NOTE 1 – CONDENSED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the
Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of
operations, and cash flows at December 31, 2017, and for all
periods presented herein, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have
been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's
June 30, 2017 audited financial statements. The results
of operations for the periods ended December 31, 2017 and 2016 are
not necessarily indicative of the operating results for the full
years.
NOTE 2 – GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles in the United States of America
applicable to a going concern which contemplates the realization of
assets and liquidation of liabilities in the normal course of
business. The Company has an accumulated deficit of
$75,157,060, negative working capital of
$10,645,400, and currently has revenues which are
insufficient to cover its operating costs, which raises substantial
doubt about its ability to continue as a going concern. The Company
has not yet established an ongoing source of revenues sufficient to
cover its operating costs and allow it to continue as a going
concern.
The future of the Company as an operating business will depend on
its ability to (1) obtain sufficient capital contributions and/or
financing as may be required to sustain its operations and (2) to
achieve adequate revenues from its ProMaster and AfterMaster
businesses. Management's plan to address these issues includes, (a)
continued exercise of tight cost controls to conserve cash, (b)
obtaining additional financing, (c) more widely commercializing the
AfterMaster and ProMaster products, and (d) identifying and
executing on additional revenue generating
opportunities.
The ability of the Company to continue as a going concern is
dependent upon its ability to successfully accomplish the plans
described in the preceding paragraph and eventually secure other
sources of financing and attain profitable operations. The
accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a
going concern. If the Company is unable to obtain adequate capital,
it could be forced to cease operations.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenue and expenses during the reporting
periods. Significant estimates are made in relation to the
allowance for doubtful accounts and the fair value of certain
financial instruments.
Principles of Consolidation
The consolidated financial statements include the accounts of
AfterMaster, Inc. and its subsidiaries. All significant
inter-Company accounts and transactions have been
eliminated.
Investments
Our available for securities are considered Level 1. Realized gains
and losses on these securities are included in “Other income
(expense) – net” in the consolidated statements of
operations using the specific identification method. Unrealized
gains and losses, on available-for-sale securities are recorded in
accumulated other comprehensive income (accumulated OCI).
Unrealized losses that are considered other than temporary are
recorded in other income (expense) – net, with the
corresponding reduction to the carrying basis of the
investment.
Our short-term investments are recorded at amortized cost, and the
respective carrying amounts approximate fair values. Our available
for securities maturing within one year are recorded in
“Other current assets,” on the balance
sheets.
Accounts Receivables
Accounts receivables are stated at amounts management expects to
collect. An allowance for doubtful accounts is provided for
uncollectible receivables based upon management's evaluation of
outstanding accounts receivable at each reporting period
considering historical experience and customer credit quality and
delinquency status. Delinquency status is determined by contractual
terms. Bad debts are written off against the allowance when
identified.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
-
continued
Fair Value Instruments
Cash is the Company’s only financial asset or liability
required to be recognized at fair value and is measured using
quoted prices for active markets for identical assets (Level 1 fair
value hierarchy). The carrying amounts reported in the
balance sheets for notes receivable and accounts payable and
accrued expenses approximate their fair market value based on the
short-term maturity of these instruments.
Market prices are not available for the Company’s loans due
to related parties or its other notes payable, nor are market
prices of similar loans available. The Company
determined that the fair value of the notes payable based on its
amortized cost basis due to the short-term nature and current
borrowing terms available to the Company for these
instruments.
Derivative Liabilities
The Company has financial instruments that are considered
derivatives or contain embedded features subject to derivative
accounting. Embedded derivatives are valued separately from the
host instrument and are recognized as derivative liabilities in the
Company’s balance sheet. The Company measures these
instruments at their estimated fair value and recognizes changes in
their estimated fair value in results of operations during the
period of change. The Company has a sequencing policy
regarding share settlement wherein instruments with the earliest
issuance date would be settled first. The sequencing policy also
considers contingently issuable additional shares, such as those
issuable upon a stock split, to have an issuance date to coincide
with the event giving rise to the additional shares.
Using this sequencing policy, the Company used this sequencing
policy, all instruments convertible into common stock, including
warrants and the conversion feature of notes payable, issued
subsequent to July 5, 2016 until the note was converted on the same
day were derivative liabilities. The Company again used this
sequencing policy, all instruments convertible into common stock,
including warrants and the conversion feature of notes payable,
issued subsequent to August 19, 2016 until the note was converted
on August 22, 2016 were derivative liabilities.
The Company entered into multiple amendments to a note payable to
extend the maturity date (the Amendments). The Company agreed to
additional $30,000 extension fees which were converted at a
percentage discount (variable) exercise price which causes the
number to be converted into a number of common shares that
“approach infinity”, as the underlying stock price
could approach zero. This creates a situation where the Company no
longer has shares enough available to “cover” all
potential equity issuance obligations during the period of issuance
until conversion.
On February 3, 2017, the company entered into a note payable with
an unrelated party at a percentage discount (variable) exercise
price which causes the number to be converted into a number of
common shares that “approach infinity”, as the
underlying stock price could approach zero. Accordingly, all
convertible instruments issued after February 3, 2017 are
considered derivatives according to the Company’s sequencing
policy.
The Company values these convertible notes payable using the
multinomial lattice method that values the derivative liability
within the notes based on a probability weighted discounted cash
flow model. The resulting liability is valued at each reporting
date and the change in the liability is reflected as change in
derivative liability in the statement of operations.
Income Taxes
There is no income tax provision for the three and six months ended
December 31, 2017 and 2016 due to net operating losses for which
there is no benefit currently available.
At December 31, 2017, the Company had deferred tax assets
associated with state and federal net operating losses. The Company
has recorded a corresponding full valuation allowance as it is more
likely than not that some portion of all of the deferred tax assets
will not be realized.
Revenue Recognition
The Company applies the provisions of FASB ASC
605,
Revenue Recognition in
Financial Statements
, which
provides guidance on the recognition, presentation and disclosure
of revenue in financial statements. ASC 605 outlines the basic
criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. In
general, the Company recognizes revenue related to goods and
services provided when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been rendered,
(iii) the fee is fixed or determinable, and (iv) collectability is
reasonably assured.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
-
continued
The Company's revenues are generated from AfterMaster products and
services, AfterMaster Pro, sessions revenue, and
remastering.
Revenues related to
AfterMaster Pro sells through consumer retail distribution channels
and through our website. For sales through consumer retail
distribution channels, revenue recognition occurs when title and
risk of loss have transferred to the customer which usually occurs
upon shipment to the customers. We established allowances for
expected product returns and these allowances are recorded as a
direct reduction to revenue. Return allowances are based on our
historical experience. Revenues related to sessions and remastering
are recognized when the event occurred.
Cost of Revenues
The Company’s cost of revenues includes employee costs, and
other nominal amounts. Costs associated with products
are recognized at the time of the sale and when the inventory is
shipped. Costs incurred to provide services are recognized as cost
of sales as incurred. Depreciation is not included within cost of
revenues.
Loss Per Share
Basic loss per Common Share is computed by dividing losses
attributable to Common shareholders by the weighted-average number
of shares of Common Stock outstanding during the period. The losses
attributable to Common shareholders was increased for accrued and
deemed dividends on Preferred Stock during the six months ended
December 31, 2017 and 2016 of $112,734 and $87,858,
respectively.
Diluted earnings per Common Share is computed by dividing net loss
attributable to Common shareholders by the weighted-average number
of Shares of Common Stock outstanding during the period increased
to include the number of additional Shares of Common Stock that
would have been outstanding if the potentially dilutive securities
had been issued. Potentially dilutive securities include
outstanding convertible Preferred Stock, stock options, warrants,
and convertible debt. The dilutive effect of potentially dilutive
securities is reflected in diluted earnings per share by
application of the treasury stock method. Under the treasury stock
method, an increase in the fair market value of the Company’s
Common Stock can result in a greater dilutive effect from
potentially dilutive securities.
For the six months ended December 31, 2017 and 2016, all of the
Company’s potentially dilutive securities (warrants, options,
convertible preferred stock, and convertible debt) were excluded
from the computation of diluted earnings per share as they were
anti-dilutive. The total number of potentially dilutive
Common Shares that were excluded were 90,410,737 and 26,336,572 at
December 31, 2017 and 2016, respectively.
Recent Accounting Pronouncements
Management has considered all recent accounting pronouncements
issued since the last audit of our consolidated financial
statements. The Company’s management believes that these
recent pronouncements will not have a material effect on the
Company’s consolidated financial statements.
NOTE 4 – SECURITIES AVAILABLE-FOR-SALE
On November 10, 2014, the Company received 600,000 shares of b
Booth stock as part of an Asset License agreement with b Booth. The
following table presents the amortized cost, gross unrealized
gains, gross unrealized losses, and fair market value of
available-for-sale equity securities, nearly all of which are
attributable to the Company's investment in b Booth stock, as
follows:
|
|
|
|
|
|
Gross unrealized (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
$
123,600
|
$
(64,800
)
|
$
-
|
$
-
|
$
-
|
$
58,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
$
63,600
|
$
60,000
|
$
-
|
$
-
|
$
-
|
$
123,600
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
Convertible Notes Payable
In accounting for its convertible notes payable, proceeds from the
sale of a convertible debt instrument with Common Stock purchase
warrants are allocated to the two elements based on the relative
fair values of the debt instrument without the warrants and of the
warrants themselves at time of issuance. The portions of the
proceeds allocated to the warrants are accounted for as paid-in
capital with an offset to debt discount. The remainder of
the proceeds are allocated to the debt instrument portion of the
transaction as prescribed by ASC 470-25-20. The
Company then calculates the effective conversion price of the note
based on the relative fair value allocated to the debt instrument
to determine the fair value of any beneficial conversion feature
(“BCF”) associated with the convertible note in
accordance with ASC 470-20-30. The BCF is recorded to
additional paid-in capital with an offset to debt
discount. Both the debt discount related to the issuance
of warrants and related to a BCF is amortized over the life of the
note.
Convertible Notes Payable – Related Parties
Convertible notes payable due to related parties consisted of the
following as of December 31, 2017 and June 30, 2017,
respectively:
|
Convertible Notes Payable
– Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various term notes
with total face value of $3,925,000 issued from February 2010 to
April 2013, interest rates range from 10% to 15%, net of
unamortized discount of $0 as of December 31, 2017 and June 30,
2017.
|
$
3,925,000
|
$
3,925,000
|
|
$30,000
face value, issued in August 2016, interest rate of 0%, matures
January 2017, a gain on extinguishment of debt was recorded
totaling $3,818 net unamortized discount of $0 as of December 31,
2017 and June 30, 2017.
|
30,000
|
26,182
|
|
$10,000
face value, issued in November 2017, interest rate of 0%, matures
November 2018,net amortized discount of $0 as of December 31,
2017.
|
10,000
|
-
|
|
$25,000
face value, issued in December 2017, interest rate of 0%, matures
December 2018, net amortized discount of $3,750 as of December 31,
2017.
|
21,250
|
-
|
|
Total convertible
notes payable – related parties
|
3,986,250
|
3,951,182
|
|
Less current
portion
|
3,986,250
|
3,951,182
|
|
Convertible notes
payable – related parties, long-term
|
$
-
|
$
-
|
On November 1, 2017, the Company issued a note to a related party
for $10,000 that matures on November 1, 2018. The note bears 0%
interest per annum. The note is convertible into shares of the
Company’s common stock at $0.10 per share.
On December 30, 2017, the Company issued a note to a related party
for $25,000 that matures on December 30, 2018. The note bears 0%
interest per annum. The note is convertible into shares of the
Company’s common stock at $0.10 per
share.
The Company
valued a BCF related to the note valued at
$3,750
.
Convertible Notes Payable - Non-Related Parties
Convertible notes payable due to non-related parties consisted of
the following as of December 31, 2017 and June 30, 2017,
respectively:
|
Convertible Notes Payable - Non-Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
$7,000
face value, issued in July 2014, interest rate of 6%, matures
October 2017, net unamortized discount of $0 as of December 31,
2017 and June 30, 2017, respectively.
|
$
7,000
|
$
7,000
|
|
$600,000
face value, issued in November 2015, interest rate of 0%, an OID of
$190,000, matures January 2018, net unamortized discount of $0 of J
December 31, 2017 and June 30, 2017, respectively, of which
$260,000 has been paid.
|
430,000
|
430,000
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
-
continued
|
$100,000
face value, issued in February 2016, interest rate of 10%, matures
March 2018, net unamortized discount of $0 as of December 31, 2017
and June 30, 2017, respectively.
|
100,000
|
100,000
|
|
$25,000
face value, issued in February 2016, interest rate of 10%, matures
February 2017, net unamortized discount of $0 as of December 31,
2017 and June 30, 2017, respectively.
|
25,000
|
25,000
|
|
$100,000
face value, issued in March 2016, interest rate of 10%, matures
June2017, net unamortized discount of $0 as of December 31, 2017
and June 30, 2017, respectively.
|
100,000
|
100,000
|
|
$10,000
face value, issued in March 2016, interest rate of 10%, matures
March 2018, net unamortized discount $0 of December 31, 2017 and
June 30, 2017, respectively.
|
10,000
|
10,000
|
|
$50,000
face value, issued in July 2016, interest rate of 0%, matures
October 2017, net unamortized discount of $0 of December 31, 2017
and June 30, 2017, respectively.
|
50,000
|
50,000
|
|
$50,000
face value, issued in August 2016, interest rate of 0%, matures
September which was amended to January 2018, net unamortized
discount of $1,403 and $5,418 of December 31, 2017 and June 30,
2017, respectively.
|
48,597
|
44,582
|
|
$1,000,000
face value, issued in September 2016, interest rate of 10%, matures
June 2018, net unamortized discount of $0 as of December 31, 2017
and June 30, 2017, respectively.
|
1,000,000
|
1,000,000
|
|
$149,000
face value, issued in February 2017, interest rate of 10%, matures
November 2017, net amortized discount of $0 and $59,740 as of
December 31, 2017 and June 30, 2017, respectively, of which $20,000
has been paid.
|
129,000
|
89,260
|
|
$224,000
face value, issued in February 2017, interest rate of 10%, matures
November 2017, net amortized discount of $32,452 and $119,795 as of
December 31, 2017 and June 30, 2017, respectively, of which $30,000
has been paid.
|
194,000
|
104,205
|
|
$258,000
face value, issued in February 2017, interest rate of 12%, matures
August 2017, net amortized discount of $0 and $48,464 as of
December 31, 2017 and June 30, 2017, respectively, of which
$258,000 has been paid.
|
-
|
209,536
|
|
$55,000
face value, issued in June 2017, interest rate of 10%, matures
January 2018, net amortized discount of $3,341 and $50,631 as of
December 31, 2017 and June 30, 2017, respectively.
|
51,659
|
4,369
|
|
$100,000
face value, issued in June 2017, interest rate of 7%, matures June
2018, net amortized discount of $25,943 and $52,317 as of December
31, 2017 and June 30, 2017, respectively.
|
74,057
|
47,683
|
|
$265,000
face value, issued in May 2017, interest rate of 10%, matures
February 2018, net amortized discount of $45,267 and $218,790 as of
December 31, 2017 and June 30, 2017, respectively, of which $25,000
has been paid.
|
194,733
|
46,210
|
|
$78,000
face value, issued in July 2017, interest rate of 12%, matures May
2018, net amortized discount of $35,830 as of December 31,
2017.
|
42,170
|
-
|
|
$50,000
face value, issued in August 2017, interest rate of 0%, matures
October 2017, net amortized discount of $0 as of December 31, 2017,
of which $34,000 has been converted and $16,000 was transferred to
a new note
|
-
|
-
|
|
$60,500
face value, issued in August 2017, interest rate of 12%, matures
August 2018, net amortized discount of $35,471 as of December 31,
2017.
|
25,029
|
-
|
|
$10,000
face value, issued in August 2017, interest rate of 0%, matures
August 2018, net amortized discount of $4,499 as of December 31,
2017.
|
5,501
|
-
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
–
continued
|
$82,250 face value,
issued in August 2017, interest rate of 12%, matures May 2018, net
amortized discount of $41,125 as of December 31, 2017.
|
41,125
|
-
|
|
$53,000 face value,
issued in August 2017, interest rate of 12%, matures June 2018, net
amortized discount of 29,115 as of December 31, 2017.
|
23,885
|
-
|
|
$65,000 face value,
issued in September 2017, interest rate of 12%, matures March 2018,
net amortized discount of $24,061 as of December 31,
2017.
|
40,939
|
-
|
|
$10,000 face value,
issued in September 2017, interest rate of 10%, matures September
2018, net amortized discount of $6,959 as of December 31,
2017.
|
3,041
|
-
|
|
$5,000 face value,
issued in September 2017, interest rate of 0%, matures March 2018,
net amortized discount of $2,092 as of December 31,
2017.
|
2,908
|
-
|
|
$50,000 face value,
issued in September 2017, interest rate of 0%, matures November
2017, net amortized discount of $0 as of December 31, 2017, of
which $50,000 was transferred to a new note.
|
-
|
-
|
|
$110,000 face
value, issued in October 2017, interest rate of 10%, matures July
2018, net amortized discount of $79,377 as of December 31,
2017.
|
30,623
|
-
|
|
$100,000 face
value, issued in October 2017, interest rate of 10%, matures
October 2018, net amortized discount of $55,740 as of December 31,
2017.
|
44,260
|
-
|
|
$115,000 face
value, issued in November 2017, interest rate of 10%, matures
August 2018, net amortized discount of $106,110 as of December 31,
2017.
|
8,890
|
-
|
|
$50,000 face value,
issued in November 2017, interest rate of 10%, matures January
2018, net amortized discount of $3,190 as of December 31,
2017.
|
46,810
|
-
|
|
$66,000 face value,
issued in November 2017, interest rate of 10%, matures November
2018, net amortized discount of $39,173 as of December 31,
2017.
|
26,827
|
-
|
|
$100,000 face
value, issued in November 2017, interest rate of 10%, matures
November 2018, net amortized discount of $89,041 as of December 31,
2017.
|
10,959
|
-
|
|
$5,000 face value,
issued in November 2017, interest rate of 10%, matures November
2018, net amortized discount of $4,310 as of December 31,
2017.
|
690
|
-
|
|
$53,000 face value,
issued in November 2017, interest rate of 12%, matures July 2018,
net amortized discount of $45,396 as of December 31,
2017.
|
7,604
|
-
|
|
$100,000 face
value, issued in December 2017, interest rate of 10%, matures
December 2018, net amortized discount of $41,451 as of December 31,
2017.
|
58,549
|
-
|
|
$20,000 face value,
issued in December 2017, interest rate of 10%, matures December
2018, net amortized discount of $9,567 as of December 31,
2017.
|
10,433
|
-
|
|
$75,000 face value,
issued in December 2017, interest rate of 10%, matures December
2018, net amortized discount of $45,982 as of December 31,
2017.
|
29,018
|
-
|
|
$20,000 face value,
issued in December 2017, interest rate of 10%, matures December
2018, net amortized discount of $12,262 as of December 31,
2017.
|
7,738
|
-
|
|
Total convertible
notes payable – non-related parties
|
2,881,045
|
2,267,845
|
|
Less current
portion
|
2,881,045
|
2,267,845
|
|
Convertible notes
payable – non-related parties, long-term
|
$
-
|
$
-
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
-
continued
On November 20, 2015, the Company issued a convertible note to an
unrelated company for $600,000 that matures on May 20,
2016. The company paid $200,000 in principle balance leaving a
remain balance of $430,000 including the extension fees and is
not convertible unless the borrower defaults under the amendment
agreement dated January 1, 2017. The note bears 0% interest
and had an original issue discount (OID) of $100,000. This note is
not convertible unless there is a default event. Per the terms of
the note there are no derivatives until it becomes convertible on
the original note, however the $30,000 extensions are to be
considered derivatives. The Lender released a clarification of
amendments to convertible promissory notes that explained the
$30,000 extension fees are the only portion that is to be
considered as convertible and converts within 2 days of issuance.
The intent of the amendment agreements were to insure the original
note dated November 20, 2015 in the amount of $600,000. Because the
terms do not dictate a maximum numbers of convertible shares, the
ability to settle these obligations with shares would be
unavailable causing these obligations to potentially be settled in
cash. This condition creates a derivative liability Under ASC
815-40. The Company has a sequencing policy regarding share
settlement wherein instruments with the earliest issuance date
would be settled first. The sequencing policy also considers
contingently issuable additional shares, such as those issuable
upon a stock split, to have an issuance date to coincide with the
event giving rise to the additional shares. During the extension
and conversion day period no additional convertible instruments
were issued, therefore on the extension was considered in the
derivative calculation. The Company extended the maturity date
seven times since February 27, 2017 for a total of $210,000, of
which, the Company paid $120,000 in the six months ended December
31, 2017. The Company latest and fourteenth extension with
consideration of $30,000 was on December 18, 2017 to extending the
maturity date to January 31, 2018. The Company evaluated the
amendments under ASC 470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt.
On February 15, 2016, the Company issued a convertible note to an
unrelated individual for $25,000 that matures on February 15, 2017.
The note was amended subsequently in September 28, 2017 to extend
the maturity date to October 15, 2017. The Company evaluated
amendment under ASC 470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the
debt.
On
September 15, 2016, the Company issued a convertible note to an
unrelated individual for $1,000,000 that matures on June 30, 2017.
The note was amended subsequently on June 30, 2017 to extend the
maturity date to June 30, 2018. The Company evalutated amendment
under ASC 47050,
"Debt
Modification and Extinguishment"
, and concluded that the
extension did not result in significant and consequential changes
to the economic substance of the debt and thus resulted in a
modification of the debt and not extinguishment of the
debt.
On February 23, 2017, the Company issued a convertible note to an
unrelated company for $149,000 that matures on November 23, 2017.
The note bears 10% interest per annum and is convertible into
shares of the Company’s common stock at lesser of 40% of the
average three lowest closing bids 20 days prior to the conversion
date. Additionally, the note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, that
this percentage discount (variable) exercise
price indicates is an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value. The Company
extended the possibility to convert date by issuing 60,000 warrants
valued at $7,813 on September 8, 2017 to November 2, 2017. The
Company extended the possibility to convert date by issuing 60,000
warrants valued at $7,813 on September 8, 2017 to November 2,
2017. The Company extended the possibility to convert
date by paying $10,000 of principal and $1,400 of accrued interest
on October 23, 2017 to November 24, 2017 and extend the maturity
date to February 21, 2018. . The Company extended the possibility
to convert date by paying $10,000 of principal and $4,000 of
accrued interest on November 29, 2017 to December 22, 2017.
The
warrants are considered derivative liabilities under ASC 815-40
under the Company’s sequencing policy and were valued using
the
multinomial lattice
model
.
The Company evaluated amendment under ASC
470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt.
On February 23, 2017, the Company issued a convertible note to an
unrelated company for $224,000 that matures on November 23, 2017.
The note bears 10% interest per annum and is convertible into
shares of the Company’s common stock at lesser of 40% of the
average three lowest closing bids 20 days prior to the conversion
date. Additionally, the note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value. The Company
extended the possibility to convert date by issuing 90,000 warrants
valued at $11,720 on September 8, 2017 to November 2,
2017. The Company extended the possibility to convert date by
paying $10,000 of principal and $2,100 of accrued interest on
October 23, 2017 to November 24, 2017 and extend the maturity date
to February 21, 2018. The Company extended the possibility to
convert date by paying $20,000 of principal and $6,000 of accrued
interest on November 29, 2017 to December 22, 2017.
The
warrants are considered derivative liabilities under ASC 815-40
under the Company’s sequencing policy and were valued using
the
multinomial lattice
model
.
The Company evaluated amendment under ASC
470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
-
continued
On August 26, 2016, the Company issued a convertible note to an
unrelated individual for $50,000 that matures on August 26,
2017. The note bears interest rate of 10% per annum and
is convertible into shares of the Company’s Common stock at
$0.40 per share. The note was amended on June 30, 2017 to extend
the maturity date to October 1, 2017. The Company evaluated
amendment under ASC 470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the debt.
The note was amended again on September 28, 2017 to extend the
maturity date to January 1, 2018. The Company evaluated amendment
under ASC 470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
the extension resulted in significant and consequential changes to
the economic substance of the debt and thus resulted in a
extinguishment of the debt. The Company recorded a debt discount of
$30,000 as a result of the extinguishment.
On March 7, 2016, the Company issued a convertible note to an
unrelated individual for $100,000 that matures on March 7, 2017.
The note bears interest rate of 10% per annum and is convertible
into shares of the Company’s Common stock at $0.40 per
share. The Company valued a BCF related to the note
valued at $24,269 and debt discount related to the 10,000 shares of
common stock issued with the note at a relative fair value of
$4,569.
The note was amended
again on September 28, 2017 to extend the maturity date to January
15, 2018, as additional consideration the Company issued 25,000
shares of common stock valued at $3,998. The Company evaluated
amendment under ASC 470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the
debt.
On July 26, 2016, the Company issued a convertible note to an
unrelated individual for $50,000 that matures on September 26,
2016. The note bears interest rate of 0% per annum and
is convertible into shares of the Company’s Common stock at
$0.40 per share, as part of the note the company issued warrants to
purchase 35,000 shares of 144 restricted common stock at an
exercise price $0.30 for a two-year period. The note was amended on
September 28, 2017 to extend the maturity date to January 15, 2018,
as additional consideration the Company issued 15,000 shares of
common stock valued at $2,399. The Company evaluated amendment
under ASC 470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the
debt.
On July 31, 2017, the Company issued a convertible note to an
unrelated company for $78,000, which included $75,000 in proceeds
and $3,000 in legal fees, that matures on April 10, 2018. The note
bears 12% interest per annum and is convertible into shares of
the Company’s common stock at 61% of the lowest two trading
prices during the fifteen (15) trading day period ending to the
date of conversion. The note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value.
On August 2, 2017, the Company issued a convertible note to an
unrelated party for $50,000 that matures on August 24, 2017. The
note bears 0% interest per annum, in lieu of interest the Company
issued 12,000 shares of common stock on August 4, 2017. The note is
convertible into shares of the Company’s common stock at
$0.10 per share. The Company valued a BCF related
to the note valued at $31,287 and debt discount related to the
12,000 shares of common stock issued with the note at a relative
fair value of $1,837.
The note was amended on
September 15, 2017, to extend the maturity date to October 15,
2017. The Company evaluated amendment under ASC 470-50,
“
Debt
- Modification and Extinguishment”
, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the
debt.
On September 15,
2017, the note converted the principal of $34,000 for $340,000
shares of common stock. On November 17, 2017, the company
transferred the remaining balance to a new note, see
below.
On August 2, 2017, the Company issued a convertible note to an
unrelated company for $60,500, which includes proceeds of $55,000,
and $5,500 in OID, that matures on August 2, 2018. The note bears
12% interest per annum and is convertible into shares of the
Company’s common stock at 61% of the lowest two trading
prices during the fifteen (15) trading day period ending to the
date of conversion. The note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
-
continued
On August 4, 2017, the Company issued a convertible note to an
unrelated party for $10,000 that matures on August 4, 2018. The
note bears 0% interest per annum, in lieu of interest the Company
issued 3,500 shares of common stock on August 7, 2017. The note is
convertible into shares of the Company’s common stock at
$0.10 per share. The Company valued a BCF related
to the note valued at $7,056 and debt discount related to the 3,500
shares of common stock issued with the note at a relative fair
value of $546.
On August 15, 2017, the Company issued a convertible note to an
unrelated company for $82,250, which included $75,000 in proceeds
and $7,250 in legal and other fees, that matures on April 18, 2018.
The note bears 12% interest
per
annum and is convertible into shares of the Company’s
common stock at 60% the lowest trading price during the previous
twenty (2) days to the date of conversion. The note contains
a percentage discount (variable) exercise price which causes
the number to be converted into a number of common shares that
“approach infinity”, as the underlying stock price
could approach zero. The Company determined under ASC 815, the
Company has determined that this percentage discount
(variable) exercise price indicates an embedded derivative
financial liability, which requires bifurcation and to be
separately accounted for. At each reporting period, the Company
will mark this derivative financial instrument to its estimated
fair value.
On August 16, 2017, the Company issued a convertible note to an
unrelated company for $53,000, which included $50,000 in proceeds
and $3,000 in legal fees, that matures on June 16, 2018. The note
bears 12% interest per annum and is convertible into shares of
the Company’s common stock at 61% of the lowest two trading
prices during the fifteen (15) trading day period ending to the
date of conversion. The note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value.
On September 8, 2017, the Company issued a convertible note to an
unrelated company for $65,000, which included $58,500 in proceeds
and $6,500 in OID, that matures on March 8, 2018. The note bears
12% interest per annum and is convertible into shares of the
Company’s common stock at 55% of either the lowest sales
price for common stock on principal market during the twenty-five
consecutive trading days including the immediately preceding the
conversion date. The note contains a percentage discount
(variable) exercise price which causes the number to be converted
into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value.
On September 11, 2017, the Company issued a convertible note to an
unrelated party for $10,000 that matures on September 11, 2018. The
note bears 10% interest per annum. The note is convertible into
shares of the Company’s common stock at $0.10 per
share. Due to sequencing on February 2, 2017, the Company
determined under ASC 815, the Company has determined that the note
is to be treated as an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value
.
On September 27, 2017, the Company issued a convertible note to an
unrelated party for $5,000 that matures on March 31, 2018. The note
bears 0% interest per annum. The note is convertible into shares of
the Company’s common stock at $0.10 per
share. The Company valued a BCF related to the note
valued at $2,995.
On September 28, 2017, the Company issued a convertible note to an
unrelated party for $50,000 that matures on November 28, 2017. The
note bears 0% interest per annum, in lieu of interest the Company
issued 25,000 shares of common stock. The note is convertible into
shares of the Company’s common stock at $0.10 per share.
The Company valued a BCF related to the note valued at $33,397
and debt discount related to the 25,000 shares of common stock
issued with the note at a relative fair value of
$3,702
.
On November 17, 2017, the company transferred the
remaining balance to a new note, see below.
On October 16, 2017, the Company issued a convertible note to an
unrelated company for $110,000 that matures on July 16, 2018. The
note bears 10% interest per annum and is convertible into
shares of the Company’s common stock at 57.5% of the lowest
closing bid 30 days prior to the conversion
date. Additionally, the note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates that these shares, if issued, are not indexed
to the Company’s own stock and, therefore, is an embedded
derivative financial liability, which requires bifurcation and to
be separately accounted for. At each reporting period, the Company
will mark this derivative financial instrument to its estimated
fair value.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
-
continued
The Company extended the possibility to convert date by issuing
60,000 warrants valued at $7,813 on September 8, 2017 to November
2, 2017.
The warrants are
considered derivative liabilities under ASC 815-40 under the
Company’s sequencing policy and were valued using
the
multinomial lattice
model
.
The Company extended the possibility to
convert date by paying $164,469 in principal on October 23, 2017 to
February 21, 2018.
The warrants are
considered derivative liabilities under ASC 815-40 under the
Company’s sequencing policy and were valued using
the
multinomial lattice
model
.
The Company evaluated amendment under ASC
470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt.
On October 29, 2017, the Company issued a convertible note to an
unrelated party for $100,000 that matures October 29, 2018. The
note bears 10% interest per annum. The note is convertible into
shares of the Company’s common stock at $0.10 per share. As
additional consideration
the Company is to issue
shares of common stock as initial interest payment in kind
calculated by dividing the principal by $0133333 per share totaling
750,002 shares of common stock.
The Company valued a BCF related to the note
valued at $20,000 and debt discount related to the 750,002 shares
of common stock issued with the note at a relative fair value
of
$47,368.
On November 13, 2017, the Company issued a convertible note to an
unrelated party for $115,000 that matures on August 13, 2018. The
note bears 10% interest per annum. The note is convertible into
shares of the Company’s common stock at 57.5% of the lowest
closing bids 30 days prior to the conversion per share. Due to
sequencing on February 2, 2017, the Company determined under ASC
815, the Company has determined that the note is to be treated as
an embedded derivative financial liability, which requires
bifurcation and to be separately accounted for. At each reporting
period, the Company will mark this derivative financial instrument
to its estimated fair value
.
As additional
consideration
the Company also issued
150,000 warrants valued at $12,570. The warrants are considered
derivative liabilities under ASC 815-40 under the Company’s
sequencing policy and were valued using the
multinomial lattice model
.
On November 13, 2017, the Company issued a convertible note to an
unrelated party for $50,000 that matures January 10, 2018. The note
bears 10% interest per annum. The note is convertible into shares
of the Company’s common stock at $0.10 per
share. The Company valued a BCF related to the note
valued at $18,500
.
The note was amended on October 30, 2017, to extend the conversion
rights from 180 days to 225 days, in consideration of the extension
the Company paid $25,000 and issued 150,000 valued at $6,691. The
Company evaluated amendment under ASC 470-50,
“
Debt
- Modification and Extinguishment”
, and concluded that
the extension did result in significant and consequential changes
to the economic substance of the debt and thus resulted in an
extinguishment of the debt.
On November 17, 2017, the Company issued a convertible note to an
unrelated party for $66,000 that matures November 17, 2018 in
exchange for two existing notes for $16,000 issued on August 2,
2017 and $50,000 on September 28, 2017. The note bears 10% interest
per annum. The note is convertible into shares of the
Company’s common stock at $0.10 per share
.
As additional
consideration
the Company is to issue
shares of common stock as initial interest payment in kind
calculated by dividing the principal by $0133333 per share totaling
495,001.
The Company
valued a BCF related to the note valued at $13,266 and debt
discount related to the
495,001
shares
of common stock issued with the note at a relative fair value
of
$31,277.
On November 21, 2017, the Company issued a convertible note to an
unrelated party for $100,000 that matures on November 21, 2018. The
note bears 10% interest per annum. The note is convertible into
shares of the Company’s common stock at 57.5% of the lowest
closing bids 20 days prior to the conversion per share. Due to
sequencing on February 2, 2017, the Company determined under ASC
815, the Company has determined that the note is to be treated as
an embedded derivative financial liability, which requires
bifurcation and to be separately accounted for. At each reporting
period, the Company will mark this derivative financial instrument
to its estimated fair value
.
On November 24, 2017, the Company issued a convertible note to an
unrelated party for $5,000 that matures November 24, 2018. The note
bears 10% interest per annum. The note is convertible into shares
of the Company’s common stock at $0.10 per share. As
additional consideration
the Company is to issue
shares of common stock as initial interest payment in kind
calculated by dividing the principal by $0133333 per share totaling
37,500.
The Company valued
a BCF related to the note valued at $2,200 and debt discount
related to the
37,500
shares of common stock issued with the
note at a relative fair value of
$2,596.
On November 28, 2017, the Company issued a convertible note to an
unrelated party for $53,000 that matures on July 16, 2018. The note
bears 12% interest per annum. The note is convertible into shares
of the Company’s common stock at 61% of the lowest closing
bids 15 days prior to the conversion per share. Due to
sequencing on February 2, 2017, the Company determined under ASC
815, the Company has determined that the note is to be treated as
an embedded derivative financial liability, which requires
bifurcation and to be separately accounted for. At each reporting
period, the Company will mark this derivative financial instrument
to its estimated fair value
.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
–
continued
On December 18, 2017, the Company issued a convertible note to an
unrelated party for $100,000 that matures December 18, 2018. The
note bears 10% interest per annum. The note is convertible into
shares of the Company’s common stock at $0.10 per
share.
As
additional consideration
the Company is to issue
shares of common stock as initial interest payment in kind
calculated by dividing the principal by $0133333 per share totaling
750,002.
The Company
valued a BCF related to the note valued at $100 and debt discount
related to the 750,002 shares of common stock issued with the note
at a relative fair value of
$42,882.
On December 21, 2017, the Company issued a convertible note to an
unrelated party for $20,000 that matures December 21, 2018. The
note bears 10% interest per annum. The note is convertible into
shares of the Company’s common stock at $0.10 per
share. As additional consideration
the Company is to issue
shares of common stock as initial interest payment in kind
calculated by dividing the principal by $0133333 per share totaling
150,000
The Company valued
a BCF related to the note valued at $1,020 and debt discount
related to the 150,000 shares of common stock issued with the note
at a relative fair value of
$8,816.
On December 31, 2017, the Company issued a convertible note to an
unrelated party for $75,000 that matures December 31, 2018. The
note bears 10% interest per annum. The note is convertible into
shares of the Company’s common stock at $0.10 per
share.
As
additional consideration
the Company is to issue
shares of common stock as initial interest payment in kind
calculated by dividing the principal by $0133333 per share
totaling
150,000.
The Company valued a BCF related to the note valued at $11,250
and debt discount related to the 150,000 shares of common stock
issued with the note at a relative fair value of
$34,732.
On December 31, 2017, the Company issued a convertible note to an
unrelated party for $20,000 that matures December 31, 2018. The
note bears 10% interest per annum. The note is convertible into
shares of the Company’s common stock at $0.10 per
share. As additional consideration
the Company is to issue
shares of common stock as initial interest payment in kind
calculated by dividing the principal by $0133333 per share totaling
562,501.
The Company
valued a BCF related to the note valued at $3,000 and debt discount
related to the 562,501 shares of common stock issued with the note
at a relative fair value of
$9,262.
Notes Payable – Related Parties
Notes payable due to related parties consisted of the following as
of December 31, 2017 and June 30, 2017, respectively:
|
Notes Payable –
Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various
term notes with total face value of $627,500 issued from April 11
to June 17, interest rates range from 0% to 15%, net of unamortized
discount of $0 as of December 31, 2017 and June 30, 2017,
respectively, of which $45,000 has been paid.
|
$
600,000
|
$
610,000
|
|
$18,000
face value, issued in September 2017, interest rate of 0%, matures
November 2017.
|
18,000
|
-
|
|
$15,000
face value, issued in October 2017, interest rate of 0%, matures
October 2018.
|
15,000
|
-
|
|
$35,000
face value, issued in December 2017, interest rate of 0%, matures
December 2018, of which $35,000 has been paid.
|
-
|
-
|
|
Total
notes payable – related parties
|
633,000
|
610,000
|
|
Less
current portion
|
633,000
|
610,000
|
|
Notes
payable - related parties, long term
|
$
-
|
$
-
|
|
|
|
|
On September 28, 2017, the Company issued a note to an unrelated
party for $18,000 that matures on November 28, 2017. The note bears
0% interest per annum.
On October 16, 2017, the Company issued a note to an unrelated
party for $15,000 that matures on October 16, 2018. The note bears
0% interest per annum.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
-
continued
On December 14, 2017, the Company issued a note to an unrelated
party for $35,000 that matures on December 14, 2018. The note bears
0% interest per annum. The note has been paid in full.
Notes Payable
–
Non-Related
Parties
Notes payable due to non-related parties consisted of the following
as of December 31, 2017 and June 30, 2017,
respectively:
|
Notes
Payable – Non-Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
Various term notes
with total face value of $40,488 due upon demand, interest rates
range from 0% to 14%.
|
$
40,488
|
$
40,488
|
|
$52,000
face value, issued in August 2017, interest rate of 0%, matures
October 2017 net of unamortized discount of $7,227 as of December
31, 2017.
|
52,000
|
-
|
|
$52,000
face value, issued in August 2017, interest rate of 0%, matures
October 2017 net of unamortized discount of $6,019 as of December
31, 2017.
|
45,981
|
-
|
|
$81,000
face value, issued in September 2017, interest rate of 8% per
month, matures March 2018 net of unamortized discount of $6,842 as
of December 31, 2017, of which $12,000 has been paid.
|
62,158
|
-
|
|
$255,000
face value, issued in October 2017, interest rate of 2.5% per
month, matures February 2018 net of unamortized discount of $2,458
as of December 31, 2017, of which $4,000 has been
paid.
|
248,542
|
-
|
|
Total note payable
– non-related parties
|
449,169
|
40,488
|
|
Less current
portion
|
449,169
|
40,488
|
|
Notes payable
– non-related parties, long-term
|
$
-
|
$
-
|
On August 25, 2017, the Company issued a note to an unrelated party
for $52,000 as part of an Accounts Receivable Financing Agreement,
which included $50,000 in proceeds and an OID of $2,000, that
matures on October 25, 2017. The note bears 0% interest per annum.
As additional consideration
the Company also issued
50,000 warrants valued at $6,625. The warrants are considered
derivative liabilities under ASC 815-40 under the Company’s
sequencing policy and were valued using the
multinomial lattice model
.
On August 31, 2017, the Company issued a note to an unrelated party
for $52,000 as part of an Accounts Receivable Financing Agreement,
which included $50,000 in proceeds and an OID of $2,000, that
matures on October 31, 2017. The note bears 0% interest per annum.
As additional consideration
the Company also issued
50,000 warrants valued at $6,773. The warrants are considered
derivative liabilities under ASC 815-40 under the Company’s
sequencing policy and were valued using the
multinomial lattice model
.
On September 19, 2017, the Company issued a note to an unrelated
party for $81,000 which included $74,504 in proceeds, $6,000 in
OID, and $496 in other fees, that matures on March 19, 2018. The
note bears 8% interest per month. As additional
consideration
the Company is to issue
75,000 shares of common stock within 10 days.
On October 31, 2017, the Company issued a secured promissory note
to an unrelated party for $255,000, that matures on February 28,
2018. The note bears 2.5% interest per month. The note is to be
paid back the greater of $1,000 per day and $75 per unit sold
commencing 31 days after closing, the greater of $1,500 per day and
$75 per unit sold commencing 61 days after closing, the greater of
$2,000 per day and $75 per unit sold commencing 91 days after
closing.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 6 – CONVERTIBLE PREFERRED STOCK
The Company has authorized 10,000,000 shares of $0.001 par value
per share Preferred Stock, of which the following were issued
outstanding:
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred
|
100,000
|
15,500
|
-
|
|
Series
A-1 Convertible Preferred
|
3,000,000
|
2,735,000
|
3,789,815
|
|
Series
B Convertible Preferred
|
200,000
|
3,500
|
35,000
|
|
Series
C Convertible Preferred
|
1,000,000
|
13,404
|
-
|
|
Series
D Convertible Preferred
|
375,000
|
130,000
|
-
|
|
Series
E Convertible Preferred
|
1,000,000
|
275,000
|
-
|
|
Series
P Convertible Preferred
|
600,000
|
86,640
|
-
|
|
Series
S Convertible Preferred
|
50,000
|
-
|
-
|
|
Total
Preferred Stock
|
6,325,000
|
3,259,044
|
$
3,824,815
|
The Company's Series A Convertible Preferred Stock ("Series A
Preferred") is convertible into Common Stock at the rate of 0.025
share of Common stock for each share of the Series A Preferred.
Dividends of $0.50 per share annually from date of issue, are
payable from retained earnings, but have not been declared or
paid.
The Company’s Series A-1 Senior Convertible Redeemable
Preferred Stock (“Series A-1 Preferred”) is convertible
at the rate of 2 shares of Common Stock per share of Series A-1
Preferred. The dividend rate of the Series A-1 Senior Convertible
Redeemable Preferred Stock is 6% per share per annum in cash, or
commencing on June 30, 2009 in shares of the Company’s Common
Stock (at the option of the Company).
Due to the fact that the Series A-1 Preferred has certain features
of debt and is redeemable, the Company analyzed the Series A-1
Preferred in accordance with ASC 480 and ASC 815 to determine if
classification within permanent equity was
appropriate. Based on the fact that the redeemable
nature of the stock and all cash payments are at the option of the
Company, it is assumed that payments will be made in shares of the
Company’s Common Stock and therefore, the instruments are
afforded permanent equity treatment.
The Company's Series B Convertible 8% Preferred Stock ("Series B
Preferred") is convertible at the rate of 0.067 share of Common
Stock for each share of Series B Preferred. Dividends from date of
issue are payable on June 30 from retained earnings at the rate of
8% per annum but have not been declared or paid.
The Company's Series C Convertible Preferred Stock ("Series C
Preferred") is convertible at a rate of 0.007 share of Common Stock
per share of Series C Preferred. Holders are entitled to
dividends only to the extent of the holders of the Company’s
Common Stock receive dividends.
The Company's Series D Convertible Preferred Stock ("Series D
Preferred") is convertible at a rate of 0.034 share of Common Stock
per share of Series D Preferred. Holders are entitled to
a proportionate share of any dividends paid as though they were
holders of the number of shares of Common Stock of the Company into
which their shares of are convertible as of the record date fixed
for the determination of the holders of Common Stock of the Company
entitled to receive such distribution.
The Company's Series E Convertible Preferred Stock ("Series E
Preferred") is convertible at a rate of 0.034 share of Common Stock
per share of Series E Preferred. Holders are entitled to a
proportionate share of any dividends paid as though they were
holders of the number of shares of Common Stock of the Company into
which their shares of are convertible as of the record date fixed
for the determination of the holders of Common Stock of the Company
entitled to receive such distribution.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 6 – CONVERTIBLE PREFERRED STOCK
-
continued
The Company's Series P Convertible Preferred Stock ("Series P
Preferred") is convertible at a rate of 0.007 share of Common Stock
for each share of Series P Preferred. Holders are entitled to
dividends only to the extent of the holders of the Company’s
Common Stock receive dividends.
In the event of a liquidation, dissolution or winding up of the
affairs of the Company, holders of Series A Preferred Stock, Series
P Convertible Preferred Stock, Series C Convertible Preferred Stock
have no liquidation preference over holders of the Company’s
Common Stock. Holders of Second Series B Preferred Stock
have a liquidation preference over holders of the Company’s
Common Stock and the Company’s Series A Preferred
Stock. Holders of Series D Preferred Stock are entitled
to receive, before any distribution is made with respect to the
Company’s Common Stock, a preferential payment at a rate per
each whole share of Series D Preferred Stock equal to
$1.00. Holders of Series E Preferred Stock are entitled
to receive, after the preferential payment in full to holders of
outstanding shares of Series D Preferred Stock but before any
distribution is made with respect to the Company’s Common
Stock, a preferential payment at a rate per each whole share of
Series E Preferred Stock equal to $1.00. Holders of
Series A-1 Preferred Stock
are superior in rank to the Company’s Common
Stock and to all other series of Preferred Stock heretofore
designated with respect to dividends and
liquidation.
The activity surrounding the issuances of the Preferred Stock is as
follows:
During the three and six months ended December 31, 2017 the Company
did not issue shares of Series A-1
Preferred.
During the fiscal year ended June 30, 2017 the Company issued
550,000 shares of Series A-1 Preferred Stock for $550,000 in
cash
and paid $196,853 in
cash offering costs
.
The Company had one
conversion of 150,000 shares of Series A-1 Preferred Stock for
300,000 shares of Common Stock, and issued 15,682 shares of Common
Stock of payment of $7,481 in accrued
dividends.
During the three and six months ended December 31, 2017 and 2016,
the outstanding Preferred Stock accumulated $112,734 and $87,858 in
dividends on outstanding Preferred Stock. The cumulative dividends
in arrears as of December 31, 2017 were approximately
$1,021,672.
NOTE 7 – COMMON STOCK
The Company has authorized 250,000,000 shares of $0.001 par value
per share Common Stock, of which 126,900,921 and 118,486,728 were
issued outstanding as of December 31, 2017 and June 30, 2017,
respectively. The activity surrounding the issuances of the Common
Stock is as follows:
For the six months Ended December 31, 2017
The Company issued
2,200,000 shares of Common Stock for $222,750 in
cash as part of a private placement, net of $4,750 of issuance
costs, respectively.
The Company issued 340,000 shares of Common Stock for the
conversion of notes and accrued interest valued at
$34,000.
The Company issued 3,010,506 shares of Common Stock as incentive
with convertible notes valued at $192,896.
The Company issued 120,000 shares of Common Stock for the prepaid
consulting services and rent valued at $22,800.
The Company issued 115,000 shares of Common Stock for the extension
of two convertible notes valued at $16,897.
As share-based compensation to employees and non-employees, the
Company issued 1,348,525 shares of common stock valued at $187,623,
based on the market price of the stock on the date of
issuance.
As interest expense on outstanding notes payable, the Company
issued 1,280,162 shares of common stock valued at $217,628 based on
the market price on the date of issuance.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 7 – COMMON STOCK
- continued
For the Six Months Ended December 31, 2016
The Company issued 848,755 shares of Common Stock for the
conversion of notes and accrued interest valued at
$190,164.
The Company also issued 100,000 shares of Common Stock as incentive
to notes valued at $33,349 and recorded $30,519 in beneficial
conversion features related to new issuances of debt.
The Company issued 1,149,860 shares of Common Stock as payment for
services and rent valued at $451,130.
The Company issued 3,020,750 shares of Common Stock for the
conversion warrants valued at $906,225.
As share-based compensation to employees and non-employees, the
Company issued 575,951 shares of common stock valued at $218,538,
based on the market price of the stock on the date of issuance. As
interest expense on outstanding notes payable, the Company issued
1,025,888, shares of common stock valued at $390,073 based on the
market price on the date of issuance.
NOTE 8 – STOCK PURCHASE OPTIONS AND WARRANTS
The Board of Directors on June 10, 2009 approved the 2009 Long-Term
Stock Incentive Plan. The purpose of the 2009 Long-term
Stock Incentive Plan is to advance the interests of the Company by
encouraging and enabling acquisition of a financial interest in the
Company by employees and other key individuals. The 2009
Long-Term Stock Incentive Plan is intended to aid the Company in
attracting and retaining key employees, to stimulate the efforts of
such individuals and to strengthen their desire to remain with the
Company. A maximum of 1,500,000 shares of the Company's
Common Stock is reserved for issuance under stock options to be
issued
under the 2009
Long-Term Stock Incentive Plan. The Plan permits the
grant of incentive stock options, nonstatutory stock options and
restricted stock awards. The 2009 Long-Term Stock
Incentive Plan is administered by the Board of Directors or, at its
direction, a Compensation Committee comprised of officers of the
Company.
Stock Purchase Options
During the six months ended December 31, 2017, the Company did not
issue any stock purchase options.
During the fiscal year ended June 30, 2017, the Company issued
500,000 stock purchase options.
The following table summarizes the changes in options outstanding
of the Company during the six months ended December 31,
2017.
|
Date
Issued
|
|
Weighted
Average Exercise Price
|
Weighted
Average Grant Date Fair Value
|
|
|
|
Balance
June 30, 2017
|
525,000
|
$
0.18
|
$
0.16
|
4.81
|
$
93,750
|
|
Granted
|
-
|
-
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
|
Cancelled/Expired
|
-
|
-
|
-
|
-
|
-
|
|
Outstanding
as of December 31, 2017
|
525,000
|
$
0.18
|
$
0.20
|
4.31
|
$
93,750
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 8 – STOCK PURCHASE OPTIONS AND
WARRANTS
-
continued
Stock Purchase Warrants
During the three and six months ended December 31, 2017, the
Company issued warrants to purchase a
total
of
1,025,000
,
consisting of 75,000 warrants as part of a private placement valued
at $6,019, 100,000 warrants as part of two
AR financing agreements executed on August
2017
valued at $13,398,
150,000 warrants as part additional consideration of a promissory
note on November 2017 valued at $12,560 and an additional 150,000
warrants to modify the note later in November 2017 valued at
$12,570, and 550,000 warrants in conjunction with extension of
three promissory notes valued at $54,491. The warrants are
considered derivative liabilities under ASC 815-40 under the
Company’s sequencing policy and were valued using
the
multinomial lattice
model.
The following table presents the assumptions used to estimate the
fair values of the stock warrants and options granted:
|
|
|
December 31, 2017
|
|
June 30, 2017
|
|
Expected volatility
|
|
105-190%
|
|
92-126%
|
|
Expected dividends
|
|
0%
|
|
0%
|
|
Expected term
|
|
0-5 Years
|
|
0-5 Years
|
|
Risk-free interest rate
|
|
0.96-2.09%
|
|
0.74-1.89%
|
The following table summarizes the changes in warrants outstanding
issued to employees and non-employees of the Company during the
three and six months ended December 31, 2017.
|
|
|
Weighted
Average Exercise Price
|
Weighted
Average Grant Date Fair Value
|
|
|
|
Outstanding
as of June 30, 2017
|
39,927,097
|
$
0.38
|
$
0.45
|
3.38
|
$
15,144,835
|
|
Granted
|
1,025,000
|
0.17
|
0.07
|
3.26
|
176,250
|
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
|
Cancelled/Expired
|
(177,500
)
|
0.48
|
-
|
-
|
(85,000
)
|
|
Outstanding
as of December 31, 2017
|
40,774,597
|
$
0.37
|
$
0.40
|
2.94
|
$
15,236,085
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 9 – FINANCIAL INSTRUMENTS
The Company has financial instruments that are considered
derivatives or contain embedded features subject to derivative
accounting. Embedded derivatives are valued separately from the
host instrument and are recognized as derivative liabilities in the
Company’s balance sheet. The Company measures these
instruments at their estimated fair value and recognizes changes in
their estimated fair value in results of operations during the
period of change. The Company has estimated the fair value of these
embedded derivatives for convertible debentures and associated
warrants using a multinomial lattice model as of December 31, 2017
and June 30, 2017. The fair values of the derivative instruments
are measured each quarter, which resulted in a loss of $767,822 and
$(574), and derivative expense of $345,133 and $0 during the three
and six months ended December 31, 2017 and 2016, respectively. As
of December 31, 2017, and June 30, 2017, the fair market value of
the derivatives aggregated $2,461,034 and $2,145,065, respectively,
using the following assumptions: estimated 5-0 year term, estimated
volatility of 189.87 -104.82%, and a discount rate of
2.09-0.96%.
NOTE 10 – FAIR VALUE MEASUREMENTS
For asset and liabilities measured at fair value, the Company uses
the following hierarchy of inputs:
|
●
|
Level
one — Quoted market prices in active markets for identical
assets or liabilities;
|
|
|
|
|
●
|
Level
two — Inputs other than level one inputs that are either
directly or indirectly observable; and
|
|
|
|
|
●
|
Level
three — Unobservable inputs developed using estimates and
assumptions, which are developed by the reporting entity and
reflect those assumptions that a market participant would
use.
|
Liabilities measured at fair value on a recurring basis at December
31, 2017, are summarized as follows:
|
|
|
|
|
|
|
Fair
value of derivatives
|
$
-
|
$
-
|
$
2,461,034
|
$
2,461,034
|
|
Securities
available-for-sale
|
$
58,800
|
$
-
|
$
-
|
$
58,800
|
|
|
|
|
|
|
|
Fair
value of derivatives
|
$
-
|
$
-
|
$
2,145,065
|
$
2,145,065
|
|
Securities
available-for-sale
|
$
123,600
|
$
-
|
$
-
|
$
123,600
|
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company may become involved in certain legal proceedings and
claims which arise in the normal course of business. The Company is
not a party to any litigation. To the best of the knowledge of our
management, there are no material litigation matters pending or
threatened against us.
Lease Agreements
We lease offices in Hollywood, California (located at 6671 Sunset
Blvd., Suite 1520, 1518 and 1550, Hollywood, California, 90028) for
corporate, research, engineering and mastering services. The lease
expires on December 31, 2017. The total lease expense for the
facility is approximately $17,220 per month, and the total
remaining obligations under these leases at December 31, 2017, were
approximately $52,722.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 11 – COMMITMENTS AND
CONTINGENCIES
-
continued
We lease a warehouse space located at 8260 E Gelding Drive, Suite
102, Scottsdale, Arizona, 85260. The lease expires on February 28,
2019. The total lease expense for the facility is approximately
$1,888 per month, and the total remaining obligations under this
leases at December 31, 2017, were approximately
$26,432.
We lease corporate offices located at 7825 E Gelding Drive, Suite
101, Scottsdale, Arizona, 85260. The lease expires on April 30,
2021. The total lease expense for the facility is approximately
$7,224 per month, and the total remaining obligations under this
leases at December 31, 2017, were approximately
$288,960.
We lease corporate offices located at 7825 E Gelding Drive, Suite
103, Scottsdale, Arizona, 85260. The lease expires on April 30,
2021. The total lease expense for the facility is approximately
$3,000 per month, and the total remaining obligations under this
leases at December 31, 2017, were approximately
$117,000.
Below is a table summarizing the annual operating lease obligations
over the next 5 years:
|
Year
|
|
|
2018
|
72,672
|
|
2019
|
141,464
|
|
2020
|
131,475
|
|
2021
|
87,287
|
|
2022
|
-
|
|
Total
|
$
445,266
|
Other
The Company has not declared dividends on Series A or B Convertible
Preferred Stock or its Series A-1 Convertible Preferred Stock. The
cumulative dividends in arrears through December 31, 2017 were
approximately $1,021,672.
As of the date of this filing, the Company has not filed its tax
return for the fiscal year ended 2015, 2016, and 2017.
NOTE 12 – INVENTORIES
Inventories
are stated at the first in first out and consisted of the
following:
|
|
|
|
|
|
|
|
|
Components
|
$
340,389
|
$
159,017
|
|
Finished
Goods
|
-
|
-
|
|
Allowance
/ Reserve
|
-
|
(54,126
)
|
|
Totals
|
$
340,389
|
$
104,891
|
NOTE 13 - SUBSEQUENT EVENTS
In accordance with ASC 855, Company’s management reviewed all
material events through the date of this filing and determined that
there were the following material subsequent events to
report:
On January 10, 2018, the Company issued a convertible note to an
unrelated company for $115,000 that matures on October 10, 2018.
The note bears 10% interest per annum and is convertible into
shares of the Company’s common stock at the lesser of $0.12
or 57.5% of the lowest closing bid 30 days prior to the conversion
date. Additionally, the note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates that these shares, if issued, are not indexed
to the Company’s own stock and, therefore, is an embedded
derivative financial liability, which requires bifurcation and to
be separately accounted for. At each reporting period, the Company
will mark this derivative financial instrument to its estimated
fair value. As additional consideration
the Company also issued
150,000 three year warrants with an exercise price of $0.12 per
share valued at $11,455. The warrants are considered derivative
liabilities under ASC 815-40 under the Company’s sequencing
policy and were valued using the
multinomial lattice model
.
On October 31, 2017, the Company issued a secured promissory note
to an unrelated party for $255,000, that matures on February 28,
2018. The note bears 2.5% interest per month. The note is to be
paid back the greater of $1,000 per day and $75 per unit sold
commencing 31 days after closing, the greater of $1,500 per day and
$75 per unit sold commencing 61 days after closing, the greater of
$2,000 per day and $75 per unit sold commencing 91 days after
closing.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and June 30, 2017
NOTE 13 - SUBSEQUENT EVENTS
-
continued
The note was amended on January 2, 2018, to allow the Company to
redeem 80% of the principal and accrued interest as well as the
orderly sale of shares of common stock to extend the conversion
rights from 225 days to 275 days, in consideration of the extension
the Company paid $26,500 The Company evaluated amendment under ASC
470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
the extension did result in significant and consequential changes
to the economic substance of the debt and thus resulted in an
extinguishment of the debt.
On February 23, 2017, the Company issued a convertible note to an
unrelated company for $149,000 that matures on November 23, 2017.
The note bears 10% interest per annum and is convertible into
shares of the Company’s common stock at lesser of 40% of the
average three lowest closing bids 20 days prior to the conversion
date. Additionally, the note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, that
this percentage discount (variable) exercise
price indicates is an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value. The Company
extended the possibility to convert date by issuing 60,000 warrants
valued at $7,813 on September 8, 2017 to November 2, 2017. The
Company extended the possibility to convert date by issuing 60,000
warrants valued at $7,813 on September 8, 2017 to November 2,
2017. The Company extended the possibility to convert
date by paying $10,000 of principal and $1,400 of accrued interest
on October 23, 2017 to November 24, 2017 and extend the maturity
date to February 21, 2018. The Company extended the possibility to
convert date by paying $10,000 of principal and $4,000 of accrued
interest on November 29, 2017 to December 22, 2017. The Company
extended the possibility to convert date by paying $10,000 of
principal on December 21, 2017 to January 16, 2018.
The
warrants are considered derivative liabilities under ASC 815-40
under the Company’s sequencing policy and were valued using
the
multinomial lattice
model
.
The Company evaluated amendment under ASC
470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt.
On February 23, 2017, the Company issued a convertible note to an
unrelated company for $224,000 that matures on November 23, 2017.
The note bears 10% interest per annum and is convertible into
shares of the Company’s common stock at lesser of 40% of the
average three lowest closing bids 20 days prior to the conversion
date. Additionally, the note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value. The Company
extended the possibility to convert date by issuing 90,000 warrants
valued at $11,720 on September 8, 2017 to November 2,
2017. The Company extended the possibility to convert date by
paying $10,000 of principal and $2,100 of accrued interest on
October 23, 2017 to November 24, 2017 and extend the maturity date
to February 21, 2018. The Company extended the possibility to
convert date by paying $20,000 of principal and $6,000 of accrued
interest on November 29, 2017 to December 22, 2017. The Company
extended the possibility to convert date by paying $15,000 of
principal on December 21, 2017 to January 16, 2018.
The
warrants are considered derivative liabilities under ASC 815-40
under the Company’s sequencing policy and were valued using
the
multinomial lattice
model
.
The Company evaluated amendment under ASC
470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt.
On August 2, 2017, the Company issued a convertible note to an
unrelated company for $60,500, which includes proceeds of $55,000,
and $5,500 in OID, that matures on August 2, 2018. The note bears
12% interest per annum and is convertible into shares of the
Company’s common stock at 61% of the lowest two trading
prices during the fifteen (15) trading day period ending to the
date of conversion. The note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value. On January 4,
2018, the Company paid the entire principal balance of $60,500 and
$12,640 in accrued interest.
On January 4, 2018, the Company issued a convertible note to an
unrelated party for $53,000 that matures on July 16, 2018. The note
bears 12% interest per annum. The note is convertible into shares
of the Company’s common stock at 61% of the lowest closing
bids 15 days prior to the conversion per share. Due to
sequencing on February 2, 2017, the Company determined under ASC
815, the Company has determined that the note is to be treated as
an embedded derivative financial liability, which requires
bifurcation and to be separately accounted for. At each reporting
period, the Company will mark this derivative financial instrument
to its estimated fair value
.
NOTE
14 – RESTATEMENT OF INTERIM CONDENSED FINANCIAL
STATEMENTS
This Amendment No. 1 to recognize cost of sales related to the sale
of 4,000 units for a total cost of $400,000 to its manufacturer
that was recorded in the three-month ended December 31, 2017. The
sales of the 4,000 units took place during the quarter ending
September 30, 2017 therefore the cost of sales should have been
recorded in the same period. (ii) As part of the 4,000 units
transaction the manufacture agreed to extinguish $525,000 of
accounts payable, for the relief of the $400,000 in accounts
receivable, which resulted in a gain of
$125,000.
In the quarter
ending December 31, 2017, the company sold an additional 1,000
units for a total sale of $120,000 to the same manufacture as the
September 30, 2017 transaction referenced above. The transaction
eliminated $90,000 in accounts receivable and accounts payable,
resulting in a net gain of $30,000. (ii) as part of the 1,000 units
transaction the company transferred consigned inventory in the
amount of $142,389 which the company mistakenly wrote off the
inventory to cost of good sold, in the December 30, 2017 amendment
the company corrected the removal of the inventory and the
overstatement of cost of good sold. (iii) The manufacture also had
inventory in the amount of $198,000 that the company did not
account for in the original filed 10Q.
The
effects of these corrections on the interim consolidated financial
statements were:
|
|
Consolidated Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
559,714
|
(490,000
)
|
69,714
|
|
Inventory,
net
|
-
|
340,389
|
340,389
|
|
Total Current
Assets
|
1,227,336
|
(149,611
)
|
1,077,725
|
|
Total
Assets
|
$
1,549,948
|
$
(149,611
)
|
$
1,400,337
|
|
Accounts payable
and other accrued expenses
|
$
1,019,799
|
$
(417,000
)
|
$
602,799
|
|
Total Current
Liabilities
|
12,140,125
|
(417,000
)
|
11,723,125
|
|
Total
Liabilities
|
12,140,125
|
(417,000
)
|
11,723,125
|
|
Accumulated
Deficit
|
(75,424,449
)
|
267,389
|
(75,157,060
)
|
|
Total Stockholders'
Deficit
|
(10,590,177
)
|
267,389
|
(10,322,788
)
|
|
Total Liabilities
and Stockholders' Deficit
|
$
1,549,948
|
$
(149,611
)
|
$
1,400,337
|
25
|
|
Consolidated
Statements of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Reported
|
|
|
|
|
Cost of Revenues
(Exclusive of Depreciation and Amortization)
|
987,401
|
(542,389
)
|
445,012
|
|
Total Costs and
Expenses
|
1,905,227
|
(542,389
)
|
1,362,838
|
|
Loss from
Operations
|
(1,570,161
)
|
542,389
|
(1,027,772
)
|
|
Gain on
Extinguishment of Debt
|
-
|
-
|
-
|
|
Total Other
Expense
|
163,954
|
20,210
|
184,164
|
|
Loss Before Income
Taxes
|
(1,406,207
)
|
562,599
|
(843,608
)
|
|
NET
LOSS
|
$
(1,406,207
)
|
$
562,599
|
$
(843,608
)
|
|
NET LOSS AVAILABLE
TO COMMON SHAREHOLDERS
|
$
(1,462,574
)
|
$
562,599
|
$
(899,975
)
|
|
Basic and diluted
Loss Per Share of Common Stock
|
$
(0.01
)
|
$
0.00
|
$
(0.01
)
|
|
NET LOSS AVAILABLE
TO COMMON SHAREHOLDERS
|
(1,462,574
)
|
562,599
|
(899,975
)
|
|
COMPREHENSIVE
LOSS
|
$
(1,541,714
)
|
$
652,599
|
$
(889,115
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
(Exclusive of Depreciation and Amortization)
|
1,143,729
|
(142,389
)
|
1,001,340
|
|
Total Costs and
Expenses
|
2,982,352
|
(142,389
)
|
2,839,963
|
|
Loss from
Operations
|
(2,031,890
)
|
142,389
|
(1,889,501
)
|
|
Gain on
Extinguishment of Debt
|
(34,958
)
|
125,000
|
90,042
|
|
Total Other
Expense
|
(1,089,008
)
|
125,000
|
(964,008
)
|
|
Loss Before Income
Taxes
|
(3,120,898
)
|
267,389
|
(2,853,509
)
|
|
NET
LOSS
|
$
(3,120,898
)
|
$
267,389
|
$
(2,853,509
)
|
|
NET LOSS AVAILABLE
TO COMMON SHAREHOLDERS
|
$
(3,233,632
)
|
$
267,389
|
$
(2,966,243
)
|
|
Basic and diluted
Loss Per Share of Common Stock
|
$
(0.03
)
|
$
0.01
|
$
(0.02
)
|
|
NET LOSS AVAILABLE
TO COMMON SHAREHOLDERS
|
(3,233,632
)
|
267,389
|
(2,966,243
)
|
|
COMPREHENSIVE
LOSS
|
$
(3,298,432
)
|
$
267,389
|
$
(3,031,043
)
|
|
|
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
$
(3,120,890
)
|
$
267,381
|
$
(2,853,509
)
|
|
(Gain)/Loss on
extinguishment of debt
|
34,958
|
(125,000
)
|
(90,042
)
|
|
Accounts
receivables
|
(462,611
)
|
490,000
|
27,389
|
|
Inventory
|
104,891
|
(340,389
)
|
(235,498
)
|
|
Accounts payable
and accrued expenses
|
565,241
|
(292,000
)
|
273,241
|
|
Net Cash Used in
Operating Activities
|
(1,427,304
)
|
-
|
(1,427,304
)
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report (the “Report”) includes
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934, as amended, and as contemplated
under the Private Securities Litigation Reform Act of
1995. These forward-looking statements may relate to
such matters as the Company’s (and its
subsidiaries) business strategies, continued growth in the
Company’s markets, projections, and anticipated trends in the
Company’s business and the industry in which it operates
anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services,
anticipated market performance and similar matters. All
statements herein contained in this Report, other than statements
of historical fact, are forward-looking statements.
When used in this Report, the words “may,”
“will,” “expect,” “anticipate,”
“continue,” “estimate,”
“project,” “intend,” “budget,”
“budgeted,” “believe,” “will,”
“intends,” “seeks,” “goals,”
“forecast,” and similar words and expressions are
intended to identify forward-looking statements regarding events,
conditions, and financial trends that may affect our future plans
of operations, business strategy, operating results, and financial
position. These forward-looking statements are based largely on the
Company’s expectations and are subject to a number of risks
and uncertainties, certain of which are beyond the Company’s
control. We caution our readers that a variety of
factors could cause our actual results to differ materially from
the anticipated results or other matters expressed in the forward
looking statements, including those factors described under
“Risk Factors” and elsewhere herein. In
light of these risks and uncertainties, there can be no assurance
that the forward-looking information contained in this Report will
in fact transpire or prove to be accurate. These risks
and uncertainties, many of which are beyond our control,
include:
|
|
●
|
the sufficiency of existing capital resources and our ability to
raise additional capital to fund cash requirements
for future
operations;
|
|
|
●
|
uncertainties involved in growth and growth rate of our operations,
business, revenues, operating margins, costs,
expenses and acceptance of
any products or services;
|
|
|
●
|
uncertainties involved in growth and growth rate of our operations,
business, revenues, operating margins, costs,
expenses and acceptance of
any products or services;
|
|
|
●
|
volatility of the stock market, particularly within the technology
sector;
|
|
|
●
|
our dilution related to all equity grants to employees and
non-employees;
|
|
|
●
|
that we will continue to make significant capital expenditure
investments;
|
|
|
●
|
that we will continue to make investments and
acquisitions;
|
|
|
●
|
the sufficiency of our existing cash and cash generated from
operations;
|
|
|
●
|
the increase of sales and marketing and general and administrative
expenses in the future;
|
|
|
●
|
the growth in advertising revenues from our websites and studios
will be achievable and sustainable;
|
|
|
●
|
that seasonal fluctuations in Internet usage and traditional
advertising seasonality are likely to affect our business;
and
|
|
|
●
|
general economic conditions.
|
Although we believe the expectations reflected in these
forward-looking statements are reasonable, such expectations cannot
guarantee future results, levels of activity, performance or
achievements. We urge you not to place undue reliance on
these forward-looking statements, which speak only as of the date
of this Annual Report.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
All references in this report to
“we,” “our,” “us,” the
“Company” or “AfterMaster” refer to
AfterMaster, Inc., and its
subsidiary and
predecessors.
Corporate Background
We are a Delaware corporation, incorporated on about May 12, 1988,
and traded on an over the counter market (ticker symbol
OTCQB:AFTM). As of December 31, 2017, there were
126,900,921
shares of Common Stock
issued and outstanding. The Company's office and principal place of
business, research, recording and mastering studios are located at
6671 Sunset Blvd., Suite 1520, Hollywood, CA 90028 USA, and its
telephone number is (310) 657-4886. The Company also has an office
at 7825 E. Gelding Drive, Suite 101, Scottsdale, Arizona 85260 USA,
and its telephone number is (480) 556-9303.
Aftermaster, Inc. (“the Company" or
“Aftermaster”) is an audio technology company located
in Hollywood, California and Scottsdale, Arizona. The Company's
wholly-owned subsidiaries include Aftermaster HD Audio Labs, Inc.
and MyStudio, Inc.
The Company and its subsidiaries are engaged in the development and
commercialization of proprietary (patents issued and pending),
leading-edge audio and video technologies and products for
professional and consumer use, including Aftermaster® Audio,
ProMaster™, Aftermaster Pro™ and MyStudio®. The
Company also operates recording and mastering studios at its
Hollywood facilities.
Aftermaster holds an unparalleled position in the audio technology
industry and it is operated by a world-class team of experts with
and extensive experience in music and audio technology. The
Aftermaster team has produced, engineered and mastered more hit
music than any other audio company in the world. We believe that
our expertise and technical skills have led us to develop audio
technologies unmatched in the audio industry. Aftermaster
technologies are both patented and patent pending, and these
technologies have won several awards.
www.aftermaster.com
Mission Statement
Aftermaster's goal is to become one of the most innovative and
important audio companies in the world through the development and
licensing of proprietary audio technologies, the development and
sales of leading-edge consumer and professional audio electronics
products and through its contributions in the production, mixing
and mastering of music, television and film audio.
Quarterly Summary
Financial
For the quarter ending December 31, 2017, revenues rose to $335,066
over revenues of $48,739 during the same period in 2016. For the
six months ending December 31, 2017, revenues increased to $950,462
over revenues of $103,225 during the same period in 2016. Net
losses also declined to $1,386,741 from $2,158,238 during the six
months ending December 31, 2017 and December 31, 2016 respectively.
Despite an increase in revenues over the comparable quarter in
2016, revenues were lower than anticipated due to a delay in the
commencement of an on-line sales program aimed at its Aftermaster
Pro television audio system. The on-line marketing program
commenced on February 1, 2018 and is showing strong growth. Based
on current and forecasted sales, the Company believes that it will
continue to see increased growth from the sale of the Aftermaster
Pro, licensing, studio revenues and its partnerships with Tunecore
and others.
Business and Products
On November 4, 2017 the Company entered into an agreement with
headphone manufacturer Muzik, Inc., to license its Aftermaster
technology (through both its Company’s proprietary DSP chip
and software application). Known as the “smartphone” of
headphones, award-winning Muzik has created the worlds most
advanced wireless headphone. Muzik's proprietary voice command and
multiple "hot keys" allow a user to access Spotify, Siri
and connect their headphones to over 300 apps from
fitness, news, and productivity to the connected home, commerce,
automotive, and social media. Muzik is considered the most
important new headphone designer and manufacturer.
The Company has also recently expanded its relationship with
Tunecore, Inc. TuneCore is considered to be one of the most
important artist portals for independent artists. We originally
partnered with Tunecore in May 2016 to do the professional music
mastering for their independent artist services. Our professional
hands-on music mastering service is headed up by Peter Doell, one
of the world’s most talented and respected mastering
engineers. Just recently, the Company entered into an agreement to
process all of the instant music-mastering for Tunecore that was
previously done by Landr. Tunecore recognizes that quality and
value of the Company’s Promaster music mastering for its
artists. In September 2017, we displaced Landr and became
Tunecore’s exclusive mastering partner for instant electronic
music mastering. We continue to be Tunecore’s choice for
professional mastering services as well.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
During
the past year, the Company also designed and developed its first
professional hardware product dubbed the “Aftermaster Studio
Pro” which is the Company’s first product designed for
use in commercial audio applications. The new product is a 1 U,
19” rack-mount Aftermaster audio processor that allows a user
to enhance any audio playback with Aftermaster to make their sound
fuller, clearer, louder and deeper. It is expected to retail for
$3,995 and can be seen at
www.aftermastermaster.com/products
.
The Company believes that the worldwide market for its new product
is significant, as it can be used in potentially hundreds of
thousands of applications worldwide: radio stations, private and
public recording studios, places of worship, restaurants and bars,
sports facilities, high-end residential, live concerts and concert
facilities, hospitals – virtually any place where a business
wants the audio to sound significantly better than anything they
can do in house. The product is expected to be available for
pre-sale in the first quarter of 2018.
Despite our record growth this year and proof of product interest
by consumers, the Company’s sales performance continues to be
impacted due to manufacturing and financing challenges, both of
which have limited the timing of the rollout of some of our
products. The Company has issued an initial purchase order and paid
a substantial deposit for the electronic components and
manufacturing of the first 100,000 circuit boards for the
Aftermaster Pro TV units, which will allow an assembly manufacturer
a significant head start for larger scale unit
deliveries.
The
Company also completed an extensive renovation and subsequently
opened a world-class music recording studio originally built by
music legend Graham Nash and made famous by Crosby, Stills and Nash
in 1977, which is located adjacent to its existing studios in
Hollywood at Crossroads of the World. The studio is equipped with
state-of-the-art recording and mixing equipment, and it is used for
both audio research and development as well as to generate revenue
from rental to musicians. The Company considers it to be one of the
finest recording studios in the US, and it began generating revenue
in the first quarter of 2017. It is the largest of the six
recording studios that Aftermaster now operates at its studio
facilities in Hollywood.
www.aftermaster.com/studios
Investment Bankers
The recent successful introduction of our Aftermaster Pro has led
the Company to engage a respected investment banking firm that
specializes in small cap stocks, Maxim Group of New York, to assist
the Company in concurrently raising the capital to both extinguish
its current debt and to provide the additional growth capital
required for the Company to complete an up-listing of its shares to
a larger trading platform. Such financing is contingent on market
conditions, share price and the performance of the company over the
next two fiscal quarters, and there is no guarantee that we will
raise such capital or complete such an up-listing.
TuneCore Agreement
Aftermaster offers both world-class, professional hands-on
mastering services and instant online mastering through its
Promaster brand for music, TV and film customers in its facilities
in Hollywood, California. The Professional Mastering division is
headed up by Peter Doell, one of the world’s foremost
mastering engineers. In May 2016, the Company entered into a
partnership with TuneCore Digital Music Services to provide
professional hands-on mastering services to TuneCore’s
customers. In September 2017, the Company expanded its relationship
with TuneCore and entered into a multi-year agreement to also
provide TuneCore with the Company’s award-winning Promaster
instant online mastering service to TuneCore’s artists. The
agreement displaced TuneCore’s previous relationship with
online mastering service, Landr. TuneCore was impressed by the
music quality and technologies developed by
Aftermaster.
Currently, TuneCore is one of the world's largest independent
digital music distribution and publishing administration service.
Under our agreement, Aftermaster has become the platform for both
hands-on professional and online instant mastering services for
TuneCore’s artists on an exclusive basis. TuneCore has one of
the highest artist revenue-generating music catalogs in the world,
earning TuneCore Artists approximately $987 million from billions
of downloads and streams. TuneCore’s music distribution
services help artists, labels and managers sell their music through
iTunes, Amazon Music, Spotify and other major download and
streaming sites while retaining 100% of their sales revenue and
rights for a low annual flat fee. TuneCore’s artists have
direct access to Aftermaster's world-class senior mastering
engineers and unmatched technologies and can get their tracks hand
mastered for a premium price or instantly electronically mastered
through Aftermaster's Promaster, returned and ready for
distribution. The partnership builds upon TuneCore's mission to
provide independent artists with key tools to build their careers
and gain broad fan exposure, by granting access to unparalleled
mastering that meets the industry's highest standards.
Home Shopping Network and QVC
On April 15, 2017, the Company introduced its Aftermaster Pro
personal re-mastering device on national television on the Home
Shopping Network (HSN) during two 15-minute infomercials. Home
Shopping Network is one of the world’s largest television
retailers. HSN initially purchased 1,000 Aftermaster Pros, and its
management team has expressed to the Company that it considered the
launch to be a big success. HSN has subsequently issued the Company
purchase orders for several thousand more units and began new
airing dates on June 9, 2017 followed on September 2, 2017. HSN
provides a unique format which provides the Company with the
opportunity to showcase the quality of the product, while
explaining the differentiating features and operation of its
Aftermaster Pro on national television.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
The Company’s Aftermaster Pro product was recently approved
for sale by marketing giant QVC and is currently scheduled for two
airings in the first quarter of 2018. The Company expects that
Aftermaster Pro will continue to be featured on HSN and other
television, online and store based retailers.
Icon Health and Fitness Products
The Company is party to into a consulting and license agreement
with ICON Health & Fitness, Inc. (“ICON”), pursuant
to which the Company will act as an audio technology development
consultant to develop an AfterMaster-based sound module for
integration with ICON’s exercise equipment. ICON will pay the
Company a per module fee and receive a license from the Company to
use or sell the modules and use the software relating to each
module in its products. The Company will also provide audio tuning
services to further enhance the sound quality for ICON’s
other audio-enabled equipment. The Company recently completed the
design of a proprietary audio board for ICON and is expected to be
included in ICON products in the near future.
ICON
Health and Fitness, Inc. is the world’s largest manufacturer
and marketer of home fitness equipment, selling over 10 million
audio-enable fitness-related devices annually. ICON manufactures
treadmills, elliptical trainers, stationary bicycles, weight
machines and benches, and yoga and Pilates equipment. ICON has a
wide range of well-known and respected brands, products and
technologies, and sells home fitness and health club equipment
under the following brands: NordicTrack®, ProForm®,
Weider®, Gold's Gym® Home Fitness and FreeMotion®.
Its fitness technology brand, including Wi-Fi-enabled fitness
equipment and fitness wearables, is iFit
®.
CB2 Marketing Agreement
CB2 (a division of Crate and Barrel), an industry leading lifestyle
furniture retailer, and the Company have entered into a multi-year
partnership to
bring music and lifestyle spaces together like
never before. CB2 has unique positioning in the furnishings
industry as a modern, affordable and socially responsible brand who
regularly offers its sophisticated clientele new and exciting
opportunities to better their lifestyle and living
environments.
Under the partnership, CB2’s customers will receive the
chance to purchase the unprecedented leading-edge audio through
Aftermaster’s revolutionary technology to be showcased with
the CB2 platforms in a myriad of ways. As part of its collaborative
strategic venture, CB2 began offering the Company's
Aftermaster
Pro
personal audio remastering devices at key store
locations across the United States including West Hollywood, New
York: Soho, South Beach, Chicago, and Austin. The units retail at
$189.99 in stores and online at CB2
's website
.
In addition, Aftermaster will now be a part of powering
CB2’s
“After Hours” concert series. The
“After Hours”
events transform CB2 locales into intimate
nocturnal music experiences. Just after closing time, the stores
play host to a bevy of notable artists as they perform a
one-of-a-kind show to an exclusive audience sipping on cocktails in
a chic and sophisticated atmosphere. Aftermaster provides enhanced
audio capability for these shows with its proprietary technology
and offers unrivaled sound in real-time. Attendees may also try the
Aftermaster Pro at demo stations throughout the stores during these
events. We believe this is another important brand awareness avenue
for the Pro.
Extending this partnership, CB2 also outfitted Aftermaster's famous
music recording studios at Crossroads of the World in Hollywood,
with a complete makeover of new furniture including
"first-to-be-seen" pieces from their latest
collection.
Aftermaster Consumer and Professional Electronics
Products
The Company has assembled a world-class branding, technical and
design team who have designed the Company’s first consumer
and professional electronics products. The first consumer
electronics product is the Aftermaster Pro, designed to
dramatically improve the quality of TV audio. Aftermaster Pro is
the world’s first personal audio re-mastering device and
defines a new category in consumer electronics products by offering
a product never before offered. Aftermaster Pro is a proprietary,
first-to-market product which has no direct
competition.
The number of existing televisions worldwide is substantial, and a
majority of TV owners complain about their TV audio quality,
especially the need to continually adjust the volume because of
difficulty hearing dialogue in certain programming. Feedback from
thousands of TV owners have provided the Company with valuable data
that confirms that no manufacturer is delivering an audio solution
with the same sound quality of Aftermaster Pro.
Smaller than an iPhone, Aftermaster Pro transforms the audio of
your TV, smartphone, headphones, laptop, tablet, gaming unit, or
virtually any audio-enabled device to sound clearer, fuller,
deeper, and more exciting. Aftermaster Pro connects easily via HDMI
or 3.5mm audio cables with virtually any media source (i.e., cable,
satellite box, cell phone, computer, tablet, etc.). When used with
a television, Aftermaster Pro raises and clarifies dialogue in
programming while significantly enhancing the quality of the
overall audio content. This solves the longstanding issue with TV
audio of having to continually adjust volume during a TV show to
hear dialogue. When used portably with its built-in battery,
Aftermaster transforms music and video to standards that we believe
are superior to any portable audio enhancement device.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
The Company has an aggressive marketing and sales plan for the
Aftermaster Pro, which is the Company's first consumer electronics
product completely developed in-house. The Aftermaster Pro debuted
to consumers on national television on the Home Shopping Network
(“HSN”) show on April 15, 2017. The Aftermaster Pro
sales were deemed to be very successful, and the product has since
been featured on 5 additional HSN programs in June and September.
The Company’s Aftermaster Pro product was also recently
approved for sale by marketing giant QVC and is currently scheduled
for two airings in the first quarter of 2018.
In June 2017, the Aftermaster Pro also went on sale at Crate and
Barrel's "CB2" stores (see below) and is also now available at
several other prominent online retail outlets including Amazon.com,
Walmart.com, as well as the Company’s own website,
Aftermasterpro.com. The Company has engaged a well regarded on-line
marketing firm and began an online advertising campaign on February
1, 2018 to drive buyers to our various online retailers and our
aftermasterpro.com website using the same ad process that produced
highly successful sales metrics during our crowdfunding
campaigns.
The
Company has sold thousands of Aftermaster Pros to buyers in 65
countries and has generated revenues well over $1,000,000.
www.aftermasterpro.com
.
Additional Aftermaster branded consumer electronics products are
under development, which we expect to introduce in the coming
year.
The
“Aftermaster Studio Pro” is the Company’s first
product designed for use in commercial audio environments. Due to
the strong demand from potential customers, the Company’s new
product is a 1 U, 19” rack mount Aftermaster audio processor
that allows a user to enhance any audio playback with Aftermaster
to make their sound fuller, clearer, louder and deeper. The
worldwide market is significant as it can be used in radio
stations, private and public recording studios, church’s,
restaurants and bars, sports facilities, high-end residential,
concerts and concert facilities.
ON Semiconductor/Aftermaster Audio Chip and Software
The Company is party to a multi-year joint development and
marketing agreement with ON Semiconductor ("ON") of Phoenix,
Arizona, to commercialize its technology through audio
semiconductor chips. ON is a multi-billion dollar, multi-national
semiconductor designer and manufacturer.
The agreement calls for ON to implement and support our Aftermaster
technology in a Digital Signal Processor (DSP) semiconductor chip
that is being marketed to their current OEM customers, distributors
and others. We selected ON for its technical capabilities, sales
support and deep customer pool.
In conjunction with ON, we have completed the development of an
Aftermaster software algorithm that is designed to be used in
semiconductor chips or as a standalone software product. We believe
the sound quality from our algorithm provides a superior audio
experience relative to other products on the market.
Now
branded the BelaSigna 300 AM chip, it is one of the smallest, high
power/low voltage DSP chips available. It is small enough to fit
into a hearing aid but equally effective in any size device with
audio capability.
The algorithm and chips allow consumer product manufacturers an
opportunity to offer a significantly improved and differential
audio experience in their products without having to significantly
change hardware and form factor designs. Through the combined
relationships of the Company and ON, we hope to generate
significant revenues for both parties through the sale of the
ON/AfterMaster chips and software licensing.
Promaster
Promaster is an online music mastering, streaming, and storage
service designed for independent artists which utilizes proprietary
audio technologies developed by Aftermaster.
Tens of millions of songs are produced, distributed and played on
the Internet each month around the world by independent artists.
However, many of these artists lack the financial and technical
means to master, or “finish” their composition, as a
professional mastering session can cost up to $500 per song. Now,
with the Promaster online platform, musicians can transmit their
music directly to the Promaster HD website, where it can be
mastered with Aftermaster technology for $9.99 per song. Each user
receives four different mastered versions of their song done in
different styles, and they can preview 90 seconds of each version
to make a decision about whether or not they want to buy
it.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
Promaster creates a compelling offering for those seeking to
significantly enhance the quality of their music for personal use,
or with intent to showcase their music in hopes of advancing their
career aspirations. Based on the enormous addressable market for
this product, we believe that Promaster has the potential to
generate significant revenues for the Company.
Our
Promaster on-line music mastering product is in the final stages of
a complete redesign including the addition of new features. The
current website will remain active until the new website is
launched in the coming months.
www.promasterhd.com
Recording and Mastering Studios
Aftermaster operates six (6) recording and mastering studios at its
Hollywood California facility. The Company’s engineers mix
and master music for both independent and high profile artists,
most recently the music for the hit TV show "Empire". When
available, the Company also rents its studios to third party
artists and producers.
The
Company recently took over the former recording studio built by
music legends Crosby, Stills and Nash in 1977, which is located
next to its existing studios. The Company recently completely
renovated the studio and installed state-of-the-art equipment. The
Company considers the new studio to be one of the finest recording
studios in the US and began generating revenues in the first
quarter of 2017.
www.aftermaster.com/studios
Adobe Audition
Aftermaster's Promaster on-line audio mastering service has been
chosen to be included with Adobe® Audition® CC, a
professional audio workstation for mixing, finishing and editing
audio/video. The integration of Promaster will allow Adobe Audition
CC users to instantly master their original work directly within
Adobe Creative Cloud®. Promaster infuses the clearest, deepest
sound quality into any recording, which elevates that audio to a
studio remastered sound experience. Adobe's Audition CC with
Promaster HD will enable its users to substantially cut editing
time and enhance original audio work into fuller, deeper, louder
and clearer tracks. When ready, users will install the Promaster
extension from the Adobe Add-ons marketplace.
The integration of Promaster into Adobe Audition has been delayed
due the Company undertaking a complete redesign of its ProMaster
website including adding many new features to the platform. The
Company expects to complete the integration in the coming
months.
Aftermaster Audio
Technology
Aftermaster audio technology was created and developed pursuant to
a multi-year, multi-million dollar development effort to make
digital audio sound substantially better by developing proprietary
software, digital signal processing technology and consumer
products. The Aftermaster Audio Labs team is comprised of a unique
group of award-winning industry leaders in music, technology and
audio engineering which includes Ari Blitz, Peter Doell, Rodney
Jerkins, Larry Ryckman, Justin Timberlake, Paul Wolff, Andrew
Wuepper and Shelly Yakus. See
www.Aftermaster.com
h
.
The Aftermaster audio technology is an internally-developed,
proprietary (patented and patents pending) mastering, remastering
and audio processing technology which makes virtually any audio
source sound significantly louder, fuller, deeper and clearer.
Aftermaster is a groundbreaking technology which eliminates the
weaknesses found in other audio enhancement and processing
technologies while offering a much superior audio experience for
consumer and industrial applications. We believe that our
Aftermaster audio technology is one of the most significant
breakthroughs in digital audio processing technology and has the
potential to create significant revenues for the Company. The broad
commercialization of this technology is a top priority for the
Company.
As the convergence of features on consumer electronics continues,
it is becoming more difficult for leading consumer electronics
companies to differentiate their products. We believe that
Aftermaster provides a unique and significant competitive advantage
for consumer electronics manufacturers by offering their customers
a superior audio experience. Aftermaster technology can be
incorporated into most audio capable devices through the addition
of an Aftermaster DSP chip or Aftermaster software. Such uses are
intended to include phones (i.e., mobile, home, business and VoIP);
headphones; televisions; stereo speakers; stereos (i.e., home,
portable, commercial and automobile); and computers (i.e., desktop,
laptop and tablets).
Aftermaster
audio is also the only commercial audio enhancement technology
available that is used for professional music mastering because it
enhances the entire frequency range without distortion or changing
the underlying intent of the music. The technology has been used to
master music created by some of the world’s most popular
artists. Further information on Aftermaster and Aftermaster
products can be found at www.Aftermaster.com
.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
Intellectual Property and Licensing
The Company has been awarded six patents and six trademarks with
numerous others pending. The Company has an aggressive intellectual
property strategy to protect the Aftermaster and the related
technologies it has developed. We also enter into confidentiality
and invention assignment agreements with our employees and
consultants and confidentiality agreements with third parties. We
rigorously control access to our proprietary technologies. During
the year, the Company engaged Morgan Chu of Irell and Manella, to
represent its intellectual property interests along with its
existing IP attorneys Farjami & Farjami LLP and Arnold
Weintraub of the Weintraub Group. Mr. Weintraub serves on the Board
of the Company.
Employees
As of December 31, 2017, we employed thirteen full-time and one
part-time employees. We expect to add additional employees in the
next year to handle anticipated potential growth.
We believe that our relationship with our employees is good. None
of our employees are members of any union nor have they entered
into any collective bargaining agreements.
Facilities
We lease a warehouse space located at 8260 E Gelding Drive, Suite
102, Scottsdale, Arizona, 85260. The lease expires on February 28,
2019. The total lease expense for the facility is approximately
$1,888 per month, and the total remaining obligations under this
leases at December 31, 2017, were approximately
$26,432.
We lease corporate offices located at 7825 E Gelding Drive, Suite
101, Scottsdale, Arizona, 85260. The lease expires on April 30,
2021. The total lease expense for the facility is approximately
$7,224 per month, and the total remaining obligations under this
leases at December 31, 2017, were approximately
$288,960.
We lease corporate offices located at 7825 E Gelding Drive, Suite
103, Scottsdale, Arizona, 85260. The lease expires on April 30,
2021. The total lease expense for the facility is approximately
$3,000 per month, and the total remaining obligations under this
leases at December 31, 2017, were approximately
$117,000.
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AfterMaster
Revenues
|
$
239,619
|
$
103,225
|
|
Product
Revenues
|
710,843
|
-
|
|
Total
Revenues
|
$
950,462
|
$
103,225
|
|
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
AfterMaster
Revenues
|
$
118,904
|
$
48,739
|
|
Product
Revenues
|
216,162
|
-
|
|
Total
Revenues
|
$
335,066
|
$
48,739
|
We currently generate revenue from our operations through three
activities: AfterMaster revenues and AfterMaster product
revenues.
AfterMaster revenues are generated primarily from AfterMaster audio
services provided to producers and artists on a contract basis. We
hope this source of revenue grows in coming years, and the Company
is expecting to generate additional revenues in this category from
on-line mastering downloads and the development of the AfterMaster
software algorithm and chip, although such growth and additional
revenues are not assured and may not occur. AfterMaster revenues
for the three and six months ended December 31, 2017, increased to
$118,904 and 239,619, as compared to $48,739 and $103,225 for the
comparable three and six months ended December 31, 2016, the
increases were due primarily to an increase in the mastering and
remastering of music.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
AfterMaster Product revenues are generated through the sale of the
AfterMaster TV Pro. Our product revenues were $216,162
and $710,843 and $0 and $0 during the three and six months ended
December 31, 2017 and 2016. The AfterMaster TV Pro began selling
online in January 2017.
In the aggregate, total Company revenues increased to $335,066 amd
$950,462 for the three and six months ended December 31, 2017, as
compared to total revenues of $48,739 and $103,225 for the three
and six months ended December 31, 2016, due to the company
launching the AfterMaster TV Pro in 2017 and recognition of
deferred revenues from presales.
|
Cost of Revenues
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
Cost of
Revenues (excluding depreciation and
amortization)
|
$
445,012
|
$
157,680
|
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Revenues (excluding depreciation and
amortization)
|
$
1,001,340
|
$
319,775
|
Cost of sales consists primarily of manufacturing
cost of the AfterMaster Pro TV consumer electronic product,
AfterMaster Studio Rent, Consultants, senior engineers, and
Internet connectivity and excludes depreciation and amortization on
the studios. The increase in cost of sales for the three and six
months ended December 31, 2017, over the comparable periods, is
attributable, primarily,
to an increase in
manufacturing cost of $490,000 for a large sale to the
Company’s manufacturer for 5,000 units totaling $520,000 in
the current period and an increase in manufacturing cost for
the AfterMaster Pro TV. The company had manufacturing cost in the
amount of $1,001,340 for the AfterMaster Pro TV for
the six months ending December 31,
2017.
|
Other Operating Expenses
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization Expense
|
$
44,538
|
$
45,015
|
|
Research
and Development
|
-
|
26,020
|
|
Advertising
and Promotion Expense
|
16,649
|
2,565
|
|
Legal
and Professional Expense
|
23,000
|
30,804
|
|
Non-Cash
Consulting Expense
|
15,597
|
659,938
|
|
General
and Administrative Expenses
|
818,042
|
915,206
|
|
Total
|
$
917,826
|
$
1,679,548
|
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization Expense
|
$
83,507
|
$
85,554
|
|
Research
and Development
|
2,194
|
93,015
|
|
Advertising
and Promotion Expense
|
18,665
|
17,644
|
|
Legal
and Professional Expense
|
37,190
|
55,070
|
|
Non-Cash
Consulting Expense
|
92,035
|
1,531,909
|
|
General
and Administrative Expenses
|
1,605,032
|
1,628,042
|
|
Total
|
$
1,838,623
|
$
3,411,234
|
General and administrative expenses consist primarily of
compensation and related costs for our finance, legal, human
resources, investor relation, Public relations and
information technology personnel; advertising and promotion
expenses; rent and facilities; and expenses related to the issuance
of stock compensation. During
the three months ended
December 31, 2017
, General and
administrative expenses decrease by $97,164 and $23,010 as compared
to the three and six months ending December 31, 2016. The Decrease
in General and administrative expenses is due to decrease in
outside consulting services.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
During
the three and six
months ended December 31, 2017
,
Research and Development costs decreased by $26,020 and $90,821,
Advertising and Promotion increased by $14,084 and $1,021, Legal
and Professional fees decreased by $7,804 and $17,880 and
consulting services decreased by $761,722 and $1,439,874, as
compared
to the three and six
months ended December 31, 2016
.
The decreases in Research and Development, decreases in Advertising
and Promotion, and consulting services are primarily due to the
design, development and marketing of its Aftermaster Pro consumer
hardware product. Legal and Professional fees decrease are
primarily to the company only using one attorney on a monthly
retainer to handle all the company’s legal
needs.
|
Other Income (Expense)
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
Interest
Expense
|
$
(601,426
)
|
$
(378,522
)
|
|
Derivative
Expense
|
(211,481
)
|
-
|
|
Change in Fair
Value of Derivative
|
976,861
|
(463
)
|
|
Loss
on Extinguishment of Debt
|
-
|
9,236
|
|
Total
|
$
163,954
|
$
(369,749
)
|
|
Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
$
(1,476,739
)
|
$
(747,595
)
|
|
Derivative
Expense
|
(345,133
)
|
-
|
|
Change in Fair
Value of Derivative
|
767,822
|
(574
)
|
|
Loss
on Extinguishment of Debt
|
(90,042
)
|
9,236
|
|
Total
|
$
(964,008
)
|
$
(738,933
)
|
The other income/(expense) during the three and six ended December
31, 2017, totaling $163,954 and ($964,008) of
income/(expense), which consists of interest expense, derivative
expense, change in fair value of derivative, and loss on
extinguishment of debt. During the comparable period in 2016, other
expenses totaled $369,749 and $738,933. Interest expense has
increased primarily due to an increase in non-cash interest expense
relating to warrants attached to recent debt
discount. These additional borrowings have been used in
the development of the AfterMaster HD. Derivative expense and
change in fair value of derivatives has increased due to the
issuance of derivative instruments in the current period and the
company revaluing the instruments at the end of the current period.
Loss on extinguishment of debt increased in the current period due
to notes extinguished in the current period.
|
Net Income (Loss)
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
$
(1,613,601
)
|
$
(2,158,238
)
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
$
(3,184,163
)
|
$
(4,366,717
)
|
Due to the Company’s cash position, we use
our Common Stock as currency to pay many employees, vendors and
consultants. Once we have raised additional capital from outside
sources, as well as generated cash flows from operations, we expect
to reduce the use of Common Stock as a significant means of
compensation. Under FASB ASC 718, “
Accounting for Stock-Based
Compensation”
,
these
non-cash issuances are expensed at the equity instruments fair
market value.
Absent these large
stock-based compensations of $15,597 and $92,035 and $659,938 and
$1,531,909, derivative expense of $211,481 and $345,133 and $0 and
$0, loss on the change in the derivative liability of $976,861 and
$767,822 and ($463) and ($574) for the three and six months ended
December 31, 2017 and 2016, our net loss would have been
$1,613,601 and $2,158,238 and $3,184,163
and $4,366,717 for three and six months ended December 31, 2017 and
2016, respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
LIQUIDITY AND CAPITAL RESOURCES
The Company had revenues of $
335,066 and
$950,462
during the three
and six months ended December 31, 2017 as compared to
$
48,739 and
$103,225
in the comparable
periods of 2016. The Company has incurred losses since inception of
$75,157,060. At December 31, 2017, the Company has
negative working capital of $10,645,400, which was a
decrease in working capital of $1,774,288 from June
30, 2017.
The Company had cash of $161,699 as of December 31, 2017, as
compared to $
250,728
as
of June 30, 2017. The increase is a result of the company entering
into thirteen (13) Share Purchase Agreements with individual
accredited investors resulting in net proceeds of $222,750, four
(4) notes payable resulting in net proceeds of $425,000, three (3)
related notes payable resulting in net proceeds of $68,000, and
twenty-four (24) convertible notes payable resulting in net
proceeds of $1,145,785. This amount was partially offset by
operational costs, purchases of assets, and payments of obligations
from convertible notes, notes, and lease
payables.
The Company had prepaid expense of $447,123 as of December 31,
2017, as compared to $507,254 as of June 30, 2017. The
decrease is due to the Company amortizing the prepaid expenses
totaling $96,135 over the six months ended September 30, 2017,
partially offset by the issuance of two consulting agreements
entered into in the current period.
The future of the Company as an operating business will depend on
its ability to obtain sufficient capital contributions and/or
financing as may be required to sustain its
operations. Management’s plan to address these
issues includes a continued exercise of tight cost controls to
conserve cash and obtaining additional debt and/or equity
financing.
As we continue our activities, we will continue to experience net
negative cash flows from operations, pending receipt of significant
revenues that generate a positive sales
margin.
The Company expects that additional operating losses will occur
until net margins gained from sales revenue is sufficient to offset
the costs incurred for marketing, sales and product development.
Until the Company has achieved a sales level sufficient to break
even, it will not be self-sustaining or be competitive in the areas
in which it intends to operate.
In addition, the Company will require substantial additional funds
to continue production and installation of the additional studios
and to fully implement its marketing
plans.
As of December 31, 2017, the existing capital and anticipated funds
from operations were not sufficient to sustain Company operations
or the business plan over the next twelve months. We
anticipate substantial increases in our cash requirements which
will require additional capital to be generated from the sale of
Common Stock, the sale of Preferred Stock, equipment financing,
debt financing and bank borrowings, to the extent available, or
other forms of financing to the extent necessary to augment our
working capital. In the event we cannot obtain the
necessary capital to pursue our strategic business plan, we may
have to significantly curtail our operations. This would
materially impact our ability to continue operations. There is no
assurance that the Company will be able to obtain additional
funding when needed, or that such funding, if available, can be
obtained on terms acceptable to the
Company.
Recent global events, as well as domestic economic factors, have
recently limited the access of many companies to both debt and
equity financings. As such, no assurance can be made that financing
will be available or available on terms acceptable to the Company,
and, if available, it may take either the form of debt or equity.
In either case, any financing will have a negative impact on our
financial condition and will likely result in an immediate and
substantial dilution to our existing
stockholders.
Although the Company intends to engage in a subsequent equity
offering of its securities to raise additional working capital for
operations, the Company has no firm commitments for any additional
funding, either debt or equity, at the present time.
Insufficient financial resources may require the Company to delay
or eliminate all or some of its development, marketing and sales
plans, which could have a material adverse effect on the
Company’s business, financial condition and results of
operations. There is no certainty that the expenditures to be
made by the Company will result in a profitable business proposed
by the Company.