

405,007

Total Liabilities

4,867,977

8,760,482

 

Stockholders' Equity (Deficit)

Common stock

309,744

280,744

Preferred stock - Series E, non-redeemable

-

50

Preferred stock - Series F, non-redeemable

11

-

Additional paid-in-capital

50,543,538

46,215,049

Accumulated deficit

(50,779,175)

(47,931,128)

Total Stockholders' Equity (Deficit)

74,118

(1,435,285)

 

Total Liabilities and Stockholders' Equity (Deficit)

$

4,942,095

$

7,325,197

See accompanying notes to the condensed consolidated financial statements (unaudited).

-3-

GALAXY NEXT GENERATION, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

For the Three Months Ended December 31,

For the Six Months Ended December 31,

2021

2020

2021

2020

Revenues

$

904,055

$

798,793

$

2,588,826

$

1,977,006

Cost of Sales

848,099

471,063

1,866,862

1,304,240

 

Gross Profit

55,956

327,730

721,964

672,766

 

General and Administrative Expenses

Stock compensation and stock issued for ​services

-

13,200

32,750

2,776,200

Impairment expense

46,869

-

46,869

-

General and administrative

1,049,993

1,257,918

2,548,117

2,650,145

 

Total General and Administrative Expenses

1,096,862

1,271,118

2,627,736

5,426,345

Loss from Operations

(1,040,906)

(943,388)

(1,905,772)

(4,753,579)

 

Other Income (Expense)

5,878

-

5,878

-

Expenses related to convertible notes payable:

Change in fair value of derivative liability

834,000

(2,442,688)

1,842,000

(3,496,583)

Interest accretion

(15,540)

(366,667)

(24,290)

(766,603)

Interest expense related to Equity Purchase ​Agreement (Note 11)

(1,890,600)

(995,000)

(2,143,500)

(5,001,900)

Interest expense

(354,852)

(3,020,338)

(622,363)

(6,884,194)

 

Total Other Income (Expense)

(1,421,114)

(6,824,693)

(942,275)

(16,149,280)

 

Net Loss before Income Taxes

(2,462,020)

(7,768,081)

(2,848,047)

(20,902,859)

 

Income taxes (Note 9)

-

-

-

-

 

Net Loss

$

(2,462,020)

$

(7,768,081)

$

(2,848,047)

$

(20,902,859)

 

Net Basic and Fully Diluted Loss Per Share

$

(0.0007)

$

(0.0034)

$

(0.0009)

$

(0.0106)

 

Weighted average common shares outstanding

Basic

3,352,600,273

2,314,084,953

3,270,956,252

1,978,500,180

Fully diluted

3,352,600,620

2,776,901,944

3,270,956,598

3,205,073,044

See accompanying notes to the condensed consolidated financial statements (unaudited).

-4-

GALAXY NEXT GENERATION, INC.

Consolidated Statement of Changes in Stockholders' Equity (Deficit)

Six Months Ended December 31, 2021

(Unaudited)

Common Stock

Preferred Stock Series E

Preferred Stock Series F

Additional

Paid-in

Accumulated

Total

Stockholders'

Shares

Amount

Shares

Amount

Shares

Amount

Capital

Deficit

Deficit

 

Balance, July 1, 2021​

3,139,882,882

$

280,744

500,000

$

50

-

$

-

$

46,215,049

$

(47,931,128)

$

(1,435,285)

 

Common Stock issued for services

2,500,000

250

-

-

-

-

32,500

-

32,750

 

Common stock issued under Equity Purchase Agreement

225,000,000

22,500

-

-

-

-

2,121,000

-

2,143,500

Preferred Series F issued in exchange for debt

-

-

-

-

11,414

$

11

1,824,989

-

1,825,000

 

Retirement of Preferred Series E

-

-

(500,000)

(50)

-

-

-

-

(50)

Common stock cancelled

(50,000,000)

-

-

-

-

-

-

-

-

 

Commitment shares issued

62,500,000

6,250

-

-

-

-

350,000

-

356,250

 

Consolidated net loss​

-

-

-

-

-

(2,848,047)

(2,848,047)

 

Balance, December 31, 2021

3,379,882,882

$

309,744

-

$

-

$

11,414

$

11

$

50,543,538

$

(50,779,175)

$

74,118

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, 2020

(Unaudited)

Common Stock

Preferred Stock - Class E

Additional

Paid-in

Accumulated

Total

Stockholders'

Shares

Amount

Shares

Amount

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

-

2,776,000

 

Common stock issued 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

-

-

3,927,700

-

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

$

238,645

500,000

$

50

$

36,478,169

$

(44,399,651)

$

(7,682,787)

See accompanying notes to the condensed consolidated financial statements (unaudited).

 

-6-

GALAXY NEXT GENERATION, INC.

Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended December 31,

2021

2020

Cash Flows from Operating Activities

Net loss

$

(2,848,047)

$

(20,902,859)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

241,785

177,529

Amortization of convertible debt discounts

24,290

247,702

Impairment expense

46,869

-

Change in fair value of derivative liability

(3,273,253)

4,126,813

Stock issued for services

32,961

2,786,775

Stock issued under Equity Purchase Agreement

2,166,000

11,893,497

 

Changes in assets and liabilities:

Accounts receivable

560,281

(401,935)

Inventories

1,887,814

(526,227)

Intangibles

-

(120,404)

Right of use assets

(14,285)

-

Accounts payable

(196,376)

(1,463,810)

Accrued expenses

376,126

(175,384)

Deferred revenue

(316,511)

(161,221)

Net cash provided by (used in) operating activities

(1,312,346)

(4,519,524)

 

Cash Flows from Investing Activities

Acquisition of business, net of cash

-

38,836

Capitalization of development costs

(221,430)

-

Purchases of property and equipment

(194,326)

-

 

Net cash (used in) provided by investing activities

(415,756)

38,836

 

Cash Flows from Financing Activities

Principal payments on notes payable

(157,364)

(932)

Payments on advances from stockholder, net

(18,500)

(121,663)

Proceeds from convertible notes payable

1,075,000

1,956,000

Proceeds from convertible notes payable related party

-

535,963

Payments on line of credit, net

(991,598)

(245,000)

Proceeds from sale of common stock under Equity Purchase Agreement

1,633,700

2,316,520

 

Net cash provided by financing activities

1,541,238

4,440,888

 

Net Decrease in Cash and Cash Equivalents

(186,864)

(39,800)

 

Cash, Beginning of Period

541,591

412,391

Cash, End of Period

$

354,727

$

372,591

-7-

Supplemental and Non Cash Disclosures

Noncash additions related to convertible debt

$

25,000

$

210,520

 

Cash paid for interest

$

51,401

$

35,888

 

Interest on shares issued under Equity Purchase Agreement

$

2,143,500

$

5,001,900

 

Related party note payable issued for acquisition of business

$

-

$

194,526

Acquisition of goodwill and intangibles

$

-

$

46,869

Stock issued for services

$

32,750

$

2,776,200

 

Property leased with financing lease

$

97,253

$

25,317

 

Change in fair value of derivatives

$

1,842,000

$

4,238,991

 

Common stock issued in exchange for convertible debt reduction

$

-

$

4,117,650

 

Preferred stock issued in exchange for convertible debt reduction

$

1,825,000

$

-

See accompanying notes to the condensed consolidated financial statements (unaudited).

 

-8-

Note 1 - Summary of Significant Accounting Policies

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 37 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.

Ehlert Solutions Group, Inc. ("Solutions") and Interlock Concepts, Inc. ("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. Solutions and Concepts' products and services allow institutions access to intercom, scheduling, and notification systems with improved ease of use. The products provide an open architecture solution to customers which allows the products to be used in both existing and new environments. Intercom, public announcement (PA), bell and control solutions are easily added and integrated within the open architecture design and software model. These products combine elements over a common internet protocol (IP) network, which minimizes infrastructure requirements and reduces costs by combining systems.

On October 15, 2020, Galaxy 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 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.

COVID-19 Update

The Covid-19 Pandemic that began in early 2020 caused shelter-in-place policies, unexpected factory closures, supply chain disruptions, and market volatilities across the globe. As a result of the economic disruptions and unprecedented market volatilities and uncertainties driven by the Covid-19 outbreak, the Company experienced some supply chain disruptions. However, the Company has not experienced any significant payment delays or defaults by our customers as a result of the COVID-19 pandemic.

The full impact of the Covid-19 outbreak continues to evolve as of the date of this report. The depth and duration of the pandemic remains unknown. Despite the availability of vaccines, recent surges in the infection rate and the detection of new variants of the virus have reinforced the general consensus that the containment of Covid-19 remains a challenge. Management is actively monitoring the global situation and its effect on its financial condition, liquidity, operations, suppliers, industry, and workforce.

-9-

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, 2021 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.

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 12.

All intercompany transactions and accounts have been eliminated in the consolidation.

The Company’s common stock is traded on the over-the-counter public company traded under the stock symbol listing GAXY (formerly FLCR).

Capital Structure

The Company's capital structure is as follows:

December 31, 2021

 

Authorized

Issued

Outstanding

 

Common stock

4,000,000,000

3,379,882,882

3,379,844,257

$.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 F

15,000

11,414

11,414

$.001 par value; no voting rights, convertible to common stock at a fixed price of $0.37 per share; stated value is $1,000 per share

-10-

June 30, 2021

 

Authorized

Issued

Outstanding

 

Common stock

4,000,000,000

3,139,882,882

3,089,844,257

$.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.

The Preferred Series D and E were retired in December 2021. Preferred Series F certificate of designation was filed on February 10, 2022.

There are 434,891,143 common shares reserved at December 31, 2021 under terms of the convertible debt agreements, Stock Plan and Equity Purchase Agreement (see Notes 6, 11 and 13).

There are 104,764,231 issued common shares that are restricted as of December 31, 2021. The shares may become free-trading upon satisfaction of certain terms and regulatory conditions.

Supplier Agreement

Contract assets and contract liabilities are as follows:

December 31, 2021

June 30, 2021

Contract assets

$

12,409

$

43,360

Contract liabilities

137,351

228,514

For the three months ended December 31, 2021 and 2020, the Company recognized $219,309 and $445,136 of revenues related to supplier agreements. For the six months ended December 31, 2021 and 2020, the Company recognized $637,746 and $500,075 of revenues related to supplier agreements.

-11-

Accounts Receivable

Management deemed no allowance for doubtful accounts was necessary at December 31, 2021 and June 30, 2021. At December 31, 2021 and June 30, 2021, $0 and $190,779 of total accounts receivable were considered unbilled and recorded as deferred revenue.

Inventories

Management estimates $67,635 of inventory reserves at December 31, 2021 and June 30, 2021, respectively.

Goodwill, Intangible Assets and Product Development Costs

Goodwill, intangible assets, and product development costs are comprised of the following at December 31, 2021:

Cost

Accumulated Amortization

Net Book Value

Impairment

Total

Goodwill

$

834,220

$

-

$

834,220

$

-

$

834,220

Finite-lived assets:

Customer list

$

922,053

$

(376,351)

$

545,702

$

(41,053)

$

504,649

Vendor relationships

484,816

(215,550)

269,266

(5,816)

263,450

Capitalized product development cost

1,015,707

(312,664)

703,043

-

703,043

$

2,422,576

$

(904,565)

$

1,518,011

$

(46,869)

$

1,471,142

Goodwill, intangible assets, and product development costs are comprised of the following at June 30, 2021:

Cost

Accumulated Amortization

Total

Goodwill

$

834,220

$

-

$

834,220

Finite-lived assets:

Customer list

$

922,053

$

(314,166)

$

607,887

Vendor relationships

484,816

(168,474)

316,342

Product development costs

790,118

(197,532)

592,586

$

2,196,987

$

(680,172)

$

1,516,815

-12-

Intangible assets such as customer lists and vendor relationships are stated at the lower of cost or fair value. They are amortized on a straight-line basis over periods ranging from three to six years, representing the period over which the Company expects to receive future economic benefits from these assets. Amortization of these intangible assets amounted to $44,700 and $69,953 for the three months ended December 31, 2021 and 2020. Amortization of these intangible assets amounted to $118,243 and $137,953 for the six months ended December 31, 2021 and 2020.

Costs incurred in designing and developing classroom technology products are expensed as research and development until technological feasibility has been established. Technological feasibility is established upon completion of a detail product design, or in its absence, completion of a working model. Upon the achievement of technological feasibility, development costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Management's judgment is required in determining whether a product provides new or additional functionality, the point at which various products enter the stages at which costs may be capitalized, assessing the ongoing value and impairment of the capitalized costs and determining the estimated useful lives over which the costs are amortized.

Annual amortization expense is calculated based on the straight-line method over the product's estimated economic lives, which are typically three to six years. Amortization of product development costs incurred begins when the related products are available for general release to customers. Amortization of product development costs of $44,761 and $20,416 for the three months ended December 31, 2021 and 2020, and $115,134 and $32,927 for the six months ended December 31, 2021 and 2020, is included in cost of revenues in the Company's unaudited condensed consolidated statements of operations.

Estimated amortization expense related to finite-lived intangible assets for the next five years is: $555,920 for fiscal year 2023, $483,959 for fiscal year 2024, $314,272 for fiscal year 2025, $60,400 for fiscal year 2026, and $40,207 for fiscal year 2027 and $16,384 thereafter.

Recent Accounting Pronouncements

In January 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted this ASU on July 1, 2021 with no significant impact on its unaudited condensed consolidated financial statements.

-13-

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 adopted this ASU on July 1, 2021 with no significant impact on its unaudited condensed 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, 2020, with early adoption permitted. The Company adopted this ASU on July 1, 2021 with no significant impact on its unaudited condensed consolidated financial statements.

The Company has implemented all new applicable accounting pronouncements that are in effect and applicable. 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.

Note 2 - Property and Equipment

Property and equipment are comprised of the following at:

December 31, 2021

June 30, 2021

Vehicles

$

212,658

$

115,135

Building

201,823

-

Equipment

16,192

25,115

Leasehold improvements

31,000

31,000

Furniture and fixtures

28,321

25,085

489,994

196,335

Accumulated depreciation

(119,937)

(109,523)

 

Property and equipment, net

$

370,057

$

86,812

Note 3 - Lines of Credit

The Company had $1,000,000 available under a line of credit bearing interest at prime plus 0.5% (3.75% at June 30, 2021) which expired October 29, 2021. The bank provided a 30-day grace period to repay the line to November 29, 2021. The line of credit was collateralized by certain real estate owned by stockholders and a family member of a stockholder, 7,026,894 shares of the Company's common stock owned by two stockholders, personal guarantees of two stockholders, and a key man life insurance policy. In addition, a 20% curtailment of the outstanding balance may occur any time prior to maturity. The outstanding balance was $0 and $991,598 at December 31, 2021 and June 30, 2021, respectively. The line of credit was completely paid off in November of 2021.

The Company has up to $1,000,000 available credit line under an accounts receivable factoring agreement through July 30, 2022. Total available credit under the factoring agreement was $989,680 and $1,000,000 as of December 31, 2021 and June 30, 2021, respectively. See Note 11.

-14-

Note 4 - Notes Payable

Long Term Notes Payable

December 31, 2021

June 30, 2021

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 an interest rate of 3%. In July 2021, the note was renewed by the lender with a revised maturity date of July 7, 2026. 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.

$

223,823

$

237,039

 

Note payable to an investor bearing interest at 10% and maturing on January 13, 2022 with monthly installments of principal and interest of $45,294 beginning in June 2021.

100,845

348,456

 

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 upon notification by the SBA regarding note servicing.

150,000

150,000

 

Financing lease liabilities for offices and warehouses with monthly installments of $22,723 (ranging from $245 to $9,664) over terms expiring through December 2024.

222,336

208,051

 

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.

28,241

31,016

 

Note payable with a bank for delivery vehicle with monthly installments totaling $844 including interest at 6% over a 4 year term expiring in August 2025.

33,662

-

 

Note payable with a finance company for delivery vehicle with monthly installments totaling $948 including interest at 5.9% over a 6 year term expiring in January 2027.

56,717

-

 

Note payable to an investor bearing interest at 12% and maturing on May 26, 2023 with monthly installments of principal and interest of $120,185 beginning in May 2022.

1,222,222

-

 

Total Notes Payable

2,037,846

974,562

 

Less: Unamortized original issue discount

115,432

17,500

 

Current Portion of Notes Payable

1,147,856

552,055

 

Long-term Portion of Notes Payable

$

774,558

$

405,007

-15-

Future minimum principal payments on the long-term notes payable to unrelated parties are as follows:

Period ending December 31,

2022

$

1,147,856

2023

513,508

2024

103,336

2025

86,431

2026

42,149

Thereafter

144,566

$

2,037,846

Note 5 - Fair Value Measurements

The following table presents information about the liabilities that are measured at fair value on a recurring basis at December 31, 2021 and June 30, 2021 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value.

At December 31, 2021

Total

Level 1

Level 2

Level 3

Derivative liability, convertible note features

$

-

$

-

$

-

$

-

At June 30, 2021

Total

Level 1

Level 2

Level 3

Derivative liability, convertible note features

$

1,842,000

$

-

$

-

$

1,842,000

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. In December 2021, the derivative liability was eliminated when we entered into an agreement to convert the convertible debt. (See Note 6).

-16-

The derivative liability was valued using the Monte Carlo pricing model with the following inputs:

At June 30, 2021

Risk-free interest rate:

0.17%

Expected dividend yield:

0.00%

Expected stock price volatility:

295.00%

Expected option life in years:

.037 to .70 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, 2021 and June 30, 2021:

Balance at June 30, 2021

$

1,842,000

Realized

(1,842,000)

Unrealized

-

Balance at December 31, 2021

$

-

 

Balance at June 30, 2020

$

246,612

Convertible securities at inception

4,000

Realized

(80,924)

Unrealized

1,672,312

Balance at June 30, 2021

$

1,842,000

As of December 31, 2021 and June 30, 2021, 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.

-17-

Note 6 - Related Party Transactions

Notes Payable

December 31, 2021

June 30, 2021

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 13, 2021. The note bears interest at 6% per annum 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. Extinguished by exchange for Series F Preferred Stock on December 28, 2021.

$

-

$

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. Payment is 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 was payable on November 7, 2021. Note was amended in March 2020 by increasing the balance to $1,225,000. Interest is payable in cash or common stock, at the holder's option. If interest is paid in common stock, the conversion price was to be the market price at the time of conversion. Principal on the note at maturity is convertible into 1,225,000 shares of Series D Preferred Stock. If principal was paid prior to maturity, the right of conversion is terminated. Extinguished by exchange for Series F Preferred Stock on December 27, 2021.

-

1,225,000

 

Note payable to a stockholder in which the note principal plus 6% interest is payable in November 13, 2021. Interest was payable in cash or common stock, at the Company's option. If interest was 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 was paid prior to maturity, the right of conversion is terminated. Extinguished by exchange for Series F Preferred Stock on December 20, 2021.

-

200,000

-18-

Note payable to a stockholder in which the note principal plus interest at 15% is payable the earlier of 60 days after invoicing a certain customer, or April 2022 due to an extension granted by the lender. On December 23, 2021, an amendment extended the maturity to March 30, 2025, changed the interest rate to 10% with monthly payments of principal and interest of $8,823. The note is collateralized by a security interest in a certain customer purchase order.

385,000

385,000

 

Note payable related to the 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.

125,690

155,690

 

Other short-term payables due to stockholders and related parties

43,488

75,986

Total Related Party Notes Payable and Other Payables

1,584,257

3,471,755

Current Portion of Related Party Notes Payable and Other Payables

1,296,310

3,471,755

 

Long-term Portion of Related Party Notes Payable and Other Payables

$

287,947

$

-

As of December 31, 2021, related party notes payable maturities are as follows:

Period ending December 31,

2022

$

1,296,310

2023

105,876

2024

105,876

2025

76,195

$

1,584,257

In December of 2021, $1,825,000 of related party convertible notes and 500,000 shares of Series E preferred stock were eliminated upon the execution of an agreement to exchange them for Series F preferred shares. In addition, the agreement of the exchange of the notes resulted in the elimination of the derivative liability related to the conversion features of the notes into Series D Preferred stock. The derivative liability was reduced by $1,842,000 resulting in additional paid in capital of approximately $1,825,000. On December 31, 2021, the recorded derivative liability is $0.

Related Party 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 $9,664 plus maintenance and property taxes, as defined in the lease agreement. Rent expense for this lease was $28,992 and $4,500 for the three months ended December 31, 2021 and 2020, respectively and $57,984 and $9,000 for the six months ended December 31, 2021 and 2020 respectively.

Other Related Party 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 4).

-19-

Note 7 - Lease Agreements

Financing Lease Agreements

The Company leases offices, warehouses and equipment under financing lease agreements with monthly installments of $22,723 (ranging from $245 to $9,664), expiring through December 2024.

Right-of-use assets:

Operating right-of-use assets

$

222,336

Operating lease liabilities:

Current portion of long term payable

134,095

Financing leases payable, less current portion

82,594

 

Total operating lease liabilities

$

216,689

As of December 31, 2021, financing lease maturities are as follows:

Period ending December 31,

2022

$

134,095

2023

57,186

2024

25,408

$

216,689

As of December 31, 2021, the weighted average remaining lease term was 1.67 years.

Note 8 - Equity

For the six month ended December 31, 2021:

During the six months ended December 31, 2021, the Company issued 2,500,000 shares of common stock for services.

During the six months ended December 31, 2021, the Company issued 225,000,000 shares of common stock in exchange for proceeds under the Equity Purchase Agreement. These shares were valued at $2,143,500 upon issuance.

During the six months ended December 31, 2021, the Company issued 62,500,000 shares of common stock as commitment shares in a structured loan agreement. These shares were valued at $356,250 upon issuance.

During the six months ended December 31, 2021, the Company cancelled 50,000,000 shares of common stock which were previously held as collateral for a line of credit.

During the six months ended December 31, 2021, the Company entered into exchange agreements to issue 11,414 shares of Preferred Series F stock.

During the six months ended December 31, 2021, the Company cancelled 500,000 shares of Preferred Series E stock.

For six month ended December 31, 2020:

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 the Equity Purchase Agreement. These shares were valued at $1,050,000 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 were held in the Company's name and serve as collateral for a line of credit with a bank.

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.

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.

See the capital structure section in Note 1 for disclosure of the equity components included in the Company's consolidated financial statements.

Note 9 - Income Taxes

The Company's effective tax rate differed from the federal statutory income tax rate for the six months ended December 31, 2021 as follows:

Federal statutory rate

21

%

State tax, net of federal tax effect

5.04

%

Valuation allowance

-26

%

Effective tax rate

0

%

The Company had no federal or state income tax (benefit) for the six months ended December 31, 2021 or 2020.

-20-

The Company's deferred tax assets and liabilities as of December 31, 2021 and June 30, 2021, are summarized as follows:

December 31, 2021

June 30, 2021

Federal

Deferred tax assets

$

11,226,100

$

10,226,700

Less valuation allowance

(11,226,100)

(10,226,700)

Deferred tax liabilities

-

-

 

-

-

State

Deferred tax assets

2,837,200

2,730,800

Less valuation allowance

(2,837,200)

(2,730,800)

Deferred tax liabilities

-

-

 

-

-

Net Deferred Tax Assets

$

-

$

-

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, 2021 and 2020, 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 2022 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, 2021 and June 30, 2021, are as follows:

December 31, 2021

June 30, 2021

 

Net operating loss carryforwards

$

13,675,000

$

12,579,200

Valuation allowance

(14,063,300)

(12,957,500)

Goodwill

238,700

(20,400)

Property and equipment

(36,300)

251,600

Development costs

33,100

27,900

Intangible assets

106,300

72,900

Inventory allowance

17,600

17,800

Warranty accrual and other

28,200

28,500

 

Net Deferred Tax Assets

$

-

$

-

As of December 31, 2021, 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, 2021, the Company's income tax returns generally remain open for examination for three years from the date filed with each taxing jurisdiction.

-21-

Note 10 - Commitments, Contingencies, and Concentrations

Contingencies

Certain conditions may exist as of the date the unaudited 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 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 in the note payable to seller of $1,030,079 at December 31, 2021 and June 30, 2021 (Note 6).

Concentrations

Galaxy contracts the manufacture of its products with domestic and 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 vendor that accounted for approximately 36% of purchases as of December 31, 2021.

Galaxy has four customers that accounted for approximately 78% of accounts receivable at December 31, 2021 and two customers that accounted for approximately 73% of accounts receivable at June 30, 2021. Galaxy has two customers that accounted for approximately 69% of total revenue for the three months ended December 31, 2020. Galaxy has two customers that accounted for approximately 55% and three customers that accounted for approximately 51% of total revenue for the six months ended December 31, 2021 and 2020, respectively.

Note 11 - Material Agreements

Manufacturer and Distributorship Agreement

On September 15, 2018, the Company signed an agreement with a company in China for the manufacture of Galaxy’s SLIM series of interactive panels. The manufacturer agreed to manufacture, and the Company agreed to be the sole distributor of the interactive panels in the United States for a term of two years. The agreement includes a commitment by Galaxy to purchase $2 million of product during the first year beginning September 2018. If the minimum purchase is not met, the manufacturer can require the Company to establish a performance improvement plan, and the manufacturer has the right to terminate the agreement. The payment terms are 20% in advance, 30% after the product is ready to ship, and the remaining 50% 45 days after receipt. The manufacturer provides Galaxy with the product, including a three-year manufacturer’s warranty from the date of shipment. The agreement renews automatically in two year increments unless three months’ notice is given by either party.

-22-

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. During the three months ended December 31, 2021 and 2020, the Company issued 90,000,000 and 68,938,679 shares of common stock to the investor in exchange for proceeds for working capital. During the six months ended December 31, 2021 and 2020, the Company issued 225,000,000 and 242,000,000 shares of common stock to the investor in exchange for proceeds for working capital.

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 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 paid collection fees of $13,243 and $16,602 during the three months ended December 31, 2021 and 2020, respectively. The Company paid collection fees of $36,224 and $21,377 during the six months ended December 31, 2021 and 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 and preferred stock to maintain, together with the CFO, a minimum 25.5% of the total voting rights. The agreement includes a non-compete agreement and severance benefits of $90,000.

On January 1, 2020, the Company entered into an employment agreement with the Chief Finance Officer/Chief Operations Officer (CFO/COO) of the Company for a two-year term, which was amended on September 1, 2020. Under the amended employment agreement, the CFO/COO will receive annual compensation of $250,000, and an annual discretionary bonus based on profitability and revenue growth and preferred stock to maintain, together with the CEO, a minimum 25.5% of the total voting rights.. The agreement includes a non-compete agreement and severance benefits of $72,000.

Supplier Agreement

The Company is party to a one-year supplier agreement to manufacture and sell audio products to a buyer. 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 3,729 units under this agreement as of December 31, 2021, with 860 units during the six months ended December 31, 2021 and 245 of the units during the three months period ended December 31, 2021. The Company will continue to supply audio products under individual purchase orders after the initial order for 4,000 units is complete.

-23-

Note 12 - Acquisition

On October 15, 2020, the Company entered into an Asset Purchase Agreement, 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.

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

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

Impairment expense relates to the Company's purchase price adjustment for the Classroom Tech acquisition on October 15, 2020. During the acquisition, customer lists and vendor relationship intangible assets were recorded in the amount of $46,869. In October 2021, the Company moved its Florida operations to a new leased location. Management discovered inventory items with missing parts that could not be sold. As a result, the bonus payable of $30,000 to the seller of Classroom Tech was removed, the inventory was written down and the intangible assets were impaired.

Note 13 - 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 2020 Plan was effective September 16, 2020 and expired December 15, 2021. The 2019 Plan was effective December 13, 2018 and expired June 1, 2020. Common shares of 99,250,000 are reserved for stock awards under the Plans. There were 98,857,857 shares awarded under the Plans as of December 31, 2021 and June 30, 2021. No additional shares were awarded during the three or six months ended December 31, 2021.

-24-

Note 14 - Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As reflected in the accompanying consolidated financial statements, the Company had negative working capital of approximately $1,700,000, an accumulated deficit of approximately $51,000,000, and cash used in operations of approximately $1,300,000 at December 31, 2021. Shareholders equity increased by approximately $1,500,000 to almost break even at December 31, 2021.

The Company's operational activities have 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 15 - Subsequent Events

On January 18, 2022, the Company issued 100,000,000 shares under a stock purchase agreement in exchange for $500,000.

On February 4, 2022 the Company issued 12,203,390 common shares for services.

 

-25-

 

 

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-

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information under this Item is not required to be provided by smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including the Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial and accounting officer), we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this Report.

 

Evaluation of Disclosure Controls and Procedures 

 

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures ("Disclosure Controls") as of the end of the period covered by this Report. The Disclosure Controls evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial and accounting officer). Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure Controls are also designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation our Chief Executive Officer and Chief Financial Officer have concluded that, because of a material weakness in our internal control over financial reporting that existing at June 30, 2021 and had not been remediated by the end of the period covered by this Report, our disclosure controls and procedures were not effective as of the end of the period covered by this Report. This material weakness in the Company's internal control over financial reporting and the Company's remediation efforts are described below.

 

The material weakness relates to the fact that our management is relying on external consultants for purposes of preparing its financial reporting package; however, the officers may not be able to identify errors and irregularities in the financial reporting package before its release as a continuous disclosure document. As a result of the deficiencies, we have discovered it is reasonably possible that internal controls over financial reporting may not have prevented or detected errors from occurring that could have been material, either individually or in the aggregate.

 

Remediation Measures

 

Management began to discontinue outsourcing its bookkeeping beginning July 1, 2021.  Outsourced bookkeeping was still utilized to a lesser extent for bookkeeping services through September 30, 2021 and we will continue to outsource the preparation of the Company's tax returns and tax provisions.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

-33-

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of business litigation, regardless of the outcome could have a material adverse impact on us because of the defense and settlement costs, diversion of management resources and other factors. We are not currently subject to any legal proceedings that we believe will have a material impact on our business at this time.

 

ITEM 1A. RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should consider carefully the following risks, together with the risks specified in Item 1A of Part I of our Annual Report for the year ended June 30, 2021 and all the other information in this Report, including our condensed consolidated financial statements and notes thereto. If any of the following risks materializes, our operating results, financial condition and liquidity could be materially adversely affected. As a result, the trading price of our common stock could decline, and you could lose part or all of your investment. The following information updates should be read in conjunction with the information disclosed in Part 1, Item 1A, "Risk Factors," contained in our Annual Report for the year ended June 30, 2021. Except as disclosed below, there have been no material changes from the risk factors and uncertainties disclosed in our Annual Report for the year ended June 30, 2021.

 

We have incurred losses for the six months ended December 31, 2021 and 2020 and there can be no assurance that we will generate net income

 

For the three months ended December 31, 2021 and 2020 we had a net loss of $2,462,020 and $7,768,081, respectively. For the six months ended December 31, 2021 and 2020 we had a net loss of $2,848,047 and $20,902,859 respectively and for the year ended June 30, 2021, we had a net loss of $24,434,336. For the year ended June 30, 2020, we had a net loss of $14,026,107. There can be no assurance that our losses will not continue in the future, even if our revenues and expenditures for the products and solutions we sell and distribute increase. In addition, as of December 31, 2021, we had stockholders' equity of approximately $74,000 and cash used in operations of approximately $1,300,000. In addition, as of June 30, 2021, we had stockholders' deficit of approximately $1,400,000 and cash used in operations of approximately $6,300,000. These factors raise substantial doubt regarding our ability to continue as a going concern.

 

We require funds to operate and expand our business.

 

During the six months ended December 31, 2021, our operating activities used net cash of $1,312,346 and our cash was $354,727. During the year ended June 30, 2021, our operating activities used net cash of approximately $6.3 million and our cash and cash equivalents was $541,591. As of December 31, 2021, our accumulated deficit totaled approximately $51 million on a consolidated basis. Although we have been able to mitigate our losses during the three months ended December 31, 2021, we expect to incur additional operating losses in the future and therefore expect our cumulative losses to increase. We will require funds to purchase additional inventories, pay our vendors, and build our marketing and sales staff. If we do not succeed in raising additional funds on acceptable terms, we may be unable to expand our business and could default on our obligations. There can be no assurance that such financing will be available and that the equity interests of all of our stockholders would not be substantially diluted. Any additional sources of financing will likely involve the issuance of our equity or debt securities, which will have a dilutive effect on our stockholders. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that may impact our ability to conduct our business. Our ability to raise capital through the sale of securities may be limited by the rules of the SEC and the terms of the agreements that we enter into.  We currently do not have any committed sources of financing other than our accounts receivable factoring agreement, which requires us to meet certain conditions to utilize and there can be no assurance that we will meet those conditions.

 

-34-

 

We may not be able to access the full amounts available under the Amended and Restated Purchase Agreement, which could prevent us from accessing the capital we need to continue our operations, which could have an adverse effect on our business

 

We have generated significant losses to date and expect to continue to incur significant operating losses. To date, our revenue from operations have been insufficient to support our operational activities and has been supplemented by the proceeds from the issuance of securities. There is no guarantee that additional equity, debt or other funding will be available to us on acceptable terms, or at all.

 

Our ability to direct Tysadco Partners to purchase up to $10.0 million of shares of our common stock over a 24-month period is expired. We may need additional capital to fully implement our business, operating and development plans. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects.

 

Our inability to access other financing sources, could have a material adverse effect on our business.

 

Risks Relating to the COVID-19 Pandemic

 

Pandemics, including the COVID-19 pandemic, could have a material adverse effect on our operations, liquidity, financial condition, and financial results.

 

A serious global pandemic, including the current COVID-19 pandemic and variants of COVID-19, can adversely impact, shock and weaken the global economy. These impacts can amplify other risk factors and could have a material impact on our operations, liquidity, financial conditions, and financial results.

 

COVID-19 pandemic-related risks may impact our exposure to global regulatory, geopolitical, and societal changes; rapid degradation of global economic conditions, creating an increase in the volatility and the timing and level of orders; supply chain disruptions, material shortages, and increases in the costs of components; changes in labor force availability, which could reduce our ability to operate across our business in development, sales and marketing, production, installation, and ongoing service and support; an increased risk being subjected to contract performance claims if we are unable to deliver according to the terms of our contract or commitments and cannot claim force majeure to mitigate or eliminate our exposure to such claims; increased geographic work restrictions that could impact our ability to market, sell, manufacture and/or install our products; an increase in our exposure to claims or litigation related to the pandemic; limitations on our ability to meet the terms of our bank credit agreements that cause restrictions on our ability to access the liquidity under such agreements; reduced access to and an increase in the cost of capital; reduced access to surety bonds or bank guarantees to secure customer orders; volatility and changes in foreign currency rates; delayed timing of collections and/or decreased collectability of receivables and contract assets; and a material reduction to the values of our assets including, but not limited to, inventory, deferred tax assets, goodwill, intangibles, and property and equipment.

 

-35-

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

For the six month ended December 31, 2021:

 

During the six months ended December 31, 2021, the Company issued 2,500,000 shares of common stock for services.

 

During the six months ended December 31, 2021, the Company issued 225,000,000 shares of common stock in exchange for proceeds under the Equity Purchase Agreement. These shares were valued at $2,143,500 upon issuance.

 

During the six months ended December 31, 2021, the Company issued 62,500,000 shares of common stock as commitment shares in a structured loan agreement. These shares were valued at $356,250 upon issuance.

 

During the six months ended December 31, 2021, the Company cancelled 50,000,000 shares of common stock which were previously held as collateral for a line of credit.

 

During the six months ended December 31, 2021, the Company entered into exchange agreements to issue 11,414 shares of Preferred Series F stock.

 

During the six months ended December 31, 2021, the Company cancelled 500,000 shares of Preferred Series E stock.

 

For six month ended December 31, 2020:

 

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 issused 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 the Equity Purchase Agreement. These shares were valued at $1,050,000 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 were held in the Company's name and serve as collateral for a line of credit with a bank.

 

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.

 

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

 

See the capital structure section in Note 1 for disclosure of the equity components included in the Company's consolidated financial statements.

 

-36-

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

Not applicable.

 

ITEM 6. EXHIBITS

 

Exhibit No.

 

Description

 

3.1

Amended and Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to Amendment No. 1 to the Annual Report on Form 10-K/A, File No. 000-56006, filed with the Securities and Exchange Commission on October 16, 2020 )

3.2

Bylaws (incorporated herein by reference to Exhibit 3.2 to the Registrant's Form 8A-12G, File No. 000-56006, filed with the Securities and Exchange Commission on December 3, 2018)

3.3

Certificate of Designation for Series D Preferred Stock (incorporated herein by reference to Exhibit 3.3 to the Annual Report on Form 10-K, File No. 000-56006, filed with the Securities and Exchange Commission on filed on September 28, 2020)

3.4

Certificate of Designation for Series E Preferred Stock (incorporated herein by reference to Exhibit 3.4 to the Annual Report on Form 10-K, File No. 000-56006, filed with the Securities and Exchange Commission on filed on September 28, 2020)

3.5

Certificate of Designation of Series F Convertible Preferred Stock (incoporated herein by reference to Exhibit 3.1 to the Current Report on Forn 8-K filed with the Securities and Exchange Commission filed February 14, 2022).

10.1

Exchange Agreement dated December 27, 2021 by and between Galaxy Next Generation, Inc and Watson Properties, LLC (incorporated herein as referenced filed as Exhibit 10.1 on Form 10-Q filed February 14, 2022).

10.2

Exchange Agreement dated December 20, 2021 by and between Galaxy Next Generation, Inc and Mark Fulbright (incorporated herein as referenced filed as Exhibit 10.2 on Form 10-Q filed February 14, 2022).

10.3

Exchange Agreement dated December 28, 2021 by and between Galaxy Next Generation, Inc and Carl Austin (incorporated herein as referenced filed as Exhibit 10.3 on Form 10-Q filed February 14, 2022).

31.1*

Amended Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Amended Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Amended Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Amended Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*

101.SCH*

Inline XBRL Taxonomy Extension Schema

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase

104*

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Filed herewith

 

-37-

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amended report to be signed on its behalf by the undersigned thereunto duly authorized.

 

GALAXY NEXT GENERATION, INC.

 

Date: February 15, 2022

 

/s/ Gary LeCroy

Gary LeCroy

Chief Executive Officer (Principal Executive Officer)

 

Date: February 15, 2022

 

/s/Magen McGahee

Magen McGahee

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

-38-

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