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Item 1.01.
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Entry into a Material Definitive Agreement.
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As previously reported, pursuant to the terms of a Securities Purchase Agreement, initially dated as of August 18, 2020 and amended and restated as of October 9, 2020 (the "Securities Purchase Agreement"), between Galaxy Next Generation, Inc. (the "Company") and YA II PN, LTD. (the "Selling Stockholder"), the Company issued and sold a Convertible Debenture (the "Initial Convertible Debenture") to the Selling Stockholder in the aggregate principal amount of $500,000. The Initial Convertible Debenture was issued with a 7.0% original issue discount, resulting in net proceeds to the Company of $465,000. Pursuant to the Securities Purchase Agreement, the Selling Stockholder had agreed, subject to customary closing conditions, to purchase from the Company an additional $1,200,000 Convertible Debenture (the "Second Convertible Debenture," and together with the Initial Convertible Debenture, the "Convertible Debentures") having the same terms as the Initial Convertible Debenture upon a registration statement registering the shares of the Company's common stock, par value $0.0001 per share (the "Common Stock") issuable upon conversion of the Convertible Debentures (the "Conversion Shares") being declared effective by the U.S. Securities and Exchange Commission (the "SEC").
On October 30, 2020, the Company closed on the sale of the Second Convertible Debenture to the Selling Stockholder and issued the Second Convertible Debenture, which matures on October 30, 2021, to the Selling Stockholder with a total principal amount of $1,200,000, a 7% original issue discount and an interest rate of 8% per annum, which resulted in net proceeds to the Company of $1,116,000, before deducting legal fees and expenses.
The Convertible Debentures are secured by a security interest in all of the assets of the Company and each of the Company's subsidiaries as evidenced by the Securities Purchase Agreement and subject to the security agreement executed by the Company and each of the Company's subsidiaries, initially dated as of August 18, 2020 and amended and restated as of October 9, 2020 (the "Security Agreement").
The holder of the Convertible Debentures, has the right, subject to certain limitations, at any time to convert all or a portion of the Convertible Debentures, up to $350,000 of the outstanding and unpaid Conversion Amount (as defined below) in any 30 day calendar period, into fully paid and nonassessable shares of Common Stock, below an initial price of $0.47 (subject to adjustment, the "Fixed Conversion Price"), provided however that the holder will not be limited to conversions in the aggregate of $350,000 for conversions at the Fixed Conversion Price. The number of shares of Common Stock issuable upon conversion of any Conversion Amount will be determined by dividing (x) such Conversion Amount by (y) the Fixed Conversion Price or (z) the Market Conversion Price, as applicable. The "Conversion Amount" means the portion of the principal and accrued interest to be converted, redeemed or otherwise with respect to which this determination is being made. The "Market Conversion Price" means, as of any conversion date or other date of determination, 80% of the lowest VWAP (as defined in the Convertible Debentures) of the Common Stock during the 10 Trading Days immediately preceding the Conversion Date as defined in the Convertible Debentures. The Selling Stockholder, together with any affiliate, will also be limited from beneficially owning more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion or receipt of shares as payment of interest (potentially limiting the Selling Stockholder' conversion right).
The Company at its option has the right to redeem (a "Redemption"), in whole or in part, subject to certain notice requirements, outstanding principal and interest under the Convertible Debentures prior to October 30, 2021 (the "Maturity Date") provided that as of the date of the Selling Stockholder' receipt of a Redemption notice the VWAP of the Company' Common Stock is less than the Fixed Conversion Price and there is no Equity Conditions Failure (as defined in the Convertible Debentures). The Company will pay an amount equal to the principal amount being redeemed plus a redemption premium equal to 15% of the outstanding principal amount being redeemed plus outstanding and accrued interest (the "Redemption Premium"). Other than as specifically permitted by the Convertible Debentures, the Company may not prepay or redeem any portion of the outstanding principal amount of the Convertible Debentures without the prior written consent of the Selling Stockholder..
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The Convertible Debentures contain standard and customary events of default including, but not limited to, failure to make payments when due, failure to observe or perform covenants or agreements contained in the Convertible Debentures, the breach of any material representation or warranty contained therein, the bankruptcy or insolvency of the Company, failure to timely file and maintain effectiveness of a registration statement for the Conversion Shares, the suspension of trading of Common Stock, and a change of control of the Company (each, an "Event of Default"). If any Event of Default occurs, subject to any cure period, the full outstanding principal amount, together with interest (including default interest of 15% per annum) and other amounts owing in respect thereof to the date of acceleration will become, at the Selling Stockholder' election, immediately due and payable in cash.
The Fixed Conversion Price of the Convertible Debentures is subject to appropriate adjustment in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting the Company's Common Stock and certain dilutive issuances.
Pursuant to the terms of a registration rights agreement entered into between the Company and the Selling Stockholder, initially dated as of August 18, 2020 and amended and restated as of October 9, 2020 (the "Registration Rights Agreement"), on October 10, 2020 the Company filed a Registration Statement on Form S-1 (File No. 333-249561) (as amended, the "Registration Statement") registering the Conversion Shares, which was declared effective by the SEC on October 29, 2020.
The foregoing description of the Convertible Debentures, the Securities Purchase Agreement, the Security Agreement and the Registration Rights Agreement are qualified in their entirety by reference to the Form of Convertible Debenture, the Securities Purchase Agreement, the Security Agreement and the Registration Rights Agreement, copies of which are filed as Exhibits 4.1, 10.1, 10.2 and 10.3 to this Current Report on Form 8-K and are incorporated by reference in this Item 1.01.