U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31,September 30, 2019

OR

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

For the transition period from ______________ to ______________

Commission File Number: 333-51918

GALAXY NEXT GENERATION, INC.

  (Exact Name of Registrant as Specified in Its Charter)

(706) 391-5030

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if  any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [      ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [      ] No [X]

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Common shares as of April 29,November 13, 2019 was 10,390,339.  16,882,050.  

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PART I – FINANCIAL INFORMATION

Item 1 - Consolidated Financial Statements

The following unaudited consolidated financial statements are included herein:

Galaxy Next Generation, Inc.

Consolidated Financial Statements

September 30, 2019

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See accompanying notes to the consolidated financial statements (unaudited)

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See accompanying notes to the consolidated financial statements (unaudited)

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See accompanying notes to the consolidated financial statements (unaudited)

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See accompanying notes to the consolidated financial statements (unaudited)

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See accompanying notes to the consolidated financial statements (unaudited)

GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 1 - Summary of Significant Accounting Policies:Policies

Corporate History, Nature of Business and Mergers

Galaxy Next Generation LTD CO. (“Galaxy CO”) was organized in the state of Georgia in February 2017 while R & G Sales, Inc. (“R&G”) was organized in the state of Georgia in August 2004. Galaxy CO merged with R&G (“common controlled merger”) on March 16, 2018, with R&G becoming the surviving company. R&G subsequently changed its name to Galaxy Next Generation, Inc. (“Galaxy”).

FullCircle Registry, Inc., (“FLCR”) is a holding company created for the purpose of acquiring small profitable businesses to provide exit plans for those company’s owners. FLCR’s subsidiary, FullCircle Entertainment, Inc. (“Entertainment” or “FLCE”), owns and operates Georgetown 14 Cinemas, a fourteen-theater movie complex located in Indianapolis, Indiana.

On June 22, 2018, Galaxy consummated a reverse triangular merger whereby Galaxy merged with and into Full Circle Registry, Inc.’s (FLCR) newly formed subsidiary - formed specifically for the transaction (Galaxy MS). The merger resulted in Galaxy MS becoming a wholly-owned subsidiary of FLCR. For accounting purposes, the acquisition of Galaxy by FLCR is considered a reverse acquisition, an acquisition transaction where the acquired company, Galaxy, is considered the acquirer for accounting purposes, notwithstanding the form of the transaction. The primary reason the transaction is being treated as a purchase by Galaxy rather than a purchase by FLCR is that FLCR is a public reporting company, and Galaxy’s stockholders gained majority control of the outstanding voting power of FLCR’s equity securities. Consequently, the assets and liabilities and the operations that are reflected in the historical financial statements of the Company prior to the merger are those of Galaxy. The financial statements after the completion of the merger include the combined assets and liabilities of the combined company (collectively Galaxy Next Generation, Inc., Full Circle Registry, Inc. and FullCircle Entertainment, Inc., or “the Company”).

In recognition of Galaxy’s merger with FLCR, several things occurred: (1) FLCR amended its articles of incorporation to change its name from FullCircle Registry, Inc. to Galaxy Next Generation, Inc.; (2) Galaxy and FLCR changed its fiscal year end to June 30, effective June 2018; (3) FLCR authorized shares of preferred stock were increased to 200,000,000 and authorized shares of common stock were increased to 4,200,000,000,4,000,000,000, (prior to the Reverse Stock Split) both with a par value of $0.0001; and (4) the Board of Directors and Executive Officers approved Gary LeCroy, President and Director; Magen McGahee, Secretary and Director; and Carl Austin, Director; and (5) the primary business operated by the combined company became the business that was operated by Galaxy.

On September 4, 2019, Galaxy entered into a stock purchase agreement with Interlock Concepts, Inc. (Concepts) and Ehlert Solutions Group, Inc. (Solutions).  Under the stock purchase agreement, Galaxy acquired 100% of the outstanding capital stock of both Concepts and Solutions. The purchase price for the acquisition was 1,350,000 shares of common stock and a two year note payable to the seller for $3,000,000. The note payable to the seller is subject to adjustment based on the achievement of certain future earnings goals.

The financial statements after the completion of the merger and acquisition include the consolidated assets and liabilities of the combined company (collectively Galaxy Next Generation, Inc., Full Circle Registry, Inc., FullCircle Entertainment, Inc., Interlock Concepts, Inc., and Ehlert Solutions Group, Inc. referred to collectively as the “Company”).

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 1 - Summary of Significant Accounting Policies (Continued):

Corporate History, Nature of Business and Mergers (Continued)

As disclosed in Note 12, the Entertainment segment was sold on February 6, 2019 in exchange for 38,625 Galaxy common shares.

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 SAM series 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 2530 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.

As disclosedSolutions 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 Note 11, the Entertainment segment was sold effective on February 6, 2019north and northwest United States.  Solutions and Concepts’ products and services allow institutions access to intercom, scheduling, and notification systems with improved ease of use.  The products provide an open architecture solution to customers which allows the products to be used in exchange for 38,625 Galaxyboth 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 shares.internet protocol (IP) network, which minimizes infrastructure requirements and reduces costs by combining systems.

Basis of Presentation and Principles of Consolidation

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”).

Due to the change in year-end, the Company’s fiscal year 2018 is shortened from 12 months to 3 months and is ending on June 30, 2018. Further, the financial statements as of June 30, 2018 represent the financial information of the Company subsequent to the acquisition. The financial statements for the three-month and nine-month period ending March 31, 2018 represent the financial information of the Company prior to the acquisition. All intercompany transactions and accounts have been eliminated in the consolidation.

The Company’s financial reporting segments are Technology (reflecting the operations of Galaxy)Galaxy, Concepts, and Solutions) and Entertainment (reflecting the operations of the movie theater). The Company is an over-the-counter public company traded under the stock symbol listing GAXY (formerly FLCR).

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 1 - Summary of Significant Accounting Policies (Continued):

Segment Reporting

With the reverse merger between Galaxy and FLCR on June 22, 2018, theThe Company has identified two reportable segments: Technology and Entertainment. Segment determination is based on the internal organization structure, management of operations and performance evaluation by management and the Company’s Board of Directors. Separate management of each segment is required because each business unit is subject to different operational issues and strategies.

The Technology segment sells interactive learning technology hardware and software that allows the presenter and participant to engage in a fully collaborative instructional environment. Galaxy’sGalaxy'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.  Concepts is a manufacturing company creating innovative products that provide fundamental tools for building notification systems.  Solutions is an audio design company providing installation, design, and servicing to customers.

The Entertainment segment owns and operates Georgetown 14 Cinemas, a fourteen-theater movie complex located in Indianapolis, Indiana. Entertainment generates revenues from movie ticket sales and concessions. As part of the merger agreement, the parties have the right to spinout the Entertainment segment to the prior shareholders of FLCR. Management plans to implement the spinout in order to focus on its primary business plan, which is Galaxy. As disclosed in Note 11, the Entertainment segment was sold to an entity with a common board member, effective February 6, 2019.

Use of Estimates

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 the allowance for doubtful accounts, inventory reserves, product warranty liabilities, valuation of goodwill and intangibles, valuation of convertible notes payable and related warrants, and the valuation of deferred tax assets. It is reasonably possible that the significant estimates used will change within the next year.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 1 - Summary of Significant Accounting Policies (Continued):

Capital Structure

In accordance with ASC 505, “Equity,”Equity, the Company’s capital structure is as follows:

There is no publicly traded market for the preferred shares.

There are 112,619,758 common shares reserved at September 30, 2019 under terms of the convertible debt agreements and Stock Plan (see Notes 4 and 14).

There are 9,578,501 issued common shares that are restricted as of September 30, 2019. The shares may become free-trading after six months of being held upon satisfaction of certain terms and regulatory conditions.  

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Note 1 - Summary of Significant Accounting Policies (Continued)

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.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Business Combinations (Continued)

Concurrent with the reverse triangular merger of FLCR and the acquisitions of Concepts and Solutions, the Company applied pushdown accounting. Pushdown accounting refers to the use of the acquirer’s basis in the preparation of the acquiree’s separate financial statements as the new basis of accounting for the acquiree. See Note 11Notes 12 and 13 for a discussion of the merger and acquisition and the related impact on the Company’s consolidated financial statements.

Revenue Recognition

Technology Interactive Panels and Related Products

The Company derives revenue from the sale of interactive panels and other related products. Sales of these panels may also include optional equipment, accessories and services (installation, training and other services, including maintenance services and/or an extended warranty)and warranty services). Product sales and installation revenue are recognized when all of the following criteria have been met: (1) products have been shipped or customers have purchased and accepted title to the goods; service revenue for installation of products sold is recognized as the installation services are performed, (2) persuasive evidence of an arrangement exists, (3) the price to the customer is fixed, and (4) collectability is reasonably assured.

Deferred revenue consists of customer deposits and advance billings of the Company’s products where sales have not yet been recognized. 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.

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 the nine-month period ended March 31, 2019 and the period ended June 30, 2018, the Company accrued $1,350 for estimated product warranty claims, which is included in accrued expenses in the accompanying balance sheets. The accrued warranty costs are based primarily on historical experience of actual warranty claims as well as current repair costs. There were no warranty claim expenses during the period ended March 31, 2019. There was $1,350 of warranty expenses for the period ended March 31, 2018.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 1 - Summary of Significant Policies (Continued):

Revenue Recognition (Continued)

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. Contract arrangements exclude a right of return for delivered items. Product sales resulting from fixed-price contracts are generated from multiple-element arrangements that require separate units of accounting and estimates regarding the fair value of individual elements. The Company has determined that its multiple-element arrangements that qualify as separate units of accounting are (1) product sales and (2) installation and related services. There is objective and reliable evidence of fair value for both the product sales and installation services and allocation of arrangement consideration for each of these units is based on their relative fair values. Each of these elements represent individual units of accounting, as the delivered item has value to a customer on a stand-alone 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.

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Note 1 - Summary of Significant Policies (Continued)

Revenue Recognition (Continued)

The fair value of installation services is separately calculated using expected costs of installation services. Many times, the value of installation services is calculated using price quotations from subcontractors to the Company who perform installation services on a stand-alone basis.

The Company sells equipment with embedded software to its customers. The embedded software is not sold separately, and it 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 Financial Accounting Standards Board (“FASB”)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.

Deferred revenue consists of customer deposits and advance billings of the Company’s products where sales have not yet been recognized. 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.

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, 2019 and June 30, 2019, the Company accrued $102,350 and $82,350, respectively, for estimated product warranty claims, which is included in accrued expenses in the accompanying consolidated balance sheets. The accrued warranty costs are based primarily on historical warranty claims as well as current repair costs. There was $82,494 and $0 of warranty expense for the three months ended September 30, 2019 and 2018, respectively. The Company is negotiating a warranty settlement with one of its manufacturers. At September 30, 2019, the Company accrued $292,138 payable to this manufacturer to be paid over twenty-four months.

Entertainment Theater Ticket Sales and Concessions

Revenues are generated principally through admissions and concessions sales with proceeds received in cash or via credit card at the point of sale.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 1 - Summary of Significant Accounting Policies (Continued):

Cash and Cash Equivalents

The Company considers cash and cash equivalents to be cash in all bank accounts, including money market and 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 fluctuation daily throughout the year. 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.

Accounts Receivable

The Company reports accounts receivable at invoiced amounts less 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 the accounts receivable is then reduced by an allowance based on management’s estimate. Management deemed no allowance for doubtful accounts was necessary at March 31,At September 30, 2019 orand June 30, 2018.2019, management had determined an allowance on uncollectable accounts totaling $100,000 and $0, respectively, At September 30, 2019 and June 30, 2019, $97,629 and $247,007, respectively, of total accounts receivable were considered unbilled and recorded as deferred revenue.

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. All inventory at March 31,September 30, 2019 and June 30, 2018,2019, represents goods available for sale. Galaxy inventoryInventory is mostly comprised of interactive panels and accessories while FLCR inventory consists of concession inventory such as popcorn, soft drinks, and candy.panels. Management estimates no$20,000 of obsolete or slow-moving inventory reserves at March 31,September 30, 2019 orand June 30, 2018.2019.

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.

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GALAXY NEXT GENERATION, INC.-13-

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 1 - Summary of Significant Accounting Policies (Continued):

Property and Equipment (Continued)

Property and equipment at March 31,September 30, 2019 and June 30, 2018,2019 and the estimated useful lives used in computing depreciation, are as follows:

Building

40 years

Building improvements

8 years

Vehicles

5 years

Equipment

5 – 8 years

Depreciation is provided using the straight-line method over the estimated useful lives of the depreciable assets. Depreciation expense was $38,220$7,832 and $17,667$89,211 for the three-month periodsthree months ended March 31, 2019 and 2018, respectively. Depreciation expense was $216,642 and $14,547 for the nine-month periods ended March 31,September 30, 2019 and 2018, 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.

Goodwill

Goodwill, net of accumulated impairment losses, representing the excess of cost over the net tangible and identifiable assets of acquired businesses, is stated at cost. 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 impairment analysis of goodwill. 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.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 1 - Summary of Significant Accounting Policies (Continued):

Goodwill (Continued)

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. AnIf determined to be impaired, an impairment charge is recorded as a general and administrative expense within the Company’s consolidated statement of operations.

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Note 1 - Summary of Significant Accounting Policies (Continued)

Intangible Assets

Intangible assets are stated at the lower of cost or fair value. Iintangible assets are amortized on a straight-line basis over periods ranging from two to four years, representing the period over which we expect to receive future economic benefits from these assets.  Estimated amortization expense related to intangible assets for the next five years is: $1,072,000 for 2020, $1,072,000 for 2021, $272,000 for 2022, $272,000 for 2023, and $272,000 for 2024.

There were no intangible assets as of June 30, 2019.

Distinguishing Liabilities from Equity

The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify certain convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company determines a liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.

If the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company determines temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.

Initial Measurement

The Company records financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.

Subsequent Measurement – Financial Instruments Classified as Liabilities

The Company records the fair value of financial instruments classified as liabilities at each subsequent measurement date.

The changes in fair value of financial instruments classified as liabilities are recorded as other income (expense).

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Note 1 - Summary of Significant Accounting Policies (Continued)

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-endyear 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 recognized.

Prior to the merger, Galaxy was organized as a Subchapter S Corporation under the Internal Revenue Code. There was no provision for federal and state income taxes for the three-month or nine-month periods ended March 31, 2018 since the proportionate share of the taxable income or loss was included in the tax returns of the stockholders. However, upon completion of the merger, Galaxy consequently changed to a C Corporation.utilized.

Research and Development

The Company accounts for research and development (R&D) costs in accordance with the Research and Development topic of the ASC. Under the Research and Development topic of the ASC, all R&D costs must be charged to expense as incurred. Accordingly, internal R&D costs are expensed as incurred. Third-partyThird party R&D costs are expensed when the contracted work has been performed.

Stock-based Compensation

The Company records stock-based compensation in accordance with the provisions set forth in ASC 718, “Stock Compensation,” using the modified prospective method. 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.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 1 - Summary of Significant Accounting Policies (Continued):

RecentFair Value of Financial Instruments (Continued)

As of September 30, 2019 and June 30, 2019, 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.

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 featuresand anti-dilution clauses in agreements.

Recently Adopted Accounting PronouncementsStandards

In January 2017,February 2016, the FASB issued ASU No. 2017-01 Business Combinations (Topic 805)-Clarifying2016-02, Leases. This ASU, together with its related clarifying ASUs (collectively “ASU 2016-02”), amended the Definitionprevious guidance for lease accounting and related disclosure requirements. The new guidance requires the recognition of a Business. This guidance changes the definition of a business to assist entities in evaluating when a set of transferredright-of-use assets and activities constituteslease liabilities on the consolidated balance sheet for leases with terms greater than 12 months or leases that contain a business.purchase option that is reasonably certain to be exercised. Lessees are required to classify leases as either finance or operating leases. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. For leases with a term of 12 months or less, a lessee can make an accounting policy election by class of underlying asset not to recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and provide additional information about the nature of an organization’s leasing activities. On July 1, 2019, the Company adopted ASU 2016-02 using the modified retrospective method, meaning it has been applied to leases that existed or have been entered into after July 1, 2019, without adjusting comparative periods in the financial statements. The guidanceadoption of this standard had no material impact on the financial statement presentation.

In November 2019, the FASB issued ASU No. 2019-08, Compensation – Stock Compensation (Topic 718). This ASU requires that an entity measure and classify share based payment awards granted to evaluate if substantially alla customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be measured on the basis of the grant-date fair value of the gross assets acquired is concentratedshare-based payment award in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business.accordance with Topic 718. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputsamendments in this update are described in Accounting Standards Codification (ASC 606) Revenue from Contracts with Customers. The new standard is effective for public entities beginning in fiscal years starting after December 15, 2017.  We adopted this standard during the quarter ended December 31, 2018. There was no significant impact on our financial statements as a result of adopting this standard.

In August 2017, FASB issued ASU No. 2017-12 Derivatives and Hedging (Topic 815)—Targeted Improvements to Accounting for Hedging Activities. This guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires, for qualifying hedges, the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also modifies the accounting for components excluded from the assessment of hedge effectiveness, eases documentation and assessment requirements and modifies certain disclosure requirements. The new standard is effective for public entities in fiscal years beginning after December 15, 2018. Early adoption is permitted.2019, and interim periods within those years. The Company is assessing the impact ofadopted this standard effective July 1, 2019 with no material impact on it’sthe consolidated financial statements.

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Note 1 - Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements (Continued)

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU provides amendments to Topic 326 related to estimating and measuring credit losses. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those years. The Company adopted this standard effective July 1, 2019 with no material impact on the consolidated financial statements.

In August 2018, the U.S. Securities and Exchange Commission ("SEC") adopted the final rule under SEC ReleaseFASB issued ASU No. 33-105322018-13, Fair Value Measurement (Topic 820) – Disclosure Update and Simplification, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. Among other changes, the amendments eliminated the annual requirement to disclose the high and low trading prices of our common stock. In addition, the amendments provide that disclosure requirements relatedFramework – Changes to the analysisDisclosure Requirements for Fair Value Measurements. This ASU provides amendments on changes in unrealized gains and losses, the range and weighted average of shareholders' equity are expanded for interim financial statements. An analysissignificant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of the changesmeasurement uncertainty that should be applied. The amendments in each captionthis update are effective for fiscal years beginning after December 15, 2019, and interim periods within those years. The Company adopted this standard effective July 1, 2019 with no material impact on the consolidated financial statements.

Leases

On July 1, 2019, the Company adopted ASU 2016-02, which amended the previous guidance for lease accounting and related disclosure requirements. The new guidance requires the recognition of shareholders' equity presented inright-of-use assets and lease liabilities on the balance sheets for leases with terms greater than 12 months or leases that contain a purchase option that is reasonable certain to be exercised. Lessees are required to classify leases as either financing or operating leases. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.

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Note 1 - Summary of Significant Accounting Policies (Continued)

Leases (Continued)

The Company elected to utilize the package of practical expedients in ASC 842-10-65-1(f) that, upon adoption of ASU 2016-02, allows entities to (1) not reassess whether any expired or existing contracts contain leases, (2) retain the classification of leases (e.g., operation or finance lease) existing at the date of adoption and (3) not reassess initial direct costs for any existing leases.

The Company adopted ASU 2016-02 using the modified retrospective method, and accordingly, the new guidance was applied to leases that existed as of July 1, 2019.  The adoption of ASU 2016-02 did not have a material impact on the Company’s balance sheet, must be provided in a noteresult of operations or separate statement,cash flows.

The Company primarily leases office and warehouse space as well as delivery vehicles used in providing equipment to its customers. The Company’s leases expire through December 2021. Most leases contain renewal options for varying periods, which are at the amountCompany’s sole discretion and included in the expected lease term if they are reasonably certain of dividends per share for each class of shares. This rule was effective on November 5, 2018;being exercised.

Right-of-use assets and we adopted this guidance during the quarter ended December 31, 2018 with no impactlease liabilities are recognized at commencement date based on the financial statements presentedpresent value of lease payments over the lease term. The Company uses its incremental borrowing rate to determine the present value of the lease as the rate implicit in accordancethe lease is typically not readily determinable.

Short-term leases (leases with generally accepted accounting principles.an initial term of 12 months or less or leases that are cancellable by the lessee and lessor without significant penalties) are not recorded on the consolidated balance sheet and are expensed on a straight-line basis over the term of the lease. The majority of the Company’s short-term leases related to certain property and delivery equipment. These leases are entered into at agreed upon hourly, daily, weekly, or monthly rental rates for an unspecified duration and typically terminate for convenience provision. Such equipment leases are considered short-term in nature unless it is reasonable certain that the equipment will be leased for a term greater than 12 months.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 2 - Property and Equipment:Equipment

Property and equipment are comprised of the following:

following at:

As disclosed in Note 11, the Entertainment segment was sold effective February 6, 2019 in exchange for 38,625 Galaxy common shares. As a result of the sale, the property and equipment belonging to this segment was reduced to zero.

Note 3 - Line of Credit:Credit

The Company has a $1,250,000 line of credit agreement with a bank. The line of credit bearsat September 30, 2019 and June 30, 2019 bearing interest at prime plus 0.5% (6.0% as of March 31,(5.5% at September 30, 2019 and 5.5% as of6.0% June 30, 2018) and2019) which expires in December 2019. The line of credit is collateralized by all assets of the business, certain propertyreal estate owned by a family member of a stockholder, equity investments850,000 shares of the Company's common stock owned by two stockholders, personal guarantees of two stockholders, and a key man life insurance policy. A minimum average bank balance of $50,000 is required as part of the line of credit agreement. In addition, a 20% curtailment of the outstanding balance willmay occur during 2019. The outstanding balance was $1,230,550 and $547,603 at March 31,September 30, 2019 and June 30, 2018, respectively.2019.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Notes 4 - Notes Payable:Payable

Long Term Notes Payable

The Company's long termlong-term notes payable obligations to unrelated parties are as follows as of March 31, 2019 and June 30, 2018:

at:

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

As disclosed in Note 11, the Entertainment segment was sold effective February 6, 2019 in exchange for 38,625 Galaxy common shares. As a result of the sale, the notes payable belonging to this segment was reduced to zero.

Note 4 - Notes Payable (Continued):

Long Term Notes Payable (Continued)

Future minimum principal payments on the non-related party long term notes payable are as follows:

Short Term

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Note 4 - Notes Payable (Continued)

The Company's short term notes payable obligations to unrelated parties assumed in the acquisition (Note 11) are as follows as of March 31, 2019 and June 30, 2018:

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

As disclosed in Note 11, the Entertainment segment was sold effective February 6, 2019 in exchange for 38,625 Galaxy common shares. As a result of the sale, the notes payable belonging to this segment was reduced to zero.

Convertible Notes Payable

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Note 4 - Notes Payable (Continued)

Convertible Notes Payable (Continued)

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Note 4 - Notes Payable (Continued)

Convertible Notes Payable (Continued)

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Note 4 - Notes Payable (Continued)

Convertible Notes Payable (Continued)

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, 2019, the Company amortized $60,268 of debt discounts to interest expense and $228,933 to interest accretion. There was no amortization of debt discounts during the three months ended September 30, 2018.

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 meets 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. 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 the unexercised warrants 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).. Unexercised warrants of 77,342 are outstanding at September 30, 2019 and June 30, 2019.  All outstanding warrants have an original exercise prices of $4 per share, contain anti-dilution protection clauses, and expire 36 months from issue date. The anti-dilution clause was triggered for outstanding warrants, which now have an exercise price of $1.325 per share. As of September 30, 2019, outstanding warrants expire between March 27, 2022 and April 1, 2022.

Note 5 – Fair Value Measurements

The Company classifies financial assets and liabilities as held-to-maturity, loans and receivables or other financial liabilities depending on their nature. Financial assets and financial liabilities are recognized at fair value on their initial recognition.

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Note 5 – Fair Value Measurements (Continued)

The Company measures the fair value of financial assets and liabilities based on U.S. GAAP guidance which defines fair value, establishes a framework for measuring fair value, and expands disclosures about 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, 2019 and June 30, 2019 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical instruments. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates, and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the financial instrument, and included situations where there is little, if any, market activity for the instrument:

The Company measures the fair market value of the Level 3 components using the Monte Carlo model and projected discounted cash flows, as appropriate. These models are prepared by an independent third party and take into account management’s best estimate of the conversion price of the stock, an estimate of the expected time to conversion, an estimate of the stock volatility, and the risk-free rate of return expected for an instrument with a term equal to the duration of the convertible note.

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Note 5 – Fair Value Measurements (Continued)

The derivative liability was valued using the Monte Carlo pricing model with the following inputs at September 30, 2019 and June 30, 2019:

During the three and nine-month periods ended March 31, 2019, the Company recorded interest expense of $40,578 and $45,022 of amortization of debt discount, included in interest expense.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 5 - Related Party Transactions:

Notes Payable

The Company's notes payable obligations to related parties assumed in the acquisition (Note 11) are as follows as of March 31, 2019 and June 30, 2018:

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, 2019:

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

As disclosed in Note 11, the Entertainment segment was sold effective February 6, 2019 in exchange for 38,625 Galaxy common shares. As a result of the sale, the notes payable belonging to this segment was reduced to zero.

Note 56 - Related Party Transactions (Continued):

Other Advances and CommitmentsNotes Payable

In support of the Company’s efforts and cash requirements, it may rely on advances from related parties until such time that it can support its operations or attain adequate financing through sales of its equity or traditional debt financing. There is no formal written commitment for continued support by officers, directors or shareholders. Amounts represent advances or amounts paid in satisfaction of liabilities. The advances are unsecured, due on demand, and the amounts outstandingCompany has a short-term note payable to a stockholder, totaling $200,000 at March 31,September 30, 2019 and June 30, 20182019, in which the note principal plus interest of $10,000 is $0payable in December 2019. Effective October 2019, the note was increased to $400,000 and $260,173, respectively.the maturity extended to December 2021 (Note 17).

Galaxy paysThe Company has a note payable to the seller of Concepts and Solutions, a related party, $7,500 as a collateral fee for securingbearing interest at 3% annually, payable in annual installments from October 31, 2019 to November 30, 2021. Payments are subject to annual earnings. The balance of the Company’s short-term note payable at September 30, 2019 totaled $900,000 with a certificate of deposit (see Note 4).$400,000 being considered current and remainder as long term.

Leases

The Company’s technology segmentCompany leases property used in operations from a related party under terms of an operating lease. The term of the lease expiredexpires on December 31, 2018 when the lease changed to a month-to-month operating lease.2021. The monthly lease payment is $1,500 plus maintenance and property taxes, as defined in the lease agreement. Rent expense for this lease as well as other month-to-month leases, totaled $21,646$4,500 and $10,500$2,988 for the three-month periodsthree months ended March 31,September 30, 2019 and 2018, respectively. Rent expense totaled $24,634 and $14,169 for the nine-month periods ended March 31, 2019 andSeptember 30, 2018, respectively.

The Company leases three vehicles from related parties under capital leases. The Company is paying the lease payments directly to the creditors, rather than the lessor. The leased vehicles are used in operations for deliveries and installations.

Other Agreements

A stockholder’s family memberrelated party collateralizes the Company’s short-term note with a CD in the amount of $375,000,$274,900, held at the same bank. The family memberrelated party will receive a $7,500 collateral fee for this service. In May 2018, 50,000 shares of stock were issued in exchange for a $100,000 reduction in the short-term note balance.service (see Note 4).

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Notes Payable Converted to Common Stock

On June 22, 2018, various board members and executives of FLCR exchanged their outstanding related party debt and accrued interest for 4% of the Company’s common stock as described in Note 11.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 67 - Lease Agreements:Agreements

Capital Lease Agreements

Capital lease agreements for delivery vehicles (disclosed in Note 4) require monthly payments totaling $1,066$724 (ranging from $253$263 to $461), including interest (ranging from 4.0%4.5% to 4.75%), over 5-year terms expiring between Aprilthrough July 2020. One of the capital leases was paid in full during July 2019 and July 2020.leaving one delivery vehicle capital lease remaining.

Operating Lease Agreements

In July 2019, the Company signed a lease agreement for certain property.  The lease expires in June 2021 and requires a non-refundable deposit of $10,000 and monthly installments of $3,000.  Rent expense for this lease totaled $9,000 for the three months ended September 30, 2019.  No rent expense was recognized under this agreement for the three months ended September 30, 2018.

The Company leases office retail shop and warehouse facilities under operating leases from a relatedan unrelated party (disclosed in Note 5) which requirerequires monthly payments of $1,500approximately $9,300 and subsequent to December 2018, became a month-to-month operating lease. Rentexpire through June 2020. These leases were assumed with the acquisition of Concepts and Solutions (Note 13) and no expense for this lease, as well as other month-to-month leases, totaled $21,646 and $10,500 forwas incurred from the three-month periods ended March 31, 2019 and 2018, respectively. Rent expense totaled $24,634 and $14,169 for the nine-month periods ended March 31, 2019 and 2018, respectively.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

ThreeFuture minimum lease payments at September 30, 2020 and Nine-Months Ended March 31, 20192021 total $59,000 and 2018 (Unaudited)

Note 7 - Equity:$35,250, respectively, with no other amounts due in future years.

Certain equity transactions related to the reverse triangular merger occurred in September 2018, but have been reflected as of June 30, 2018, in the consolidated financial statements due to FLCR effectively transferring control to Galaxy as of June 22, 2018 (see Note 11). The following equity transactions occurred simultaneously, and are treated in these consolidated financial statements as being effective on that date:8 - Equity

•

Galaxy shareholders transferred all the outstanding shares of common stock to the Merger Sub;

•

Preferred Class C shares were converted into common stock in an amount equivalent to 89% ownership in the outstanding shares of the merged company;

•

Common shares were issued to common stockholders in an amount equivalent to 7% ownership in the outstanding shares of the merged company;

•

Common shares were issued to convertible debt holders in an amount equivalent to 4% ownership in the outstanding shares of the merged company (See Note 5).

•

A reverse stock split was approved at a ratio of one new share for every 350 shares of common stock outstanding (1:350 Reverse Stock Split).

Private Placement

In March 2018, the Company offered 1,500,000 common shares to qualified investors at $2 per share in a private placement memorandum (“PPM”). The private placement offering period expired in September 2018. Proceeds were raised to purchase inventory, pay merger costsDuring July and provide working capital. As a result of the PPM, the Company issued 1,374,850 shares to new investors resulting in proceeds of $2,004,500. The shares issued in the PPM are prior to the Reverse Stock Split.

In May 2018, 50,000 shares of stock (143 shares post-Reverse Stock Split) were issued to the related party in exchange for a $100,000 reduction in the short-term note balance (see Note 4).

On December 19, 2018, the Company issued 75,511 shares as a bonus to a board member for consulting services and as a performance incentive to a key employee.

In December 2018, January 2019 and FebruaryAugust 2019, the Company issued commitment fees in the form of 252,271 returnable475,000 common shares under convertible notes.for professional consulting services.  These shares are issued but not outstandingwere valued at March 31,$1,203,300 upon issuance during the three months ended September 30, 2019. These shares will be considered outstanding upon the exercise of the conversion rights specified in the convertible notes.

During the three-month period ended March 31,August 2019, the Company issued 300,000347,397 common shares for debt reduction. These shares were valued at $619,103 upon issuance during the three months ended September 30, 2019.

During August and September 2019, the Company settled conversion features on convertible notes. These conversions were valued at $149,374 at conversion during the three months ended September 30, 2019.  

During September 2019, the Company issued 644,709 common shares to warrant holders in two cashless transactions.

During September 2019, the Company issued 44,511 common shares in lieu of compensation. These shares were valued at $44,511 upon issuance during the three months ended September 30, 2019.

During September 2019, the Company issued 80,000 common shares for professional consulting services.  These shares were valued at $80,000 upon issuance during the three months ended September 30, 2019.

During the three-month period ended March 31,September 2019, the Company acquired 38,625issued 1,350,000 common shares from an entity with a common board member under a Share Purchase Agreement related tofor the saleacquisition of Entertainment.Concepts and Solutions. These shares are issued but not outstandingwere valued at March 31,$1,485,000 upon issuance during the three months ended September 30, 2019.

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GALAXY NEXT GENERATION, INC.During September 2019, the Company issued 397,864 common shares for debt reduction. These shares were valued at $408,622 upon issuance during the three months ended September 30, 2019.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

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

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Note 89 - Income Taxes:Taxes

The U.S. Tax Cuts and Jobs Act (TCJA) legislation, enacted on December 22, 2017, reducesCompany’s effective tax rate differed from the U.S. federal corporatestatutory income tax rate from 35.0% to 21.0% and is effective January 1, 2018 for the Company. three months ended September 30, 2019 and 2018 as follows:

The Company has not generated any taxable income and has not recorded any currenthad no federal or state income tax expense at March 31, 2019. Consequently,(benefit) for the tax rate change has had no impact on thethree months ended September 30, 2019 or 2018.

The Company’s current tax expense but impacts the deferred tax assets and liabilities as of September 30, 2019 and will impact futureJune 30, 2019, are summarized as follows:

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 differenced become deductible. Management considers projected future taxable income and liabilities to be recognized.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. EstimatedThe net operating losses available at March 31, 2019 amountedloss carryforwards expire from 2020 to approximately $2,500,000, set to expire through 2038.2039 with some providing an indefinite carryforward benefit. 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 net operating loss carry forwards, a valuation allowance equal to the net deferred tax assets has been recorded.

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Note 9 - Income Taxes (Continued)

The Company’s effectivesignificant components of deferred tax rate differed from the federal statutory income tax rate for the period ended March 31,assets as of September 30, 2019 isand June 30, 2019, are as follows:

As of March 31,September 30, 2019, 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 March 31,September 30, 2019, the Company’s income tax returns generally remain open for examination for three years from the date filed with each taxing jurisdiction.

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GALAXY NEXT GENERATION, INC.-31-

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 910 - Commitments, Contingencies, and Concentrations:Concentrations

Contingencies

Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

As of September 30, 2019, the Company recorded an accrued liability for approximately $591,000 relative to unpaid payroll tax liabilities and associated penalties and fees which were assumed in the acquisition of Concepts and Solutions.

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 threeone customer that accounted for approximately 40% of accounts receivable at September 30, 2019 and four customers that accounted for approximately 76% of accounts receivable at March 31, 2019 and87%79% of accounts receivable at June 30, 2018.2019. Galaxy has two customers that accounted for approximately 81% of total revenue for the three months ended September 30, 2019 and three customers that accounted for approximately 67% and  42%89% of revenues for the three-month periodsthree months ended March 31, 2019 and March 31, 2018, respectively. Galaxy has three customers that accounted for approximately 57% and 52% of revenues for the nine-month periods ended March 31, 2019 and 2018, respectively.The Company routinely assesses the financial strength of its customers and, consequently, believes that its accounts receivable credit risk exposure is limited.September 30, 2018.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 1011 - Material Agreements:

Manufacturing and Distributorship Agreement

In December 2016, Galaxy executed an agreement with a company in South Korea. Pursuant to such distribution agreement, the manufacturer agreed to manufacture, and the Company agreed to be the sole distributor of the interactive panels in the United States for a term of one year, with automatic annual renewals. The Company must submit a three-month rolling sales forecast (which acts as a purchase order) to the manufacturer, updated monthly. The manufacturer has three days to accept the purchase order and once accepted, the Company must pay the manufacturer 105% of the cost shown on the purchase order, 10% at the time the order is accepted and the remaining 95% within 120 days if the Company has sold the panels and been paid by the end customer. The manufacturer also provides a warranty for any defects in material and workmanship for a period of 26 months from the date of shipment to the Company.

There was a $4 million minimum purchase commitment for the 12-month period ended December 31, 2017. This minimum purchase commitment was not met; however, the manufacturer and the Company extended the agreement for an additional year under the same terms. Because the Company did not meet the minimum purchase commitment, the manufacturer can require the Company to work with their sales representative to establish a performance improvement plan, and the manufacturer has the right to terminate the agreement. The agreement expires December 31, 2019.Agreements

Consulting Agreement

Galaxy entered into aA consulting agreement was renewed in May 20172019 with two consultants for advisory services through July 2019. In exchange for consulting services provided, these consultants are entitled to receive consulting feesmonthly payment terms of $15,000 per month and a 5.5% combined equity interest in Galaxy. The 5.5% equity interest was converted to450,000 shares of common stock upon the commencementexecution of the Common Controlled Merger Agreement of R&G and Galaxy CO (as describedrenewal. In addition, it was noted that the Company owed the consultant 210,000 shares under the original consulting agreement due to an anti-dilution clause in Note 1).the agreement.  The Company paid the consultants $161,500$15,000 and $374,500$110,000 in fees and expenses for consulting services provided during three months ended September 30, 2019 and 2018, respectively. The 450,000 shares were issued under the three-month and nine-month periods ended March 31, 2019. NoCompany’s Stock Plan in May 2019 (Note 14).

The Company issued 210,000 shares for services in July 2019 in satisfaction of the $400,000 accrued liability for the consulting fees were paid under this agreement duringservices per the periods ended March 31, 2018. The consulting agreement was renewed effective May 1, 2019 (as described in Note 15).anti-dilution provision within the original agreement.

Consulting Agreement – Magellan FIN, LLC

The Company entered into a consulting agreement in May 2018 for advisory services such as maintaining ongoing stock market support such as drafting and delivering press releases and handling investor requests. The program will be predicated on accurate, deliberate and direct disclosure and information flow from the Company and dissemination to the appropriate investor audiences. In exchange for these consulting services provided, the advisor received $15,000 at contract inception, an additional10,000 shares of common stock and $4,000 monthly through April 2019. The contract renews automatically each year. The Company paid the term ofconsultants $0 and $23,000 in fees and expenses for consulting services provided during the agreement, which is Aprilthree months ended September 30, 2019 and 10,0002018, respectively.  

Consulting Agreement

The Company entered into a consulting agreement in April 2018 for a period of six months for investor relations services such as blogs and newsletters, introduction to investment banks and online CEO quarterly conferences. In exchange for these consulting services provided, the advisor received $25,000 per month for four months and 25,000 shares of common stock. The Company incurred no amountspaid the consultants $35,000 for consulting fees during the three-month period and $23,000 during the nine-month periodthree months ended March 31, 2019. No consulting fees were paid under thisSeptember 30, 2018. The agreement during the periods ended March 31,expired in October 2018.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 10 - Material Agreements (Continued):

KLIK DistributionManufacturer and Distributorship Agreement

In September 2018, the Company signed a 1-year distributor agreement with KLIK Communications to be the sole distributor of KLIK products to US educational market. The agreement will automatically renew annually, unless three months’ notice is given by either party. The agreement will end upon successful acquisition of KLIK by Galaxy, per the Letter of Intent signed in July 2018. Payment terms are 45 days after invoice. Delivery terms are FOB Deliver location. The KLIK product will replace the VIVI product (specialized interactive router) previously sold with the Galaxy panels. KLIK will provide a 2-year manufacturer’s warranty from the date of shipment, and free software updates. The agreement provides KLIK with the option of storing the manufacturer’s inventory at the Galaxy warehouse.

Distribution Agreement

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

Agency Agreement

Effective December 11, 2018, the Company entered into a 12 month contract with Carter, Terry and Company (“CTC”) to act as an agent in raisingto raise capital. CTC will have the opportunity to receiveThe agent receives a finder’sfinders fee ranging from 4 to 8% relative to the amount of capital raised, plus restricted shares in an amount equal to 4% of capital raised, if successful. NoThe Agreement contains an option to extend the contract term for an additional six months. The Company paid $11,600 in fees were paid during the three-month or nine-month periodsthree months ended March 31,September 30, 2019. No fees were paid under this agreement during the periodsthree months ended March 31,September 30, 2018.

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Note 11 - Material Agreements (Continued)

Master Service AgreementFinancial Advisory Engagement

Effective January 2,June 4, 2019, the Company entered intoengaged a 3 month contractfinancial advisor to act as the Company’s exclusive financial advisor, lead managing underwriter and sole book running manager and investment banker in connection with Invictus Resources for advisory services including among other services, presenting and introducinga proposed offering. The engagement period of the agreement is June 4, 2019 to May 31, 2020. The Company to the financial communityis proposing a follow-on public offering of investors.securities. The Company paid $75,000 and issued 300,000 common stock shares under this agreement$667,500 in fees during the three-month periodthree months ended March 31,September 30, 2019. No advisory fees were paid under this agreement during the periodthree months ended March 31,September 30, 2018.
The Company issued 250,000 shares to the financial advisor for services in July 2019.

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Effective June 10, 2019, the Company entered into a three month contract for certain advisory and consulting services. The Company will issue 15,000 shares and pay $20,000 per month under the terms of the agreement. The Company paid $169,300 in fees during the three months ended September 30, 2019. No fees were paid under this agreement during the three months ended September 30, 2018. The Company issued 60,000 shares to the consultant for consulting services in July and September 2019.

GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial StatementsCapital Transaction Services Agreement

Three

Effective June 28, 2019, the Company entered into a three month contract for capital raise advisory and Nine-Months Ended March 31,consulting services.  The Company pays $3,500 per month under the terms of this agreement, which is payable upon the successful closing of a capital raise. The Company paid $3,500 upon signing of the agreement. The agreement renews automatically unless either party provided notice of cancellation. The Company paid no fees during the three months ended September 30, 2019 and 2018 (Unaudited)2018.  

Consulting Agreement

On May 1, 2019, the Company engaged an advisor to provide consulting services under an Investor Relations and Advisory Agreement. The Company pays $8,000 per month under this agreement in the form of $2,000 cash and a restricted common stock monthly fee of $6,000 in advance of services each month. The number of shares issued is calculated based on the closing price of the Company’s common shares on the first day of the month. The shares do not have registration rights, and the shares may be sold by the advisor, subject to Rule 144.  The Company paid $4,000 in fees during the three months ended September 30, 2019. No fees were paid under this agreement during the three months ended September 30, 2018.

Consulting Agreement

On August 1, 2019, the Company engaged an advisor to provide consultation services related to research and development for a one year period.  Under the terms of the agreement, the Company issued 35,000 common shares in advance of the services performed.  The shares were valued at $35,000 on the date of issuance.

Employment Agreement

The company signed a two year employment agreement with the former owner of Concepts and Solutions as a part of the acquisition. The agreement provides an annual salary of $185,000 per year and a 15% bonus. The agreement contains an anti-dilution clause for the maintenance of 8% ownership in Galaxy.

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Note 1112 - Reverse Acquisition:Acquisition and Subsequent Sale of Entertainment

On June 22, 2018, Galaxy consummated a reverse triangular merger whereby Galaxy merged with and into FLCR’s newly formed subsidiary, Galaxy MS, Inc. which was formed specifically for the transaction. Under the terms of the merger, Galaxy’s shareholders transferred all their outstanding shares of common stock to Galaxy MS, in return for FLCR’s Series C Preferred Shares, which were equivalent to approximately 3,065,000,000 shares of the common stock of FLCR on a pre-reverse stock split basis. This represents approximately 89% of the outstanding common stock of FLCR, with the remaining 11% of common stock distributed as follows: (a) an ownership interest of seven percent (7%) to the holders of common stock, pro rata; and (b) four percent (4%) of the common stock to the holders of convertible debt, pro rata.

Concurrent with the reverse triangular merger, the Company applied pushdown accounting; therefore, the consolidated financial statements after completion of the reverse merger include the assets, liabilities, and results of operations of the combined companyGalaxy and FLCR from and after the closing date of the reverse merger, with only certain aspects of pre-consummation stockholders’ equity remaining in the consolidated financial statements.

There was no cash consideration paid by Galaxy to FLCR on the date of the reverse triangular merger. Instead, shares of stock were issued and exchanged, and the Company acquired $1,511,844 of net assets of FLCR. At the closing of the merger, all of FLCR’s convertible promissory notes were converted into FLCR’s common shares. The merger agreement contains potential future tax advantages of the net operating loss carryforward available to offset future taxable income of the combined company, up to a maximum of $150,000, over a 5-year period beginning June 22, 2018. There is a valuation allowance reducing this tax benefit to zero.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31,zero at September 30, 2019 and 2018 (Unaudited)

Note 11 - Reverse Acquisition (Continued):June 30, 2019.

The following table summarizes the preliminary allocation of the fair value of the assets and liabilities as of the merger date through pushdown accounting. The preliminary allocation to certain assets and/or liabilities may be adjusted by material amounts as the Company continues to finalize thefinalizes fair value estimates.

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Note 12 - Reverse Acquisition (Continued)

As a result of the Company pushing down the effects of the acquisition, certain accounting adjustments are reflected in the consolidated financial statements, such as goodwill recognized amounting toof $834,220 and reflected in the balance sheet.sheet as of June 30, 2019. Goodwill recognized is primarily attributable to the acquisition of the fair value of the public company structure and other intangible assets that do not qualify for separate recognition.

Other assets noted in the table above consist of the differences between the acquired assets and liabilities of Full Circle Entertainment to be distributed to pre-acquisition FLCR shareholders. The Company expects to exercise its option to spin outsold the Entertainment subsidiary within one yearon February 6, 2019 to focus on its primary business plan as discussed herein and distribute all respective Entertainment assets and liabilities to these shareholders.plan. As a result, the Company doesdid not anticipate receivingreceive any economic benefit from the related assets in the table above, nor incurringincur any obligations from the corresponding liabilities.

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GALAXY NEXT GENERATION, INC.

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 31, 2019 and 2018 (Unaudited)

Note 11 - Reverse Acquisition (Continued):

The Company sold the Entertainment subsidiary to an entity related by common board member on February 6, 2019. The sale of Entertainment enabled the Company to focus its resources into the operations of the Technology segment. The consideration received for the sale of Entertainment was 38,625 shares of Galaxy common stock at the fair value on the date of the transaction, or $92,700. The fair valueA gain of $60,688 was recognized as a result of the Galaxy common shares received offset the assets and liabilities of Entertainment, with the difference recorded as a gain on the sale for the nine-months ended March 31, 2019. The gain on the sale has been recorded in general and administrative expenses in the Consolidated Statement of Operations.sale.

The following table presents a summary of Entertainment’s identifiable assets and liabilities at February 6, 2019, the date of the sale:

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Note 13 – Acquisition of Concepts and Solutions

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 common shares to the seller (Note 17) with a value of $1,485,000. In addition to the issuance of common shares, the Company entered into three promissory notes with the seller for a total note payable of $3,000,000.  The note is subject to adjustment based on certain future earnings goals. The Company believes future earnings goals will not be met and have valued the note payable at $900,000 at September 30, 2019.

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.