The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted in March 2020 in response to the COVID-19 pandemic. The CARES Act and related rules and guidelines include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments, and estimated income tax payments that we are deferring to future periods. As a result, the Company delayed payment of certain payroll tax payments in the amount of $19,517 as of September 30, 2020 and June 30, 2020, respectively.
In April 2020, the Company applied for an unsecured loan (the "PPP Loan") under the Paycheck Protection Program (PPP). The PPP was established under The CARES Act and is administered by the U.S. Small Business Administration (SBA). The PPP loan was approved and funded, and the Company entered into an unsecured loan of approximately $311,000. The PPP loan matures in April 2022 and accrues interest at an annual rate of 0.98%. The promissory note evidencing the PPP Loan contains customary events of default relating to, among other things, payment defaults and provisions of the promissory note. In accordance with the requirements of the CARES Act, the Company used the proceeds from the PPP Loan primarily for payroll costs. See Note 6.
In May 2020, the Company received a loan from the SBA under Section 7(b) of the Small Business Act. The $150,000 secured loan matures in May 2050 and accrues interest at an annual rate of 3.75%. The promissory note is collateralized by a security interest in substantially all assets of the Company. The loan proceeds are to fund working capital needs due to economic injury caused by the COVID-19 pandemic. See Note 6.
Galaxy Next Generation LTD CO. ("Galaxy CO") merged with R&G Sales, Inc. ("R&G") ("common controlled merger") with R&G becoming the surviving company. R&G subsequently changed its name to Galaxy Next Generation, Inc.
On September 4, 2019, Galaxy acquired 100% of the stock of Interlock Concepts, Inc. ("Concepts") and Ehlert Solutions Group, Inc. ("Solutions"). The purchase price for the acquisition was 1,350,000 shares of common stock and a two year note payable to the seller for $3,000,000. The note payable to the seller is subject to adjustment based on the achievement of certain future gross revenues and successful completion of certain pre-acquisition withholding tax issues of Concepts and Solutions.
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.
Galaxy is a manufacturer and U.S. distributor of interactive learning technology hardware and software that allows the presenter and participant to engage in a fully collaborative instructional environment. Galaxy's products include Galaxy's own private-label interactive touch screen panel as well as numerous other national and international branded peripheral and communication devices. New technologies like Galaxy's own touchscreen panels are sold along with renowned brands such as Google Chromebooks, Microsoft Surface Tablets, Lenovo and Acer computers, Verizon WiFi and more. Galaxy's distribution channel consists of approximately 30 resellers across the U.S. who primarily sell its products within the commercial and educational market. Galaxy does not control where the resellers focus their resell efforts; however, the K-12 education market is the largest customer base for Galaxy products comprising nearly 90% of Galaxy's sales. In addition, Galaxy also possesses its own reseller channel where it sells directly to the K-12 market, primarily throughout the Southeast region of the United States.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Any reference in these footnotes to applicable guidance is meant to refer to the authoritative U.S. generally accepted accounting principles ("GAAP") as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB").
The financial statements include the consolidated assets and liabilities of the combined company (collectively Galaxy Next Generation, Inc., Interlock Concepts, Inc., and Ehlert Solutions Group, Inc. referred to collectively as the "Company"). See Note 14.
All intercompany transactions and accounts have been eliminated in the consolidation.
The Company is an over-the-counter public company traded under the stock symbol listing GAXY (formerly FLCR).
The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates used in preparing the consolidated financial statements include those assumed in computing product warranty liabilities, product development costs, valuation of goodwill and intangible assets, valuation of convertible notes payable and warrants, and the valuation of deferred tax assets. It is reasonably possible that the significant estimates used will change within the next year.
Capital Structure
In accordance with ASC 505, Equity, the Company's capital structure is as follows:
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September 30, 2020
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|
|
|
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Authorized
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Issued
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|
Outstanding
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Common stock
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|
4,000,000,000
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|
2,194,557,083
|
|
2,194,518,458
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|
$.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
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|
Preferred stock - Class B
|
|
1,000,000
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|
-
|
|
-
|
|
Voting rights of 10 votes for 1
Preferred B share; 2% preferred
dividend payable annually
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|
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Preferred stock - Class C
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|
9,000,000
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-
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-
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|
$.0001 par value; 500 votes per
share, convertible to common
stock
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|
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|
Preferred stock - Class D
|
|
1,000,000
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-
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-
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|
$.0001 par value; no voting
rights, convertible to common
stock, mandatory conversion to
common stock 18 months after
issue
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|
Preferred stock - Class E
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500,000
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|
500,000
|
|
500,000
|
|
$.0001 par value; no voting
rights, convertible to common
stock
|
-10-
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June 30, 2020
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Authorized
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Issued
|
|
Outstanding
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|
|
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|
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|
|
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|
|
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|
|
Common stock
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|
4,000,000,000
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|
628,039,242
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|
628,000,617
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|
$.0001 par value, one vote per
share
|
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|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
200,000,000
|
|
-
|
|
-
|
|
$.0001 par value, one vote per
share
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class A
|
|
750,000
|
|
-
|
|
-
|
|
$.0001 par value; no voting rights
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|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class B
|
|
1,000,000
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|
-
|
|
-
|
|
Voting rights of 10 votes for 1
Preferred B share; 2% preferred
dividend payable annually
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|
|
|
|
|
|
|
|
|
|
Preferred stock - Class C
|
|
9,000,000
|
|
-
|
|
-
|
|
$.0001 par value; 500 votes per
share, convertible to common
stock
|
Preferred stock - Class D
|
|
1,000,000
|
|
-
|
|
-
|
|
$.0001 par value; no voting
rights, convertible to common
stock, mandatory conversion to
common stock 18 months after
issue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Class E
|
|
500,000
|
|
500,000
|
|
500,000
|
|
$.0001 par value; no voting rights, convertible to common
stock
|
There is no publicly traded market for the preferred shares.
There are 1,101,609,009 common shares reserved at September 30, 2020 under terms of the convertible debt agreements, Stock Plan and Put Purchase Agreement (see Notes 6, 14 and 15).
There are 125,953,028 issued common shares that are restricted as of September 30, 2020. The shares may become free-trading upon satisfaction of certain terms and regulatory conditions.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. Under this method, acquired assets, including separately identifiable intangible assets, and any assumed liabilities are recorded at their acquisition date estimated fair value. The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. Determining the fair value of assets acquired and liabilities assumed involves the use of significant estimates and assumptions.
-11-
Revenue Recognition
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:
● Identify the contract with a customer
● Identify the performance obligations in the contract
● Determine the transaction price
● Allocate the transaction price to performance obligations in the contract
● Recognize revenue when or as the Company satisfies a performance obligation
All of the Company's performance obligations and associated revenue are generally transferred to customers at a point in time. Shipping and handling costs billed to customers are included in revenue in the accompanying statements of operations. Costs incurred by the Company associated with shipping and handling are included in cost of sales in the accompanying statements of operations. Sales are recorded net of sales returns and discounts, and sales are presented net of sales-related taxes.
Contracts with Multiple Performance Obligations
Most contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company's products can be sold on a stand-alone basis to customers which provides objective evidence of the fair value of the product portion of the multi-element contract, and thus represents the Company's best estimate of selling price.
The Company considers several factors in determining that control transfers to the customer including that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership.
Product
Product revenue consists of fees for associated equipment sold, such as interactive panels, intercom, public announcement, bell and control solutions. Product sales resulting from fixed-price contracts involve a signed contract for a fixed price or a binding purchase order to provide the Company's interactive panels and accessories. Revenue is recognized at a point in time once the product is installed at the customer's premises. Hardware items are generally invoiced in full on execution of the arrangement.
Service
Service revenue consists of installation and training services, support maintenance, technical assistance, bug fixes, and product repair. The Company satisfies its service performance obligations by providing "stand-ready" assistance as required over the contract period. The fair value of these services is separately calculated using expected costs of the services. Many times, the value of the services is calculated using price quotations from subcontractors to the Company who perform such services on a stand-alone basis. Additionally, service revenue not part of the contract is based upon standard hourly/daily rates, and revenue is recognized as the services are performed.
-12-
Software
The Company sells equipment with embedded software to its customers. The embedded software is not sold separately and is not a significant focus of the Company's marketing efforts. The Company does not provide post-contract customer support specific to the software or incur significant costs that are within the scope of FASB guidance on accounting for software to be leased or sold. Additionally, the functionality that the software provides is marketed as part of the overall product. The software embedded in the equipment is incidental to the equipment as a whole.
Reserves and Warranties
The Company does not record a reserve for product returns as contract arrangements generally exclude a right of return for delivered items.
Because of the nature and quality of the Company's products, the Company provides for the estimated costs of warranties at the time revenue is recognized for a period of five years after purchase as a secondary warranty. The manufacturer also provides a warranty against certain manufacturing and other defects. As of September 30, 2020 and June 30, 2020, the Company accrued $102,350, respectively, for estimated product warranty claims, which is included in accrued expenses in the accompanying condensed consolidated balance sheets. The accrued warranty costs are based primarily on historical warranty claims as well as current repair costs. There was $1,391 and $82,494 of warranty expense for the three months ended September 30, 2020 and 2019, respectively.
The Company negotiated a warranty settlement with one of its manufacturers. At September 30, 2020 and June 30, 2020, the Company accrued $87,720 and $124,437 payable to this manufacturer.
Costs to Obtain and Fulfill a Contract
The Company incurs incremental costs to obtain a contract in the form of sales commissions. These costs, whether related to performance obligations that extend beyond twelve months or not, are immaterial and will continue to be recognized in the period incurred within general and administrative expenses.
Contract Assets and Contract Liabilities
Contract assets are rights to consideration in exchange for goods or services that has been transferred to a customer when that right is conditional on something other than the passage of time. The majority of our contract assets represent unbilled accounts receivable as the right to consideration is subject to the contractually agreed upon installation and billing schedule.
Contract liabilities (deferred revenue) represent consideration received or consideration which is unconditionally due from customers prior to transferring goods or services to the customer under the terms of the contract, all of which is expected to be recognized within one year.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to be cash in all bank accounts, including temporary investments that have an original maturity of three months or less.
From time to time, the Company has on deposit, in institutions whose accounts are insured by the Federal Deposit Insurance Corporation, funds in excess of the insured maximum. The at-risk amount is subject to significant daily fluctuation. The Company has never experienced any losses related to these balances, and as such, the Company does not believe it is exposed to any significant risk.
-13-
Accounts Receivable
Accounts receivable is recognized when the Company's right to consideration is unconditional and is presented net of an allowance for doubtful accounts. Interest is not charged on past due accounts. Management reviews each receivable balance and estimates that portion, if any, of the balance that will not be collected. The carrying amount of accounts receivable is then reduced by an allowance based on management's estimate. Management deemed no allowance for doubtful accounts was necessary at September 30, 2020 and June 30, 2020. At September 30, 2020 and June 30, 2020, $1,145,187 and $670,031 of total accounts receivable were considered unbilled and recorded as deferred revenue. Accounts receivable unbilled is related to 1) a supply contract with a customer and 2) customers that are school districts. The unbilled accounts receivable and deferred revenue related to the supply contract are disclosed in Note 2. The remaining unbilled accounts receivable and deferred revenues are related to unconditional purchase orders from school districts; therefore, excluded from contract asset and liabilities.
To enhance cash and liquidity, the Company factors trade accounts receivable with a financial services company. 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 proceeds received are included in cash provided by operating activities in the condensed consolidated statements of cash flows. The difference between the carrying amount of the trade receivables sold and the cash received is recorded as a general and administrative expense in the condensed consolidated statements of operations. For the three months ended September 30, 2020, expenses on sale of trade receivables was inconsequential. For the three months ended September 30, 2019, the Company did not factor accounts receivable.
Inventories
Inventory is stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out (FIFO) method of accounting. Galaxy inventory is comprised of interactive panels, audio and related accessories, and parts for audio products. Management estimates $67,635 of inventory reserves at September 30, 2020 and June 30, 2020.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations.
Property and equipment and the estimated useful lives used in computing depreciation, are as follows:
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|
Furniture and fixtures
|
5 years
|
Equipment
|
5 to 10 years
|
Vehicles
|
5 years
|
Depreciation is provided using the straight-line method over the estimated useful lives of the depreciable assets. Depreciation expense was $4,428 and $7,832 for the three months ended September 30, 2020 and 2019, respectively.
Long-lived Assets
Long-lived assets to be held and used are tested for recoverability whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the excess of the asset's carrying amount over the fair value of the asset.
-14-
Product Development Costs
Costs incurred in designing and developing classroom technology products are expensed as research and development until commercial viability has been established. Commercial viability is established upon completion of a detail product design, or a working model. Upon the achievement of commercial viability, 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 a product enters the stages at which costs may be capitalized, assessing the ongoing value and impairment of the capitalized costs and determining the estimated useful life over which the costs are amortized.
Annual amortization expense is calculated based on the straight-line method over the product's estimated economic life. Amortization of product development costs incurred begins when the related products are available for sale to customers. Amortization of product development costs of $12,512 and $0 for the three months ended September 30, 2020 and 2019, and is included in cost of sales in the Company's condensed consolidated statements of operations.
Goodwill and Intangible Assets
Goodwill is not amortized, but is reviewed for impairment at least annually, or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable. Judgments regarding indicators of potential impairment are based on market conditions and operational performance of the business. At each fiscal year-end, the Company performs an analysis of goodwill or whenever events or circumstances arise that indicate an impairment may exist, such as the loss of a key executive, adverse industry and economic conditions, or increased or unexpected competition. The Company may assess its goodwill for impairment initially using a qualitative approach to determine whether conditions exist to indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If management concludes, based on its assessment of relevant events, facts and circumstances that it is more likely than not that a reporting unit's carrying value is greater than its fair value, then a goodwill impairment charge is recognized for the amount in excess, not to exceed the total amount of goodwill allocated to that reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and no further testing is required. If determined to be impaired, an impairment charge is recorded as a general and administrative expense within the Company's condensed consolidated statements of operations.
Management of the Company determined that a triggering event to assess goodwill impairment occurred during the year ended June 30, 2020 due to the separation of a key executive associated with their acquisition of Concepts and Solutions. While there was no single determinative event, the consideration in totality of several factors that developed led management to conclude that it was more likely than not that the fair values of certain intangible assets and goodwill acquired as part of that acquisition were below their carrying amounts. These factors included: a) former key executive separating from the Company; b) respective former key executive violating his noncompete changing the use and value of it; c) sustained decrease in the Company's share price which reduced market capitalization; and d) uncertainty in the United States and global economies due to Covid-19. As a result, the Company recorded a non-cash impairment loss of approximately $2,000,000, including $800,287 related to goodwill and $1,200,000 related to finite-lived intangibleassets. No such impairment charge was recorded during the three months ended September 30, 2020.
Research and Development
Research and development costs are expensed as incurred and totaled approximately $15,000 and $0 for the three months ended September 30, 2020 and 2019.
-15-
Leases
The Company's leases relate primarily to corporate offices and warehouses. Effective July 1, 2019, the Company adopted the FASB guidance on leases ("Topic 842"), which requires leases with durations greater than twelve months to be recognized on the balance sheet. The Company adopted Topic 842 using the modified retrospective transition approach.
Income Taxes
The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss from the current year and any adjustment to income taxes payable related to previous years. Current income taxes are determined using tax rates and tax laws that have been enacted or subsequently enacted by the year-end date.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Under the asset and liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or all of the deferred tax asset will not be utilized.
Stock-based Compensation
The Company records stock-based compensation in accordance with the provisions set forth in ASC 718, Stock Compensation ("ASC 718"). ASC 718 requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards. The Company, from time to time, may issue common stock to acquire services or goods from non-employees. Common stock issued to persons other than employees or directors are recorded on the basis of their fair value.
Earnings (Loss) per Share
Basic and diluted earnings (loss) per common share is calculated using the weighted average number of common shares outstanding during the period. The Company's convertible notes and warrants are excluded from the computation of diluted earnings per share as they are anti-dilutive due to the Company's losses during those periods.
Fair Value of Financial Instruments
The Company categorized its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure the fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are significant other observable inputs; Level 3 inputs are significant unobservable inputs.
As of September 30, 2020 ,and June 30, 2020, the Company held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis. All such assets and liabilities are considered to be Level 3 in the fair value hierarchy defined above.
The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, "Distinguishing Liabilities from Equity," and ASC 815.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The amendments in ASU 2018-13 modify certain disclosure requirements of fair value measurements. The Company adopted ASU 2018-13 on July 1, 2020 with no impact to the condensed consolidated financial statements as a result.
-16-
Derivative Liabilities
The Company generally does not use derivative financial instruments to hedge exposures to cash flow or market risks. However, certain other financial instruments, such as warrants and embedded conversion features on the convertible debt, are classified as derivative liabilities due to protection provisions within the agreements. Such financial instruments are initially recorded at fair value using the Monte Carlo model and subsequently adjusted to fair value at the close of each reporting period. The Company accounts for derivative instruments and debt instruments in accordance with the interpretive guidance of ASC 815, ASU 2017-11, and associated pronouncements related to the classification and measurement of warrants and instruments with conversion features and anti-dilution clauses in agreements.
Recent Accounting Pronouncements
In January 2020, the FASB issued ASU No. 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815." The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2020-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company is currently evaluating the impacts of adoption of the new guidance to its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12") by removing certain exceptions to the general principles. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. The Company is currently evaluating the impacts of adoption of the new guidance to its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain convertible instruments, amends guidance on derivative scope exceptions for contracts in an entity's own equity and modifies the guidance on diluted EPS calculations as a result of these changes. The guidance in this ASU can be adopted using either a full or modified retrospective approach and becomes effective for annual reporting periods beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the consolidated financialstatements 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.
Reclassifications
Certain amounts in the current condensed consolidated financial statements have been reclassified to conform to the current presentation.
-17-
Note 2 - Contract Balances
Contract assets and contract liabilities are as follows:
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|
|
September 30, 2020
|
|
June 30, 2020
|
Contract assets
|
$ 756,800
|
|
$ -
|
Contract liabilities
|
1,220,761
|
|
463,961
|
For the three months ended September 30, 2020, the Company recognized $54,939 of revenue that was included in contract liabilities as of June 30, 2020.
Note 3 - Property and Equipment
Property and equipment are comprised of the following at:
|
|
|
|
|
September 30, 2020
|
|
June 30, 2020
|
Vehicles
|
$ 115,135
|
|
$ 115,135
|
Equipment
|
6,097
|
|
6,097
|
Furniture and fixtures
|
24,335
|
|
24,335
|
|
145,567
|
|
145,567
|
Accumulated depreciation
|
(97,946)
|
|
(93,518)
|
|
|
|
|
Property and equipment, net
|
$ 47,621
|
|
$ 52,049
|
-18-
Note 4 - Intangible Assets
Intangible assets are stated at the lower of cost or fair value. Intangible assets are amortized on a straight-line basis over five years, representing the period over which the Company expects to receive future economic benefits from these assets. The following tables shows goodwill, finite-lived intangible assets, accumulated amortization, and the impairment charges:
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
Impairment
|
|
Total
|
Goodwill
|
$ 834,220
|
|
$ -
|
|
$ 834,220
|
|
$ -
|
|
$ 834,220
|
Finite-lived assets:
|
|
|
|
|
|
|
|
|
|
Customer list
|
$ 881,000
|
|
$ (168,293)
|
|
$ 712,707
|
|
$ -
|
|
$ 712,707
|
Vendor relationships
|
471,096
|
|
(95,797)
|
|
375,299
|
|
-
|
|
375,299
|
Capitalized product development costs
|
281,845
|
|
(14,048)
|
|
267,797
|
|
-
|
|
267,797
|
|
$ 1,633,941
|
|
$ (278,138)
|
|
$ 1,355,803
|
|
$ -
|
|
$1,355,803
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
Impairment
|
|
Total
|
Goodwill
|
$ 1,634,507
|
|
$ -
|
|
$ 1,634,507
|
|
$ (800,287)
|
|
$ 834,220
|
Finite-lived assets:
|
|
|
|
|
|
|
|
|
|
Customer list
|
$ 881,000
|
|
$ (132,147)
|
|
$ 748,853
|
|
$ -
|
|
$ 748,853
|
Vendor relationships
|
479,000
|
|
(71,847)
|
|
407,153
|
|
-
|
|
407,153
|
Noncompete agreements
|
1,600,000
|
|
(400,000)
|
|
1,200,000
|
|
(1,200,000)
|
|
-
|
Capitalized product development costs
|
281,845
|
|
(1,536)
|
|
280,309
|
|
-
|
|
280,309
|
|
$ 3,241,845
|
|
$ (605,530)
|
|
$ 2,636,315
|
|
$(1,200,000)
|
|
$1,436,315
|
Estimated amortization expense related to intangible assets for the next five years is as follows:
|
|
Period ending September 30,
|
|
2021
|
$ 347,293
|
2022
|
353,660
|
2023
|
361,577
|
2024
|
276,383
|
2025
|
16,890
|
|
$ 1,355,803
|
-19-
Note 5 - Lines of Credit
The Company has an available $1,000,000 and $1,250,000 line of credit at September 30, 2020 and June 30, 2020, respectively, bearing interest at prime plus 0.5% (3.75% at September 30, 2020 and 4.25% at June 30, 2020). The line of credit was renewed in October 2020 at a reduced available credit line, change in collateral, and now expires on October 29, 2021. The renewed line of credit is collateralized by certain real estate owned by a family member of a stockholder, 50,000,000 shares of the Company's common stock par value $0.0001 per share (the "Common Stock") and the personal stock of two stockholders, and a key man life insurance policy. A minimum average bank balance of $50,000 was required on the line of credit agreement at June 30, 2020, but this requirement was removed as of September 30, 2020.The outstanding balance is $936,598 and $1,236,598 at September 30, 2020 and June 30, 2020, respectively.
The Company has a $1,000,000 available credit line under an accounts receivable factoring agreement through July 30, 2022. No amounts were outstanding as of September 30, 2020. See Note 13.
Note 6 - Notes Payable
Long Term Notes Payable
|
|
|
|
|
September 30, 2020
|
|
June 30, 2020
|
Note payable with a bank bearing interest at 4% and maturing on June 26, 2020. The note was renewed by the lender with a revised maturity of June 26, 2021 and a lowered interest rate to 3%. The renewal provides for monthly interest payments and a balloon payment of outstanding principal and interest at maturity. The note is collateralized by a certificate of deposit owned by a related party.
|
|
|
|
|
|
|
$275,200
|
|
$274,900
|
Long term PPP loan under the CARES Act bearing interest at 0.98% and maturing in April 2022. Monthly installments of principal and interest of $13,137 begin in October 2020. The loan is subject to forgiveness by the SBA.
|
310,832
|
|
310,832
|
Long term loan under Section 7(b) of the Economic Injury Disaster Loan program bearing interest at 3.75% and maturing in May 2050. Monthly installments of principal and interest of $731 begin in May 2021.
|
150,000
|
|
150,000
|
Financing lease liabilities for offices and warehouses with monthly installments of $12,449 (ranging from $1,083 to $3,524) over terms expiring through July 2022.
|
249,299
|
|
223,982
|
Financing leases with a related party for delivery vehicles with monthly installments totaling $813, including interest, over 5-year terms expiring through July 2020.
|
-
|
|
1,245
|
Note payable with a finance company for delivery vehicle with monthly installments totaling $679 including interest at 8.99% over a 6 year term expiring in December 2025.
|
33,245
|
|
34,019
|
|
|
|
|
Total Notes Payable
|
1,018,576
|
|
994,978
|
|
|
|
|
Current Portion of Notes Payable
|
570,962
|
|
512,425
|
|
|
|
|
Long-term Portion of Notes Payable
|
$ 447,614
|
|
$ 482,553
|
-20-
Future minimum principal payments on the long-term notes payable to unrelated parties are as follows:
|
|
Period ending September 30,
|
|
2021
|
$ 570,962
|
2022
|
247,194
|
2023
|
42,191
|
2024
|
10,230
|
2025
|
13,017
|
Thereafter
|
134,982
|
|
$ 1,018,576
|
Convertible Notes
|
|
|
|
|
September 30, 2020
|
|
June 30, 2020
|
|
|
|
|
On March 28, 2019, the Company signed a convertible promissory note with an investor. The $225,000 note was issued at a discount of $20,000 and bears interest at 10% per year. The Company issued 25,000 common shares to the investor. Three draws of $56,250, $112,500, and $56,250 were borrowed under this note. The note principal and interest were convertible into shares of common stock at the lower of (a) 70% of the lowest traded price of the common stock during the 20 trading days immediately preceding the notice of conversion or (b) $3 per share, beginning in September 2019. The note had prepayment penalties ranging from 110% to 125% of the principal and interest outstanding if repaid within 60 to 180 days from issuance. The note matured in three intervals in March 2020, June 2020, and November 2020. The note was repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
$ -
|
|
$24,150
|
|
|
|
|
-21-
|
|
|
|
On November 18, 2019, the Company signed a convertible promissory note with an investor. The $110,000 note was issued at a discount of $10,000 and bore interest at 8% per year. The note principal and interest were convertible into shares of common stock at the lower of (a) 70% of the lowest traded price of common stock during the 15 trading days prior to the issue date or (b) 70% of the lowest traded price for the common stock during the 15 trading days prior to conversion of the note. The note matures in November 2020. The note had prepayment penalties between 115% and 125% of the principal and interest outstanding if repaid before 180 days from issuance. The note was repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
1,000
|
On December 11, 2019, the Company signed a convertible promissory note with an investor. The $220,430 note was issued at a discount of $15,430 and bore interest at 8% per year. The note principal and interest were convertible into shares of common stock at the lower of (a) $0.46 per share or (b) 75% of the lowest trading price of common stock during the 10 trading days prior to conversion beginning in June 2020. The note matured in December 2020. The note had prepayment penalties between 120% and 130% of the principal and interest outstanding if repaid before 180 days from issuance. The note was repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
121,200
|
|
|
|
|
On November 25, 2019, the Company signed a convertible promissory note with an investor. The $1,000,000 note was issued at a discount of $70,000 and bore interest at 8% per year. The note principal and interest up to $250,000 every 30-day calendar period were convertible into shares of common stock at the lower of (a) 75% of the lowest traded price of the common stock during the 10 trading days immediately preceding the notice of conversion or (b) $0.46 per share. The note matures in November 2020. The note had a redemption premium of 115% of the principal and interest outstanding if repaid before maturity. The note was repaid by conversion to stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
825,000
|
|
|
|
|
On January 9, 2020, the Company entered into a $225,000 convertible note. The $225,000 note was issued at a discount of $13,500 and bore interest at 8% per year. The note principal and interest were convertible into shares of common stock at the lower of (a) 75% of the lowest traded price of the common stock during the 10 trading days immediately preceding the notice of conversion or (b) the lowest traded price of the common stock during the 10 trading days prior to the issuance of this note. The note matured in October 2020. The note had prepayment penalties of 110% to 125% of the principal and interest outstanding if repaid before 180 days from issuance. The principal amount of the note was increased by $25,000 due to the value of the stock price at conversion. The note was repaid by conversion to stock.
|
-
|
|
250,000
|
-22-
|
|
|
|
On March 25, 2020, the Company signed a convertible promissory note with an investor. The $338,625 note was issued at a discount of $23,625 and bears interest at 8% per year. The note principal and interest are convertible into shares of common stock at the lower of (a) $0.46 per share or (b) 75% of the lowest trading price of common stock during the 10 trading days prior to conversion. The note matures in March 2021. The note has prepayment penalties between 120% and 130% of the principal and interest outstanding if repaid before 180 days from issuance. The note was partially repaid by conversion to stock.
|
75,465
|
|
338,625
|
On June 26, 2020, the Company signed a convertible promissory note with an investor. The $430,000 note was issued at a discount of $30,000 and bears interest at 8% per year. The note principal and interest are convertible into shares of common stock at the lower of (a) $0.47 per share or (b) 70% of the lowest trading price of common stock during the 10 trading days prior to conversion. The note matures in June 2021. The note has prepayment penalties between 120% and 130% of the principal and interest outstanding if repaid before 180 days from issuance.
|
430,000
|
|
430,000
|
On July 20, 2019, the Company signed a convertible promissory note with an investor. The $125,000 note was issued at a discount of $8,750 and bores interest at 8% per year. The note principal and interest were convertible into shares of common stock at the lower of (a) 80% of the lowest traded price of the common stock during the 10 trading days immediately preceding the notice of conversion or (b) $0.47 per share. The note matured in July 2021. The note had a redemption premium of 115% of the principal and interest outstanding if repaid before maturity. The note is secured by a security interest in all assets of the Company. The note was borrowed and repaid by conversion to stock during the three months ended September 30, 2020.
|
-
|
|
-
|
|
|
|
|
On August 18, 2020, the Company signed a convertible promissory note with an investor. The $500,000 note was issued at a discount of $35,000 and bears interest at 8% per year. The note principal and interest are convertible into shares of common stock at the lower of (a) 80% of the lowest traded price of the common stock during the 10 trading days immediately preceding the notice of conversion or (b) $0.47 per share. The note matures in August 2021. The note has a redemption premium of 115% of the principal and interest outstanding if repaid before maturity. The note is secured by a security interest in all assets of the Company. The note was partially repaid by conversion to stock during the three months ended September 30, 2020.
|
325,000
|
|
-
|
-23-
|
|
|
|
|
|
|
|
On July 20, 2020, the Company signed a convertible promissory note with an investor. The $134,375 note was issued at a discount of $9,375 and bears interest at 8% per year. The note principal and interest are convertible into shares of common stock at the lower of (a) $0.47 per share or (b) 70% of the lowest trading price of common stock during the 10 trading days prior to conversion. The note matures in July 2021. The note contains a price protection clause where if the share price falls below $0.01 per share after six months, the conversion price discount increases by 5%. The note has prepayment penalties between 120% and 130% of the principal and interest outstanding if repaid before 180 days from issuance.
|
134,375
|
|
-
|
|
|
|
|
On July 24, 2020, the Company entered into a $168,300 convertible note. The note was issued at a discount of $15,300 and bears interest at 12% per year. The note principal and interest are convertible into shares of common stock at 71% of the average of the lowest 2 trading prices during 15 trading days prior to conversion. The note matures in July 2021. The note has prepayment penalties of 110% to 125% of the principal and interest outstanding if repaid before 180 days from issuance.
|
168,300
|
|
-
|
|
|
|
|
Total Convertible Notes Payable
|
1,133,140
|
|
1,989,975
|
Less: Unamortized original issue discounts
|
455,594
|
|
888,075
|
Current Portion of Convertible Notes Payable
|
677,546
|
|
1,101,900
|
|
|
|
|
Long-term Portion of Convertible Notes Payable
|
$ -
|
|
$ -
|
-24-
The original issue discount is being amortized over the terms of the convertible notes using the effective interest method. During the three months ended September 30, 2020 and 2019, the Company amortized $34,250 and $60,268, respectively, of debt discounts to interest expense and $399,936 and $228,933, respectively, to interest accretion.
One convertible promissory note for $125,000 was entered into during the three months ended September 30, 2020, and subsequently repaid prior to September 30, 2020.
Convertible notes are subordinate to the bank debt of the Company.
Accrued but unpaid interest on the notes is convertible by the lender into, and payable by the Company in common shares at a price per common share equal to the most recent closing price of the Company's common shares prior to the delivery to the Company of a request to convert interest, or the due date of interest, as applicable. Interest, when due, is payable either in cash or common shares.
The conversion features meet the definition of a derivative liability instrument because the conversion rate is variable and therefore does not meet the"fixed-for-fixed"criteria outlined in ASC 815-40-15. As a result, the conversion features of the notes are recorded as a derivative liability at fair value and marked-to-market each period with the changes in fair value each period charged or credited to other income (expense).
Warrants
The Company issued common stock and warrants as consideration for the convertible notes. The warrants contain certain anti-dilutive clauses that are accounted for as financial derivatives. All warrants have an original exercise price of $4 per share, contain anti-dilution protection clauses, and expire 36 months from issue date. The anti-dilution clause was triggered for warrants, which reduced the exercise price below $4 per share. As of September 30, 2020, warrants expire between November 29, 2021 and November 18, 2022. There are no unexercised warrants at September 30, 2020.
The warrants meet the definition of a derivative liability instrument because the exercise price is variable and therefore does not meet the "fixed-for-fixed" criteria outlined in ASC 815-40-15. As a result, the value of unexercised warrants was recorded as a derivative liability at fair value and marked-to-market each period with the changes in fair value each period charged or credited to other income (expense).
Note 7 - Fair Value Measurements
The following table presents information about the assets and liabilities that are measured at fair value on a recurring basis at September 30, 2020 and June 30, 2020 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value.
|
|
|
|
|
|
At September 30, 2020
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets
|
|
|
|
|
|
|
Customer List
|
$704,803
|
-
|
-
|
$704,803
|
|
Vendor Relationship
|
383,203
|
-
|
-
|
383,203
|
|
Development Costs
|
287,797
|
-
|
-
|
287,797
|
|
|
|
|
|
|
|
|
$1,355,803
|
-
|
-
|
$1,355,803
|
Liabilities
|
|
|
|
|
|
|
Original Issue discount, convertible debt
|
$1,276,312
|
-
|
-
|
$1,276,312
|
|
|
|
|
|
|
At June 30, 2020
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Assets
|
|
|
|
|
|
|
Customer list
|
$748,847
|
-
|
-
|
$748,847
|
|
Vendor relationship
|
407,153
|
-
|
-
|
407,153
|
|
Development costs
|
280,315
|
-
|
-
|
280,315
|
|
|
|
|
|
|
|
|
$1,436,315
|
-
|
-
|
$1,436,315
|
Liabilities
|
|
|
|
|
|
|
Original issue discount, convertible debt
|
$213,300
|
-
|
-
|
$213,300
|
|
Derivative liability warrants
|
33,312
|
-
|
-
|
33,312
|
Total
|
|
$246,612
|
-
|
-
|
$246,612
|
-25-
As of September 30, 2020 and June 30, 2020, the only asset required to be measured on a nonrecurring basis was goodwill and the fair value of the asset amounted to $834,220 using level 3 valuation techniques.
The Company measures the fair market value of the Level 3 liability components using the Monte Carlo model and projected discounted cash flows, as appropriate. These models were prepared by an independent third party and consider management's best estimate of the conversion price of the stock, an estimate of the expected time to conversion, an estimate of the stock's volatility, and the risk-free rate of return expected for an instrument with a term equal to the duration of the convertible note.
The derivative liability was valued using the Monte Carlo pricing model with the following inputs:
|
|
|
|
At September 30, 2020
|
|
|
|
Risk-free interest rate:
|
|
0.08%
|
|
Expected dividend yield:
|
|
0.00%
|
|
Expected stock price volatility:
|
|
325.00%
|
|
Expected option life in years:
|
|
0.48 to 1.44 years
|
At June 30, 2020
|
|
|
|
Risk-free interest rate:
|
|
0.09%
|
|
Expected dividend yield:
|
|
0.00%
|
|
Expected stock price volatility:
|
|
300.00%
|
|
Expected option life in years:
|
|
.085 to 1.69 years
|
The following table sets forth a reconciliation of changes in the fair value of the Company's convertible debt components classified as Level 3 in the fair value hierarchy at September 30, 2020 and June 30, 2020:
|
|
|
|
Balance at June 30, 2020
|
|
$ 246,612
|
Additional convertible securities at inception
|
|
2,000
|
Realized
|
|
(5,300)
|
Unrealized
|
|
1,033,000
|
Ending balance at September 30, 2020
|
|
$ 1,276,312
|
|
|
|
Balance at June 30, 2019
|
|
$ 1,025,944
|
Additional convertible securities at inception
|
|
2,027,000
|
Settlement of conversion features and warrants
|
|
(152,374)
|
Realized
|
|
(240,903)
|
Unrealized
|
|
(2,413,055)
|
Ending balance at June 30, 2020
|
|
$ 246,612
|
-26-
Note 8 - Related Party Transactions
Notes Payable
|
|
|
|
|
September 30, 2020
|
|
June 30, 2020
|
Note payable to a stockholder in which the $200,000 principal plus $10,000 of interest was payable in December 2019. Borrowings under the note increased to $400,000 and the maturity was extended to November 2021. The note bears interest at 6% interest and is payable in cash or common stock, at the Company's option. If interest is paid in common stock, the conversion price will be the market price at the time of conversion. Principal on the note at maturity is convertible into 400,000 shares of Series D Preferred Stock. If principal is paid prior to maturity, the right of conversion is terminated.
|
|
|
|
|
|
|
|
|
|
|
|
|
$400,000
|
|
$400,000
|
|
|
|
|
Fair value of unsecured notes payable to seller of Concepts and Solutions, a related party, bearing interest at 3% per year, payable in annual installments through November 30, 2021. Payments are subject to adjustment based on the achievement of minimum gross revenues and successful completion of certain pre-acquisition withholding tax issues of Concepts and Solutions.
|
1,030,079
|
|
1,030,079
|
|
|
|
|
Note payable to a stockholder in which the note principal plus 6% interest is payable in November 2021. Note was amended in March 2020 by increasing the available borrowings to $1,225,000 and extending the maturity to March 2022. Interest is payable in cash or common stock, at the holder's option. If interest is paid in common stock, the conversion price will be the market price at the time of conversion. Principal on the note at maturity is convertible into 1,000,000 shares of Series D Preferred Stock. If principal is paid prior to maturity, the right of conversion is terminated.
|
1,225,000
|
|
1,225,000
|
|
|
|
|
Note payable to a stockholder in which the note principal plus 6% interest is payable in November 2021. Interest is payable in cash or common stock, at the Company's option. If interest is paid in common stock, the conversion price will be the market price at the time of conversion. Principal on the note at maturity is convertible into 200,000 shares of Series D Preferred Stock. If principal is paid prior to maturity, the right of conversion is terminated.
|
200,000
|
|
200,000
|
|
|
|
|
Note payable to a stockholder in which the note principal plus interest at 10% is payable the earlier of 60 days after invoicing a certain customer, or April 2021, due to an extension granted by the lender. The note is collateralized by a security interest in a certain customer purchase order.
|
385,000
|
|
385,000
|
|
|
|
|
Other short term payables due to stockholders and related parties
|
74,323
|
|
107,733
|
|
|
|
|
|
|
|
|
Total Related Party Notes Payable and Other Payables
|
3,314,402
|
|
3,347,812
|
Current Portion of Related Party Notes Payable and Other Payables
|
1,239,402
|
|
1,272,812
|
|
|
|
|
Long-term Portion of Related Party Notes Payable and Other Payables
|
$2,075,000
|
|
$2,075,000
|
|
|
|
|
-27-
Future maturities of related party notes payable are as follows:
|
|
|
Period ending September 30,
|
|
2021
|
|
$1,239,402
|
2022
|
|
2,075,000
|
|
|
$3,314,402
|
Leases
The Company leases property used in operations from a related party under terms of a financing lease. The term of the lease expires on December 31, 2021. The monthly lease payment is $1,500 plus maintenance and property taxes, as defined in the lease agreement. Rent expense for this lease was $4,500 for the three months ended September 30, 2020 and 2019, respectively.
Other Agreements
A related party collateralizes the Company's short-term note with a certificate of deposit in the amount of $274,900, held at the same bank. The related party will receive a $7,500 collateral fee for this service (see Note 6).
Note 9 - Lease Agreements
The Company has financing lease liabilities for offices and warehouses with monthly installments of $12,449 (ranging from $1,083 to $3,524) including imputed interest (ranging from 0% to 2%), over 2 year terms plus extensions, expiring through July 2022.
|
|
|
Right-of-use assets:
|
|
|
Operating right-of-use assets
|
$249,299
|
Operating lease liabilities:
|
|
|
Current portion of long term payable
|
135,099
|
|
Financing leases payable, less current portion
|
114,200
|
|
|
|
|
Total financing lease liabilities
|
$249,299
|
As of September 30, 2020, financing lease maturities are as follows:
|
|
Period ending September 30,
|
|
2021
|
$135,099
|
2022
|
81,523
|
2022
|
32,677
|
|
|
|
$249,299
|
As of September 30, 2020, the weighted average remaining lease term was 1.67 years.
-28-
Note 10 - Equity
During the three months ended September 30, 2020, the Company issued 103,750,000 shares of common stock for professional consulting services. These shares were valued at $2,763,000 upon issuance during the three months ended September 30, 2020.
During the three months ended September 30, 2020, the Company issued 968,475,442 shares of common stock for debt reduction. These shares were valued at $7,974,206 upon issuance during the three months ended September 30, 2020.
During the three months ended September 30, 2020, the Company issued 249,792,217 shares of common stock to warrant holders in six cashless transactions.
During the three months ended September 30, 2020, the Company issued 2,500,000 shares of common stock for commitment shares under a two year purchase agreement entered into on May 31, 2020 between the Company and an investor, as amended and restated on July 9, 2020 (the "Put Purchase Agreement"). These shares were valued at $55,000 upon issuance during the three months ended September 30, 2020.
During the three months ended September 30, 2020, the Company issued 242,000,000 shares of common stock in exchange for proceeds under the Put Purchase Agreement. These shares were valued at $3,951,900 upon issuance during the three months ended September 30, 2020.
See the capital structure section in Note 1 for disclosure of the equity components included in the Company's consolidated financial statements.
Note 11 - Income Taxes
The Company's effective tax rate differed from the federal statutory income tax rate for the three months ended September 30, 2020 and 2019 as follows:
|
|
|
Federal statutory rate
|
|
21%
|
State tax, net of federal tax effect
|
|
5.31%
|
Valuation allowance
|
|
-26%
|
Effective tax rate
|
|
0%
|
The Company had no federal or state income tax (benefit) for the three months ended September 30, 2020 or 2019.
The Company's deferred tax assets and liabilities as of September 30, 2020 and June 30, 2020, are summarized as follows:
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
June 30, 2020
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
Deferred tax assets
|
$ 7,216,100
|
|
$ 4,825,100
|
|
|
Less valuation allowance
|
(7,216,100)
|
|
(4,825,100)
|
|
|
Deferred tax liabilities
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
State
|
|
|
|
|
|
|
Deferred tax assets
|
1,926,900
|
|
1,290,900
|
|
|
Less valuation allowance
|
(1,926,900)
|
|
(1,290,900)
|
|
|
Deferred tax liabilities
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
Net Deferred Tax Assets
|
$ -
|
|
$ -
|
-29-
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 September 30, 2020 and 2019, respectively.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred taxes is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment.
The Company's deferred tax assets are primarily comprised of net operating losses ("NOL") that give rise to deferred tax assets. The NOL carryforwards expire over a range from 2020 to 2037, with certain NOL carryforwards that have no expiration. There is no tax benefit for goodwill impairment, which is permanently non-deductible for tax purposes. Additionally, due to the uncertainty of the utilization of NOL carry forwards, a valuation allowance equal to the net deferred tax assets has been recorded.
The significant components of deferred tax assets as of September 30, 2020 and June 30, 2020, are as follows:
|
|
|
|
|
|
|
|
September 30, 2020
|
|
June 30, 2020
|
|
|
|
|
|
Net operating loss carryforwards
|
$ 8,681,800
|
|
$ 5,767,000
|
Valuation allowance
|
(9,143,000)
|
|
(6,116,000)
|
Goodwill
|
273,600
|
|
278,900
|
Property and equipment
|
(10,200)
|
|
(10,500)
|
Intangible assets
|
153,000
|
|
35,800
|
Inventory allowance
|
17,800
|
|
17,800
|
Warranty accrual and other
|
27,000
|
|
27,000
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
$ -
|
|
$ -
|
As of September 30, 2020, the Company does not believe that it has taken any tax positions that would require the recording of any additional tax liability nor does it believe that there are any unrealized tax benefits that would either increase or decrease within the next twelve months. As of September 30, 2020, the Company's income tax returns generally remain open for examination for three years from the date filed with each taxing jurisdiction.
Note 12 - Commitments, Contingencies, and Concentrations
Contingencies
Certain conditions may exist as of the date the condensed consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company's management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company's legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company's condensed consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
On September 4, 2019, the Company recorded a pre-acquisition liability for approximately $591,000 relative to unpaid payroll tax liabilities and associated penalties and fees of Concepts and Solutions. The liability is included with the seller note payable.
On August 14, 2020, the Company entered into a legal settlement agreement and recorded a liability for $2,000,000 related to a lawsuit by a previous creditor of Galaxy CO. The liability of $1,058,240 and $2,000,000 is included in the consolidated balance sheets at September 30, 2020 and June 30, 2020.
Concentrations
Galaxy contracts the manufacturer of its products with overseas suppliers. The Company's sales could be adversely impacted by a supplier's inability to provide Galaxy with an adequate supply of inventory.
Galaxy has two customers that accounted for approximately 13% of accounts receivable at September 30, 2020, and three customers that accounted for approximately 79% of accounts receivable at June 30, 2020. Galaxy has two customers that accounted for approximately 48% and 81% of total revenue for the three months ended September 30, 2020 and 2019, respectively.
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Note 13 - Material Agreements
Consulting Agreement
Galaxy renewed a consulting agreement in April 2020 for advisory services with a stockholder. In exchange for services provided, the consultant receives consulting fees paid out in stock not resulting in a greater than 4.9% equity interest in Galaxy. On September 18, 2020, the Company issued 97,250,000 shares of common stock registered under the Stock Plan 2020 to the consultant for services.
Put Purchase Agreement
On May 31, 2020, the Company entered into a two year purchase agreement (the "Put Purchase Agreement") with an investor, which was amended and restated on July 9, 2020. Pursuant to the terms of the Purchase Agreement, the investor agreed to purchase up to $2 million of the Company's common stock (subject to certain limitations) from time to time during the term of the Put Purchase Agreement. The Company issued 2,500,000 shares of common stock to the investor as consideration for its commitment to purchase shares of the Company's common stock. The Company will use proceeds from shares issued to the investor for working capital and general and administrative expenses.
Accounts Receivable Factoring Agreement
On July 30, 2020, the Company entered into a two year accounts receivable factoring agreement with a financial services company to provide working capital. 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. The Company factored $191,223 of accounts receivable as of September 30, 2020.
Employment Agreements
On January 1, 2020, the Company entered into an employment agreement with the Chief Executive Officer (CEO) of the Company for a two-year term which was amended on September 1, 2020. Under the amended employment agreement, the CEO will receive annual compensation of $500,000, and an annual discretionary bonus based on profitability and revenue growth. The agreement includes a non-compete agreement and severance benefits of $90,000.
On January 1, 2020, the Company entered into an employment agreement with the Chief Finance Officer/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. The agreement includes a non-compete agreement and severance benefits of $72,000.
Supply Agreement
The Company is party to a one year supplier agreement to manufacture and sell audio products to a buyer that is effective until July 2021. The initial order under this supplier agreement is for 4,000 units, at a discounted total price of $3,488,000, to be delivered over the agreement period. If the buyer does not meet the minimum floor of 4,000 units, then the contract becomes void and the buyer must pay the difference between the units sold and the total floor pricing of the $3,488,000. The buyer will pay tooling costs of $25 per unit shipped to them. The Company supplied 92 units as of September 30, 2020. The agreement was extended in July 2020 for a one year term. The agreement can be extended for one additional year.
Note 14 - Acquisition
On September 4, 2019, Galaxy entered into a stock purchase agreement with Concepts and Solutions. Under the terms of the stock purchase agreement, 100% of the outstanding capital for both Concepts and Solutions was purchased by Galaxy. Concurrent with this acquisition, the Company applied pushdown accounting; therefore, the consolidated financial statements after completion of the acquisition include the assets, liabilities, and results of operations of the combined company from and after the closing date. As part of the stock purchase agreement, Galaxy issued 1,350,000 shares of common stock to the seller with a value of $1,485,000. In addition to the issuance of shares of common stock, the Company entered into three promissory notes with the seller for a total note payable of $3,000,000. Payments under the notes are subject to adjustment based on the achievement of minimum gross revenues and successful resolution of certain pre-acquisition payroll withholding tax issues of Concepts and Solutions. The Company believes future earnings goals will not be met and valued the note payable at $1,484,473. The balance of the note payable is $1,030,079 at September 30, 2020 and June 30, 2020.
Management of the Company determined that a triggering event to assess the impairment of goodwill associated with the acquisition of Concepts and Solutions occurred during the year ended June 30, 2020. While there was no single event, the consideration in totality of several factors that developed during this year led management to conclude that it was more likely than not that the fair values of certain intangible assets and goodwill acquired as part of the acquisition were below their carrying amounts. See Note 4.
-31-
The following table summarizes the preliminary allocation of the fair value of the assets and liabilities as of the acquisition date through pushdown accounting. The preliminary allocation to certain assets and/or liabilities may be adjusted by material amounts as the Company finalizes fair value estimates.
|
|
|
Assets
|
|
|
Cash
|
$ 201,161
|
|
Accounts receivable
|
1,165,953
|
|
Inventory
|
94,360
|
|
Property and equipment
|
20,904
|
|
Other assets
|
2,800
|
|
Goodwill and other intangibles
|
3,760,287
|
|
|
|
|
Total Assets
|
5,245,465
|
|
|
|
Liabilities
|
|
|
Accounts payable
|
1,225,734
|
|
Accrued expenses
|
783,540
|
|
Short-term debt
|
96,941
|
|
Deferred revenue
|
518,900
|
|
|
|
|
Total Liabilities
|
2,625,115
|
|
|
|
|
Net Assets
|
$ 2,620,350
|
|
|
|
Consideration
|
|
|
Fair value of anti-dilution clause in employment agreement
|
$ 235,350
|
|
Note payable to seller
|
900,000
|
|
Stock
|
1,485,000
|
|
|
|
|
|
$ 2,620,350
|
Note 15 - Stock Plan
An Employee, Directors, and Consultants Stock Plan was established by the Company (The "Plan"). The Plan is intended to attract and retain employees, directors and consultants by aligning the economic interest of such individuals more closely with the Company's stockholders by paying fees or salaries in the form of shares of the Company's common stock. The Plan is renewed annually or earlier. The 2020 Plan is effective September 16, 2020 and expires December 15, 2021. The 2019 Plan is effective December 13, 2018 and expires June 1, 2020. 99,250,000 Shares of Common Stock of are reserved for stock awards under the Plans. There were 98,857,857 and 965,000 shares awarded under the Plans as of September 30, 2020 and June 30, 2020, respectively.
-32-
Note 16 - Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As reflected in the accompanying consolidated financial statements, the Company had negative working capital of approximately $5,000,000, an accumulated deficit of approximately $37,000,000, and cash used in operations of approximately $3,000,000 at September 30, 2020.
The Company's operational activities has primarily been funded through issuance of common stock for services, related party advances, put purchase agreement transactions for proceeds, accounts receivable factoring, debt financing, a private placement offering of common stock and through the deferral of accounts payable and other expenses. The Company intends to raise additional capital through the sale of equity securities or borrowings from financial institutions and investors and possibly from related and nonrelated parties who may in fact lend to the Company on reasonable terms. Management believes that its actions to secure additional funding will allow the Company to continue as a going concern. There is no guarantee the Company will be successful in achieving any of these objectives. These sources of working capital are not assured, and consequently do not sufficiently mitigate the risks and uncertainties disclosed above. The ability of the Company to continue as a going concern is dependent upon management's ability to raise capital from the sale of its equity and, ultimately, the achievement of operating revenues. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 17 - Subsequent Events
The Company has evaluated subsequent events through the date on which the condensed consolidated financial statements were available to be issued.
On October 15, 2020, the Company entered into an Asset Purchase Agreement (APA), to acquire the assets of Classroom Technologies Solutions, Inc. ("Classroom Tech"), for consideration of (a) paying off a secured Classroom Tech loan, not to exceed the greater of 50% of the value of the Classroom Tech assets acquired or $120,000; (b) the issuance a promissory note in the amount of $44,526 to a Classroom Tech designee; and (c) the issuance of 10 million shares of common stock to the seller of Classroom Tech.
On October 22, 2020, the Company reserved 50,000,000 shares in certificate form as collateral on the renewed line of credit (Note 5).
In October 2020, the Company issued 7,025,582 shares to investors in satisfaction of $58,300 of principal on convertible notes.
On October 30, 2020, the Company issued a $1,200,000 convertible note to an investor.The common shares reserved for conversion under the note are registered.
-33-