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. 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, 2022 (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 conditions,
including inflation. 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 business or economic conditions which 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, our "Risk Factors" section
included in Item 1A of Part I of our Annual Report, 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.
Business Overview
We are a manufacturer and U.S. distributor of interactive learning technologies
and enhanced audio solutions. We are engaged in a full range of activities:
marketing and sales, engineering and product design and development,
manufacturing, and distributing. We develop both hardware and software that
allows the presenter and participant to engage in a fully collaborative
instructional environment. We also develop award winning classroom audio
solutions, school public address ("PA") and intercom products, and emergency
communication applications creating a full line card offering for classrooms to
our channel partners. Our product offerings include our own private-label
interactive touch screen panel, our own intercom, bell, and paging solution, as
well as an audio amplification line of products that is currently supported by
both direct sales and through original equipment manufacturer ("OEM")
relationships. Our distribution channel consists of a direct sales model, as
well as in excess of 40 resellers across the U.S. that primarily sell the
products offered by us within the commercial and educational market. We do not
control where the resellers focus their reselling efforts; however, the K-12
education market is the largest customer base for our products comprising nearly
90% of our sales. In addition, our OEM division manufactures products for other
vendors in our 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 effects of
the ongoing global 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.
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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"), 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
(6,750 post March 7, 2022 reverse stock split) 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. The note has
been adjusted and is reflecting under related party notes payable in the
consolidated financial statements.
Solutions and Concepts are Utah-based audio design and manufacturing companies
creating innovative products that provide fundamental tools for building
notification systems primarily to K-12 education market customers located
primarily in the north and northwest United States. These products and services
allow institutions access to intercom, scheduling, and notification systems with
improved ease of use. The products provide an open architecture solution to
customers which allows the products to be used in both existing and new
environments. Intercom, public announcement (PA), bell and control solutions are
easily added and integrated within the open architecture design and software
model. These products combine elements over a common internet protocol (IP)
network, which minimizes infrastructure requirements and reduces costs by
combining systems.
On October 15, 2020, 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 (50,000 post March 7, 2022 reverse stock split) 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 include the consolidated assets and liabilities of the
combined company (collectively Galaxy Next Generation, Inc., Interlock Concepts,
Inc., Ehlert Solutions Group, Inc. and Classroom Technologies Solutions, Inc.
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.
Reverse Stock Split
Effective March 7, 2022, we effected a one-for-two hundred reverse stock split
of our authorized and outstanding shares of common stock. All per share numbers
reflect the one-for-two hundred reverse stock split.
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Critical Accounting 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.
Results of Operations
The tables below present 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 $429,031 and $904,055 for the three months ended
December 31, 2022 and 2021, respectively, a decrease of approximately 53%. Total
revenues recognized were $1,048,084 and $2,588,826 for the six months ended
December 31, 2022 and 2021, respectively, a decrease of approximately 60%.
Additionally, deferred revenue amounted to $627,560 and $175,436 as of December
31, 2022 and June 30, 2022, respectively. Revenues decreased during the three
and six months ended December 31, 2022 due to delays in supply chain which
resulted in a large increase in deferred revenue at quarter end.
Cost of Sales and Gross Margin
Our cost of sales was $330,016 and $848,099 for the three months ended December
31, 2022 and 2021, respectively, a decrease of approximately 61%. Our cost of
sales was $601,501 and $1,866,862 for the six months ended December 31, 2022 and
2021, respectively, a decrease of approximately 68%. Cost of sales consists
primarily of manufacturing, freight, delivery, amortization of product
development costs, and installation costs. There are no significant overhead
costs which impact cost of sales. Cost of sales decreased during the three and
six months ended December 31, 2022 due to the decrease in revenue as well as our
shift to selling products that are lower cost with higher profit margins.
General and Administrative
Three months ended December 31, 2022 December 31, 2021
Stock compensation and stock issued $ -
for services $ 50,000
Impairment - 46,869
General and administrative 1,511,292 1,049,993
Total General and Administrative $ 1,096,862
Expenses $ 1,561,292
Six months ended December 31, 2022 December 31, 2021
Stock compensation and stock issued $ 32,750
for services $ 238,128
- 46,869
General and administrative 2,943,271 2,548,117
Total General and Administrative $ 2,627,736
Expenses $ 3,181,399Total general and administrative expenses (including stock issued for services
expenses) were $1,561,292 and $1,096,862 for the three months ended December 31,
2022 and 2021, respectively. Total general and administrative expenses
(including stock issued for services expenses) were $3,181,399 and $2,627,736
for the six months ended December 31, 2022 and 2021, respectively
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Other Income (Expense)
Three months ended December 31, 2022 December 31, 2021
Other Income $ 257 $ 5,878
Expenses related to notes payable:
Change in fair value of derivative
liability (73,472) 834,000
Interest accretion (114,843) (15,540)
Interest related to equity purchase
agreement - (1,890,600)
Interest expense (1,275,819) (354,852)
Total Other Income (Expense) $ (1,464,147) $ (1,421,114)
Six months ended December 31, 2022 December 31, 2021
Other Income $ 2,800 $ 5,878
Expenses related to notes payable:
Change in fair value of derivative
liability (73,472) 1,842,000
Interest accretion (236,113) (24,290)
Interest related to equity purchase
agreement - (2,143,500)
Interest expense (1,438,196) (622,363)
Total Other Income (Expense) $ (1,745,251) $ (942,275)Interest expense amounted to $1,275,819 and $354,852 for the three months ended
December 31, 2022 and 2021, respectively, an increase of 260%. Interest expense
of $1,438,196 and $622,363 during the six months ended December 31, 2022 and
2021, was primarily due to common stock issued as commitment fees and to convert
preferred stock, warrants issued, and interest paid on notes payable, an
increase of 131%. The change in the fair value of the derivative liability was
due to convertible features of certain notes payable under recent conditions and
the elimination of the derivative in December 2021, when convertible notes were
exchanged for Series F stock.
Net Loss for the Period
Net loss incurred for the three months ended December 31, 2022 and 2021 was
$2,926,424 and $2,462,020 respectively, an increase of approximately 19%. Net
loss incurred for the six months ended December 31, 2022 and 2021 was $4,480,067
and $2,848,047 respectively, an increase of approximately 57%. Noncash
contributing factors for the net loss incurred for the six months ended December
31, 2022 and 2021 are as follows:
a) $238,128 and $32,750 represent noncash consulting fees paid through the
issuance of stock for the six months ended December 31, 2022 and 2021,
respectively;
b) Noncash interest expenses of $0 and $2,143,500 related to the Equity Purchase
Agreement for the six months ended December 31, 2022 and 2021, respectively; and
c) Depreciation and amortization expenses related to intangibles and capitalized
development costs of $360,583 and $241,785 for the six months ended December 31,
2022 and 2021, respectively.
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Liquidity and Capital Resources
To date our revenues generated from operations have been insufficient to support
our operational activities and have been supplemented by the proceeds from the
issuance of securities, including equity and debt issuances. In order to support
our operational activities our revenues still need to be supplemented by the
proceeds from the issuance of securities, including equity and debt issuances.
At December 31, 2022, we had a working capital deficit of approximately
$6,500,000 and an accumulated deficit of approximately $58,700,000. As stated in
Note 13 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. 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 should 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 and small lines of credit, 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, or accounts receivable
factoring agreement, and therefore those financing options may be unavailable to
us. The Equity Purchase Agreement that we entered into November 2022 also has
several conditions that we must meet before ClearThink Capital Partners, LLC is
required to purchase shares of our common stock and there can be no assurance
that we will meet those conditions. 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 $21,360 at December 31, 2022, as compared with $300,899 at June
30, 2022, a decrease of $279,539. Net cash of $1,990,898 and $208,245 was used
in operations and investing activities, respectively, for the six months ended
December 31, 2022. 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.
Net cash of $1,919,604 was provided from financing activities for the six months
ended December 31, 2022, primarily due to proceeds from notes payable
agreements. Net cash of $1,541,238 was provided from financing activities for
the six months ended December 31, 2021, primarily due to proceeds from an equity
purchase agreement.
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.
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, 2022 and 2021.
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. We
calculate EBITDA as net loss before income taxes, depreciation and amortization
and we calculate Adjusted EBITDA as EBITDA adjusted to exclude stock
compensation. 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.
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Non-GAAP Adjusted EBITDA financial results for the three and six months ended
December 31, 2022 and 2021:
Three months ended December 31, 2022 December 31, 2021
Revenue $ 429,031 $ 904,055
Gross Profit 99,015 55,956
General and Administrative 1,561,292 1,096,862
Expenses
Loss from Operations (1,462,277) (1,040,906)
Other Income (Expense) (1,464,147) (1,421,114)
Net Loss (2,926,424) (2,462,020)
Interest, taxes, depreciation 1,573,869 2,372,631
and amortization
EBITDA (1,352,555) (89,389)
Stock Compensation 50,000 -
Non-GAAP Adjusted EBITDA $ (1,302,555) $ (89,389)
Six months ended December 31, 2022 December 31, 2021
Revenue $ 1,048,084 $ 2,588,826
Gross Profit 446,583 721,964
General and Administrative 3,181,399 2,627,736
Expenses
Loss from Operations (2,734,816) (1,905,722)
Other Income (Expense) (1,745,251) (942,275)
Net Loss (4,480,067) (2,848,047)
Interest, taxes, depreciation 2,034,892 3,031,938
and amortization
EBITDA (2,445,175) 183,891
Stock Compensation 238,128 32,750
Non-GAAP Adjusted EBITDA $ (2,207,047) $ 216,641Non-GAAP Adjusted EBITDA was net loss of $1,302,555 and $89,389 for the three
months ended December 31, 2022 and 2021, respectively. Non-GAAP Adjusted EBITDA
was net loss of $2,207,047 and net gain of $216,641 for the six months ended
December 31, 2022 and 2021, respectively.
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GALAXY NEXT GENERATION, INC. 
