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 September 30, 2018, 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, 2018 audited financial statements. The results
of operations for the periods ended September 30, 2018 are not
necessarily indicative of the operating results for the full
year.
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 $78,683,282,
negative working capital of $7,990,353 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.
Accounts Receivables
Accounts receivable 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. Allowance for doubtful accounts were $0 as of
September 30, 2018 and June 30, 2018.
Fair Value Instruments
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.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
-
continued
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, 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
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 used this sequencing policy, all instruments convertible
into common stock, including warrants and the conversion feature of
notes payable, issued subsequent to October 3, 2016 and November
15, 2016 until the notes were 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 January 1, 2017 until the note was converted on
January 4, 2017 were derivative liabilities.
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 months ended
September 30, 2018 and 2017 due to net operating losses for which
there is no benefit currently available.
At September 30, 2018, 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
606,
Revenue Recognition in
Financial Statements
, which
provides guidance on the recognition, presentation and disclosure
of revenue in financial statements. ASC 606 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 in accordance with that
core principle by applying the following steps: (i) identify the
contract(s) with a customer, (ii) identify the performance
obligations in the contract, (iii) determine the transaction price
(iv) allocate the transaction price to the performance obligations
in the contract, and (v)
recognize revenue when (or as) the entity
satisfies a performance obligation. In general, the Company’s
revenues are recognized when control of the promised goods or
services is transferred to our customers, in an amount that
reflects the consideration we expect to be entitled to in exchange
for those goods or services.
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.
Adoption of ASC Topic 606, "Revenue from Contracts with
Customers"
On July 1, 2018, we adopted Topic 606 using the modified
retrospective method applied to those contracts which were not
completed as of July 1, 2018. Results for reporting periods
beginning after July 1, 2018 are presented under Topic 606, while
prior period amounts are not adjusted and continue to be reported
in accordance with our historic accounting under Topic 605. We did
not record a change to accumulated deficit as of July 1, 2018 due
to the immaterial cumulative impact of adopting Topic
606.
Revenue is measured as the amount of consideration we expect to
receive in exchange for transferring goods or providing services.
Revenue is recognized when obligations under the terms of a
contract with our customers are satisfied; generally, this occurs
with the transfer of control of our products to our customers.
Transfer of control to the customer for products generally occurs
at the point in time when products have been shipped to our
customer by third party carriers as this represents the point in
time when the customer has a present obligation to pay and physical
possession including title and risk of loss have been transferred
to the customer.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
-
continued
The Company accounts for a contract with a customer when there is
an approval and commitment from both parties, the rights of the
parties are identified, payment terms are identified, the contract
has commercial substance and collectability of the consideration is
probable. The Company's distinct performance obligations consist
mainly of transferring control of its products identified in the
contracts, purchase orders or invoices and implied PCS
services.
Transaction prices are typically based on contracted rates.
Generally, payment is due from customers within 60 days of the
invoice date and the contracts do not have significant financing
components or include extended payment terms.
The timing of revenue recognition, billing and cash collections
results in billed accounts receivable, deferred revenue, and
customer deposits on the Consolidated Balance Sheets. Accounts
receivable are recognized in the period the Company’s right
to the consideration is unconditional. Our contract liabilities
consist of advance payments (Customer deposits) recognized
primarily related to deferred revenue. We classify customer
deposits as a current liability, and deferred revenue as a current
or noncurrent liability based on the timing of when we expect to
fulfill these remaining performance obligations. The current
portion of deferred revenue is included in other current
liabilities and the noncurrent portion is included in other
long-term liabilities in our consolidated balance
sheets.
Cost of Revenues
The Company’s cost of revenues includes studio lease expense,
employee costs, component and finished goods expense, and other
nominal amounts. Costs associated with products are recognized at
the time of the sale. 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 three months ended
September 30, 2018 and 2017 of $56,367 and $56,367,
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 three months ended September 30, 2018 and 2017, 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 129,530,326 and 37,364,624 at
September 30, 2018 and 2017, respectively.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No.
2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic
606 supersedes the revenue recognition requirements in Topic 605
“Revenue Recognition” (Topic 605), and requires
entities to recognize revenues when control of the promised goods
or services is transferred to customers at an amount that reflects
the consideration to which the entity expects to be entitled to in
exchange for those goods or services. We adopted Topic 606 as of
July 1, 2018 using the modified retrospective transition method.
See Note 4 for further details.
In February 2016, the FASB issued ASU 2016-02—Leases (Topic
842), requiring lessees to recognize a right-of-use asset and a
lease liability on the balance sheet for all leases except for
short-term leases. For lessees, leases will continue to be
classified as either operating or finance leases in the income
statement. The effective date of the new standard for public
companies is for fiscal years beginning after December 15, 2018 and
interim periods within those fiscal years. Early adoption is
permitted. The new standard must be adopted using a modified
retrospective transition and requires application of the new
guidance at the beginning of the earliest comparative period
presented. The Company is evaluating the effect that the updated
standard will have on its financial statements and related
disclosures.
In August 2016, the FASB issued ASU 2016-15—Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments. ASU 2016-15 provides guidance for eight specific cash
flow issues with respect to how cash receipts and cash payments are
classified in the statements of cash flows, with the objective of
reducing diversity in practice. The effective date for ASU 2016-15
is for annual periods beginning after December 15, 2017 and interim
periods within those fiscal years. Early adoption is permitted. We
adopted Topic 230 as of January 1, 2018
In January 2017, the FASB issued ASU 2017-04, Intangibles –
Goodwill and Other (Topic 350). The amendments in this update
simplify the test for goodwill impairment by eliminating Step 2
from the impairment test, which required the entity to perform
procedures to determine the fair value at the impairment testing
date of its assets and liabilities following the procedure that
would be required in determining fair value of assets acquired and
liabilities assumed in a business combination. The amendments in
this update are effective for public companies for annual or any
interim goodwill impairment tests in fiscal years beginning after
December 15, 2019. The Company is evaluating the effect that the
updated standard will have on its financial statements and related
disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations
(Topic 805); Clarifying the Definition of a Business. The
amendments in this update clarify the definition of a business to
help companies evaluate whether transactions should be accounted
for as acquisitions or disposals of assets or businesses. The
amendments in this update are effective for public companies for
annual periods beginning after December 15, 2017, including interim
periods within those periods. We adopted Topic 230 as of January 1,
2018
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 4 – 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 September 30, 2018 and June 30, 2018,
respectively:
Convertible Notes Payable – Related
Parties
|
|
|
|
|
|
|
|
|
|
|
|
$30,000
face value, issued in August 2016, interest rate of 0% and is
convertible into shares of the Company’s Common stock at
$0.40 per share, matures June 2019.
|
$
30,000
|
$
30,000
|
$5,000 face value,
issued in September 2017, interest rate of 0% and
is convertible into shares of the Company’s
common stock at $0.10 per share
, matures June 2019, net
amortized discount of $0 and $607 as of September 30, 2018 and June
30, 2018, respectively.
|
5,000
|
4,393
|
$10,000 face value, issued in November 2017,
interest rate of 0%
and
is
convertible into shares of the Company’s common stock at
$0.10 per share, matures
June 2019
.
|
10,000
|
10,000
|
$25,000 face value, issued in December 2017,
interest rate of 0%
and
is
convertible into shares of the Company’s common stock at
$0.10 per share, matures December 2018, net amortized discount of
$1,414 and $1,890 as of September 30, 2018 and June 30, 2018,
respectively.
|
23,586
|
23,110
|
$10,000 face value, issued in January 2018,
interest rate of 0%
and
is
convertible into shares of the Company’s common stock at
$0.10 per share, matures January 2019, net unamortized discount of
$399 and $534 as of September 30, 2018 and June 30, 2018,
respectively.
|
9,601
|
9,466
|
$15,000 face value, issued in January 2018,
interest rate of 0%
and
is
convertible into shares of the Company’s common stock at
$0.10 per share, matures January 2019, net unamortized discount of
$$1,040 and $1,391 as of September 30, 2018 and June 30, 2018,
respectively.
|
13,960
|
13,609
|
$24,500 face value, issued in February 2018,
interest rate of 0%
and
is
convertible into shares of the Company’s common stock at
$0.10 per share, matures February 2019.
|
24,500
|
24,500
|
Total convertible
notes payable – related parties
|
116,647
|
115,078
|
Less current
portion
|
116,647
|
115,078
|
Convertible notes
payable – related parties, long-term
|
$
-
|
$
-
|
Due to sequencing on February 2, 2017, the Company determined under
ASC 815, that notes containing 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.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
.
During the three months ended September 30, 2018,
four notes were amended to extend the
maturity dates.
The Company evaluated
the amendments under ASC 470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
three of the extensions 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. One
extension
resulted in significant and consequential changes to the economic
substance, however the effect was not material.
Convertible Notes Payable - Non-Related Parties
Convertible notes payable due to non-related parties consisted of
the following as of September 30, 2018 and June 30, 2018,
respectively:
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 4 – NOTES PAYABLE
-
continued
Convertible Notes Payable
- Non-Related Parties
|
|
|
|
|
|
|
|
|
$7,000
face value, issued in July 2014, interest rate of 6% and is
convertible into shares of the Company’s common stock at
$0.10 per share, matures February 2019.
|
$
7,000
|
$
7,000
|
$100,000
face value, issued in February 2016, interest rate of 10% and is
convertible into shares of the Company’s Common stock at
$0.50 per share, matures February 2019.
|
100,000
|
100,000
|
$25,000
face value, issued in February 2016, interest rate of 10% and is
convertible into shares of the Company’s Common stock at
$0.40 per share, matures February 2019.
|
25,000
|
25,000
|
$100,000
face value, issued in March 2016, interest rate of 10%, matures
October 2018. The note is currently in default.
|
100,000
|
100,000
|
$10,000
face value, issued in March 2016, interest rate of 10% and is
convertible into shares of the Company’s Common stock at
$0.40 per share, matures October 2018. The note is currently in
default.
|
10,000
|
10,000
|
$50,000
face value, issued in July 2016, interest rate of 0% and is
convertible into shares of the Company’s Common stock at
$0.40 per share, matures October 2018. The note is currently in
default.
|
50,000
|
50,000
|
$50,000
face value, issued in August 2016, interest rate of 10% and is
convertible into shares of the Company’s Common stock at
$0.40 per share, matures October 2018. The note is currently in
default.
|
50,000
|
50,000
|
$1,000,000
face value, issued in September 2016, interest rate of 10% and is
convertible into shares of the Company’s Common stock at
$0.40 per share, matures October 2018. The note is currently in
default.
|
1,000,000
|
1,000,000
|
$149,000
face value, issued in February 2017, interest rate of 10% 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, matures June 2018, of which $55,238
was converted. The note is currently in default.
|
93,762
|
79,340
|
$224,000
face value, issued in February 2017, interest rate of 10% 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, matures June 2018, of which $99,458
was converted. The note is currently in default.
|
124,542
|
98,508
|
$265,000
face value, issued in May 2017, interest rate of 10% and is
convertible into shares of the Company’s common stock at the
lesser of $.31 and 60% of the lowest closing bids 25 days prior to
the conversion date, matures February 2018, of which 95,208 was
converted. The note is currently in default.
|
169,792
|
200,412
|
$100,000
face value, issued in June 2017, interest rate of 10% and is
convertible into shares of the Company’s common stock at $.17
per share, matures June 2018. The note is currently in
default.
|
100,000
|
100,000
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 4 – NOTES PAYABLE
-
continued
$78,000
face value, issued in July 2017, interest rate of 12% 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, matures May 2018, of
which $72,000 was converted. The note is currently in
default.
|
6,000
|
6,000
|
$10,000
face value, issued in August 2017, interest rate of 0% and is
convertible into shares of the Company’s common stock at
$0.10 per share, matures August 2018. The note currently is in
default.
|
10,000
|
9,271
|
$53,000 face value,
issued in August 2017, interest rate of 12% 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, matures June 2018. The note currently is in
default.
|
53,000
|
53,000
|
$10,000 face value,
issued in September 2017, interest rate of 10% and is convertible
into shares of the Company’s common stock at $0.10 per share,
matures September 2018, net amortized discount of $0 and $4,400 as
of September 30, 2018 and June 30, 2018, respectively. The note is
currently in default.
|
10,000
|
5,600
|
$100,000 face
value, issued in October 2017, interest rate of 10% and is
convertible into shares of the Company’s common stock at
$0.10 per share, matures October 2018, net amortized discount of
$16,704 and $22,333 as of September 30, 2018 and June 30, 2018,
respectively. The note is currently in default.
|
83,296
|
77,667
|
$115,000 face
value, issued in November 2017, interest rate of 10% and s
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, matures August 2018, net amortized discount of $9,073
and $50,584 as of September 30, 2018 and June 30, 2018,
respectively. The note is currently in default.
|
105,927
|
64,416
|
$50,000 face value,
issued in November 2017, interest rate of 10% and is convertible
into shares of the Company’s common stock at $0.10 per share,
matures December 2018.
|
50,000
|
50,000
|
$66,000 face value,
issued in November 2017, interest rate of 10% and is convertible
into shares of the Company’s common stock at $0.10 per share,
matures November 2018, net amortized discount of $12,779 and
$17,085 as of September 30, 2018 and June 30, 2018,
respectively.
|
53,221
|
48,915
|
$100,000 face
value, issued in November 2017, interest rate of 10% and 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, matures November 2018, net amortized discount of $0 and
$39,452 as of September 30, 2018 and June 30, 2018, respectively,
$100,000 was transferred to a new note.
|
-
|
60,548
|
$5,000 face value,
issued in November 2017, interest rate of 10% and is convertible
into shares of the Company’s common stock at $0.10 per share,
matures November 2018, net amortized discount of $1,445 and $1,932
as of September 30, 2018 and June 30, 2018,
respectively.
|
3,555
|
3,068
|
$53,000 face value,
issued in November 2017, interest rate of 12% and 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,
matures July 2018, net amortized discount of $0 and $4,649 as of
September 30, 2018 and June 30, 2018, respectively, $53,000 was
converted.
|
-
|
13,821
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 4 – NOTES PAYABLE
-
continued
$100,000 face
value, issued in December 2017, interest rate of 10% and is
convertible into shares of the Company’s common stock at
$0.10 per share, matures December 2018, net amortized discount of
$15,061 and $20,137 as of September 30, 2018 and June 30, 2018,
respectively.
|
84,939
|
79,863
|
$20,000 face value,
issued in December 2017, interest rate of 10% and is convertible
into shares of the Company’s common stock at $0.10 per share,
matures December 2018, net amortized discount of $3,507 and $4,689
as of September 30, 2018 and June 30, 2018,
respectively.
|
16,493
|
15,311
|
$75,000 face value,
issued in December 2017, interest rate of 10% and is convertible
into shares of the Company’s common stock at $0.10 per share,
matures December 2018, net amortized discount of $17,337 and
$23,180 as of September 30, 2018 and June 30, 2018,
respectively.
|
57,663
|
51,820
|
$20,000 face value,
issued in December 2017, interest rate of 10% and is convertible
into shares of the Company’s common stock at $0.10 per share,
matures December 2018, net amortized discount of $4,623 and $6,181
as of September 30, 2018 and June 30, 2018,
respectively.
|
15,377
|
13,819
|
$115,000 face
value, issued in January 2018, interest rate of 10% and s
convertible into shares of the Company’s common stock at the
lesser of $.12 and 57.5% of the lowest trading price during the
prior 30 days, matures October 2018, net amortized discount of
$28,487 and $42,967 as of September 30, 2018 and June 30, 2018,
respectively.
|
86,513
|
72,033
|
$20,000 face value,
issued in February 2018, interest rate of 10% and is convertible
into shares of the Company’s common stock at $0.10 per share,
matures February 2019, net amortized discount of $3,629 and $4,847
as of September 30, 2018 and June 30, 2018,
respectively.
|
16,371
|
15,153
|
$75,075 face value,
issued in February 2018, interest rate of 12% and is convertible
into shares of the Company’s common stock at 55% of the
lowest sales price for common stock on principal market during the
twenty-five consecutive trading days including the immediately
preceding the conversion date, matures November 2018, net amortized
discount of $0 as of September 30, 2018 and June 30, 2018, of which
$75,075 was transferred to two new notes.
|
-
|
75,075
|
$6,000 face value,
issued in February 2018, interest rate of 10% and is convertible
into shares of the Company’s common stock at $0.10 per share,
matures June 2019.
|
6,000
|
6,000
|
$10,000 face value,
issued in March 2018, interest rate of 10% and is convertible into
shares of the Company’s common stock at $0.10 per share,
matures March 2019, net amortized discount of $1,696 and $2,267 as
of September 30, 2018 and June 30, 2018, respectively.
|
8,304
|
7,733
|
$15,000 face value,
issued in March 2018, interest rate of 10% and is convertible into
shares of the Company’s common stock at $0.10 per share,
matures March 2019, net amortized discount of $2,079 and $2,780 as
of September 30, 2018 and June 30, 2018, respectively.
|
12,921
|
12,220
|
$100,000 face
value, issued in March 2018, interest rate of 10% and is
convertible into shares of the Company’s common stock at
$0.10 per share, matures March 2019, net amortized discount of
$16,227 and $21,696 as of September 30, 2018 and June 30, 2018,
respectively.
|
83,773
|
78,304
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 4 – NOTES PAYABLE
-
continued
$120,000 face
value, issued in July 2018 for prepaid services, interest rate of
15% and is convertible into shares of the Company's common stock at
70% of the lowest closing price during the 20 days prior to the
conversion per share, matures July 2019.
|
120,000
|
|
$26,000 face value,
issued from an assignment in March 2018, interest rate of 0% 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, matures October 2018, net amortized discount of
$0 as of September 30, 2018 and June 30, 2018. The note is
currently in default.
|
26,000
|
26,000
|
$160,000 face
value, issued in April 2018, interest rate of 10% and is
convertible into shares of the Company’s common stock at the
lesser of $0.05 and 57.5% of the lowest closing bids 20 days prior
to the conversion date, matures January 2019, net amortized
discount of $70,417 and $105,818 as of September 30, 2018 and June
30, 2018, respectively.
|
89,583
|
44,182
|
$400,000 face
value, issued from an assignment in April 2018 of $355,000 in
principal and an OID of $45,000, interest rate of 10% and is
convertible into shares of the Company’s common stock at rate
of 55% of the average trading price for the prior 3 trading days,
matures April 2019, net amortized discount of $31,507 and $36,000
as of September 30, 2018 and June 30, 2018, respectively, of which
$223,198 has been converted.
|
145,295
|
140,802
|
$15,000 face value,
issued in April 2018, interest rate of 10% and is convertible into
shares of the Company’s common stock at rate of 55% of the
average trading price for the prior 3 trading days, matures April
2019, net amortized discount of $8,975 and $12,000 as of September
30, 2018 and June 30, 2018, respectively.
|
6,025
|
3,000
|
$150,086 face
value, issued in May 2018, interest rate of 12% 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, matures January 2020, net
amortized discount of $87,152 and $116,522 as of September 30, 2018
and June 30, 2018, of which $41,000 has been paid.
|
21,934
|
21,564
|
$135,700 face
value, issued in May 2018, interest rate of 12% 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, matures May 2019, net
amortized discount of $83,395 and $111,499 as of September 30, 2018
and June 30, 2018, of which $41,000 has been paid.
|
11,304
|
12,201
|
$15,651 face value,
issued in June 2018, interest rate of 12% 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, matures June 2019.
|
15,651
|
15,651
|
$55,718 face value,
issued from an assignment in June 2018, interest rate of 12% 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, matures October 2018,
net amortized discount of $0 as of September 30, 2018 and June 30,
2018, of which $55,718 has been converted.
|
-
|
55,718
|
$161,000 face
value, issued in June 2018, interest rate of 12% 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, matures June 2018, net
amortized discount of $120,089 and $160,558 as of September 30,
2018 and June 30, 2018, respectively, of which 29,000 was
paid.
|
11,911
|
441
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 4 – NOTES PAYABLE
-
continued
$23,000 face value,
issued in August 2018 of $20,000 in principal and an OID of $3,000,
interest rate of 12% and is convertible into shares of the
Company's common stock at 55% of the average of the 3 lowest
closing price during the 25 days prior to the conversion per share,
matures August 2019, net amortized discount of $20,416 as of
September 30, 2018.
|
2,584
|
-
|
$106,795 face
value, issued from an assignment in August 2018, interest rate of
10% and 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, matures August 2019, net amortized discount
of $0 as of September 30, 2018, of which $69,857 has been
converted.
|
36,938
|
-
|
$575,000 face
value, issued from an assignment in August 2018 of $496,000 in
principal and an OID of $79,000, interest rate of 10% and is
convertible into shares of the Company’s common stock at
equal the lesser of $0.12 and 70% of the lowest Trading Price for
the Common Stock during the thirty Trading Day period ending on the
latest complete Trading Day prior to the Conversion Date, matures
August 2019, net amortized discount of $488,356 as of September 30,
2018.
|
86,644
|
-
|
$23,000 face value,
issued in August 2018 of $20,000 in principal and an OID of $3,000,
interest rate of 12% and is convertible into shares of the
Company’s common stock at 61% of the lowest trading price for
the prior fifteen trading days including the immediately preceding
the conversion date, matures August 2019, net amortized discount of
$20,416 as of September 30, 2018.
|
2,584
|
-
|
$41,850 face value,
issued in August 2018, interest rate of 12% and is convertible into
shares of the Company’s common stock at 61% of the lowest
trading price for the prior 15 trading days to the date of
conversion, matures August 2019, net amortized discount of $35,085
as of September 30, 2018.
|
6,765
|
-
|
Total convertible
notes payable – non-related parties
|
3,176,667
|
2,959,456
|
Less current
portion
|
3,176,667
|
2,959,456
|
Convertible notes
payable – non-related parties, long-term
|
$
-
|
$
-
|
Due to sequencing on February 2, 2017, the Company determined under
ASC 815, the Company has determined that notes containing
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 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
.
During the three months
ended September 30, 2018,
ten
notes were amended to extend the maturity dates.
The Company
evaluated the amendments under ASC 470-50,
“
Debt
- Modification and Extinguishment”
, and concluded that
nine of the extensions 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. One
extension
resulted in significant and consequential changes to the economic
substance, however the effect was not
material.
On February 23, 2017, the Company issued a convertible note to an
unrelated company for $149,000 that matured in June 2018. The note
bears 10% interest per annum and is convertible into shares of
the Company’s common stock at lesser of $.04 per share or 40%
of the average three lowest closing bids 20 days prior to the
conversion date. On September 10, 2018, the note converted
the principal of $23,966 and $5,966 in accrued interest into for
1,800,000 shares of common stock.
On February 23, 2017, the Company issued a convertible note to an
unrelated company for $224,000 that matured in June 2018. The note
bears 10% interest per annum and is convertible into shares of
the Company’s common stock at lesser of $.04 per share or 40%
of
the
average three lowest closing bids 20 days prior to the conversion
date. On September 10, 2018, the note converted the principal
of $15,578 and $4,222 in accrued interest into for 1,200,000 shares
of common stock.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 4 – NOTES PAYABLE
-
continued
On May 12, 2017, the Company issued a convertible note to an
unrelated company for $265,000 that matures on February 17, 2018.
The note bears 10% interest per annum and is convertible into
shares of the Company’s common stock at the lesser of $.31
and 60% of the lowest closing bids 25 days prior to the conversion
date. On August 24, 2018, the note converted principal of
$30,620, $7,380 in interest, and $250 in conversion fees for
2,500,000 shares of common stock.
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. On
August 16, 2018, the Lender assigned principal of $100,000 and
accrued interest of $6,795 an unrelated party.
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. On July 9,
2018, the note converted the remainder of the principal of $18,470
and $2,524 for 914,934 shares of common stock.
On February 21, 2018, the Company issued a convertible note to an
unrelated party for $6,000 that matures April 1, 2018. The note was
amended on August 24, 2018, to extend the maturity date to June 30,
2019. 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 note was amended on August 24, 2018, to extend
the maturity date to June 30, 2019.
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 16, 2018, the Company issued a convertible note to an
unrelated party for $75,075 that matures on November 16, 2018. The
note bears 12% interest per annum. The note is convertible into
shares of the Company’s common stock at 55% of the lowest
sales price for common stock on principal market during the
twenty-five consecutive trading days including the immediately
preceding the conversion date. On August 16, 2018, the Lender
assigned principal of $39,759 to two unrelated party.
On June 13, 2018, the Company issued a convertible note to an
unrelated party for $55,718 that matures June 13, 2019 in exchange
for an existing note for $53,000 issued on January 8, 2018 and
$2,718 in accrued interest. 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. On July 19, 2018, the note converted all the
principal of $55,718 for 2,854,420 shares of common
stock.
On July 2, 2018, the Company issued a convertible note to an
unrelated company for $120,000 as part of an advisory agreement for
prepaid services over a twelve month period that matures on July 2,
2019. The note bears 15% interest per annum and is convertible into
shares of the Company’s common stock at 70% of the lowest
closing bids 20 days prior to the conversion per share. As
additional consideration
the Company also issued
3,000,000 warrants. 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 2, 2018, the Company issued a convertible note to an
unrelated party for $106,795 that matures August 2, 2019 in
exchange for an existing note for $100,000 issued on November 21,
2017 and $6,795 in accrued interest. 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. On
August 24, 2018, the note converted a principal of $69,857 for
5,217,098 shares of common stock.
As part of the assignment of the convertible note for $106,795 on
August 2, 2018, the Company issued a convertible note to an
unrelated party for $41,850 that matures August 2, 2019 as an early
out payment. The note bears 12% interest per
annum and is convertible into shares of the Company’s
common stock at 61% of the lowest trading price for the prior 15
trading days to the date of conversion.
On August 2, 2018, the Company issued a convertible note to an
unrelated company for $575,000, which includes proceeds of $496,000
and $79,000 in OID, that matures on August 2, 2019. The note bears
10% interest per annum and is convertible into shares of the
Company’s common stock at equal the lesser of $0.12 and 70%
of the lowest Trading Price for the Common Stock during the thirty
Trading Day period ending on the latest complete Trading Day prior
to the Conversion Date . As additional
consideration
the Company also issued
3,593,750 warrants. 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 16, 2018, the Company issued a convertible note to an
unrelated party for $39,759, that matures August 2, 2019 in
exchange for an existing note for $37,538 issued on February 16,
2018 and $2,221 in accrued interest. The note bears 12% interest
per annum. The note is convertible into shares of the
Company’s common stock at 55% of the lowest sales price for
common stock on principal market during the twenty-five consecutive
trading days including the immediately preceding the conversion
date. On August 16, 2018, the new note holder converted the
entire $39,759 balance for 2,839,920 shares of common
stock.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 4 – NOTES PAYABLE
–
continued
On August 16, 2018, the Company issued a convertible note to an
unrelated party for $39,759, that matures August 2, 2019 in
exchange for an existing note for $37,538 issued on February 16,
2018 and $2,221 in accrued interest. The note bears 12% interest
per annum. The note is convertible into shares of the
Company’s common stock at 55% of the lowest sales price for
common stock on principal market during the twenty-five consecutive
trading days including the immediately preceding the conversion
date. On August 31, 2018, the other new note holder paid the
entire $39,759 balance.
On August 20, 2018, the Company issued a convertible note to an
unrelated party for $23,000, which includes proceeds of $23,000 and
$3,000 in OID, that matures August 20, 2019. The note bears 12%
interest per annum. The note is convertible into shares of the
Company’s common stock at 55% of the average of the three
lowest closing prices for common stock on principal market during
the twenty-five consecutive trading days including the immediately
preceding the conversion date.
On August 20, 2018, the Company issued a convertible note to an
unrelated party for $23,000, which includes proceeds of $23,000 and
$3,000 in OID, that matures August 20, 2019. The note bears 12%
interest per annum. The note is convertible into shares of the
Company’s common stock at 61% of the lowest trading price for
the prior fifteen trading days including the immediately preceding
the conversion date.
Notes Payable – Related Parties
Notes payable due to related parties consisted of the following as
of September 30, 2018 and June 30, 2018, respectively:
Notes Payable – Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various term notes
with total face value of $30,000 issued from November 16 to
February 17, interest rates of 0%, of which $5,000 has been
paid.
|
$
25,000
|
$
25,000
|
$18,000
face value, issued in September 2017, interest rate of 0%, matures
June 2019.
|
18,000
|
18,000
|
$15,000
face value, issued in October 2017, interest rate of 0%, matures
June 2019.
|
15,000
|
15,000
|
$10,000
face value, issued in June 2018, interest rate of 0%, matures June
2019.
|
10,000
|
10,000
|
$8,000
face value, issued in June 2018, interest rate of 0%, matures June
2019.
|
8,000
|
8,000
|
$6,000
face value, issued in July 2018, interest rate of 0%, matures June
2019.
|
6,000
|
-
|
$6,000
face value, issued in July 2018, interest rate of 0%, matures June
2019.
|
6,000
|
-
|
$12,000
face value, issued in August 2018, interest rate of 0%, matures
June 2019.
|
12,000
|
-
|
$15,000
face value, issued in September 2018, interest rate of 0%, matures
June 2019.
|
15,000
|
-
|
Total notes payable
– related parties
|
115,000
|
76,000
|
Less current
portion
|
115,000
|
76,000
|
Notes payable -
related parties, long term
|
$
-
|
$
-
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 4 – NOTES PAYABLE
-
continued
During the
three months ended September 30, 2018,
three notes were amended to extend the maturity
dates.
The Company evaluated
the amendments under ASC 470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
two of the extensions 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. One
extension
resulted in significant and consequential changes to the economic
substance, however the effect was not
material.
From July 23 through September 29, the Company
issued notes to a related party for a total of
$39,000 that all mature on June 30, 2019. The
notes bears 0% interest per annum.
Notes Payable
–
Non-Related
Parties
Notes payable due to non-related parties consisted of the following
as of September 30, 2018 and June 30, 2018,
respectively:
Notes
Payable
–
Non-Related
Parties
|
|
|
|
|
|
|
|
|
$52,000
face value, issued in August 2017, interest rate of 0%, matures
October 2017 net of unamortized discount of $0 as of September 30,
2018 and June 30, 2018.
|
$
52,000
|
$
52,000
|
$52,000
face value, issued in August 2017, interest rate of 0%, matures
December 2018 net of unamortized discount of $0 and $4,901 as of
September 30, 2018 and June 30, 2018, respectively.
|
52,000
|
47,099
|
$81,000
face value, issued in September 2017, interest rate of 96%, matures
September 2018 net of unamortized discount of $0 as of September
30, 2018 and June 30, 2018.
|
81,000
|
81,000
|
$50,000 face value,
issued in March 2017, interest rate of 10%, matures January 2018,
net amortized discount of $0 as of September 30, 2018 and June 30,
2018.
|
50,000
|
50,000
|
$225,000
face value, issued in March 2018, interest rate of 30%, matures
March 2019 net of unamortized discount of $46,756 and $62,512 as of
September 30, 2018 and June 30, 2018, respectively.
|
178,244
|
162,488
|
$260,000
face value, issued in June 2018, interest rate of 0%, matures July
2018 net of unamortized discount of $0 and $9,677 as of September
30, 2018 and June 30, 2018, respectively, of which $10,000 has been
paid.
|
250,000
|
250,323
|
$52,000
face value, issued in August 2018, interest rate of 0%, matures
November 2018 net of unamortized discount of $979 as of September
30, 2018.
|
51,021
|
-
|
$80,000
face value, issued in September 2018, interest rate of 0%, matures
October 2018 net of unamortized discount of $4,167 as of September
30, 2018.
|
75,833
|
-
|
Total note payable
– non-related parties
|
790,098
|
642,910
|
Less current
portion
|
790,098
|
642,910
|
Notes payable
– non-related parties, long-term
|
$
-
|
$
-
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 4 – NOTES PAYABLE
-
continued
During the three months ended September 30, 2018,
one note was amended to extend the
maturity date.
The Company evaluated
the 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 16, 2018, 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 November 16, 2018. The note bears 0% interest per
annum.
On September 28, 2018, the Company issued a note to an unrelated
party for $80,000, which included $75,000 in proceeds and an OID of
$5,000, that matures on October 10, 2018. The note bears 0%
interest per annum.
NOTE 5 – 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
|
2,585,000
|
3,581,964
|
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
|
3,109,044
|
$
3,616,964
|
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.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 5 – CONVERTIBLE PREFERRED STOCK
-
continued
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.
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 months ended September 30, 2018 the Company did
not issue shares of Series A-1 Preferred.
During the fiscal year ended June 30, 2018 the Company did not
issue shares of Series A-1 Preferred.
During the three months ended September 30, 2018 and 2017, the
outstanding Preferred Stock accumulated $56,367 and $56,367 in
dividends on outstanding Preferred Stock. The cumulative dividends
in arrears as of September 30, 2018 were approximately
$1,190,773.
NOTE 6 – COMMON STOCK
The Company has authorized 250,000,000 shares of $0.001 par value
per share Common Stock, of which 194,167,500 issued (of which
30,721,165 are to be issued) as of September 30, 2018 and
162,287,902 issued (of which 28,841,381 are to be issued) as of
June 30, 2018. The activity surrounding the issuances of the Common
Stock is as follows:
For the Three Months Ended September 30, 2018
The Company issued 17,326,372 shares of Common Stock for the
conversion of notes and accrued interest valued at
$274,310.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 6 – COMMON STOCK
- continued
The Company issued 9,385,000 shares of Common Stock as payment for
services valued at $366,015.
As share-based compensation to employees and non-employees, the
Company issued 2,168,226 shares of common stock valued at $65,047,
based on the market price of the stock on the date of
issuance.
As part of a provision in a note payable, the Company issued
3,000,000 shares of common stock valued at $90,000 based on the
market price on the date of issuance.
For the Three Months Ended September 30, 2017
The Company issued
1,625,000
shares of Common Stock for $168,500 in cash as part of a private
placement, net of $1,500 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 120,000 shares of Common Stock as payment for
services and rent valued at $22,800.
The Company issued 115,500 shares of Common Stock for the incentive
with convertible notes valued at $15,963.
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 591,692 shares of common stock valued at $100,589,
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.
NOTE 7 – 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 three months ended September 30, 2018, the Company did
not issue any stock purchase options, and 25,000
expired.
During the fiscal year ended September 30, 2018, the Company issued
3,593,750 stock purchase options.
During the fiscal year ended September 30, 2018, the Company did
not issue stock purchase options.
The following table summarizes the changes in options outstanding
of the Company during the three months ended September 30,
2018.
Date
Issued
|
|
Weighted
Average Exercise Price
|
Weighted
Average Grant Date Fair Value
|
|
|
Balance
June 30, 2018
|
525,000
|
$
0.05
|
$
0.16
|
3.81
|
$
93,750
|
Granted
|
-
|
-
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
Cancelled/Expired
|
(25,000
)
|
-
|
-
|
-
|
(3,750
)
|
Outstanding
as of September 30, 2018
|
500,000
|
$
0.05
|
$
0.17
|
3.75
|
$
90,000
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 7 – STOCK PURCHASE OPTIONS AND
WARRANTS
-
continued
Stock Purchase Warrants
During the three months ended September 30, 2018, the Company
issued warrants to purchase a total
of
6,593,750
in conjunction with
issuance of two promissory notes valued at $195,150. 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:
|
|
September 30, 2018
|
|
June 30, 2018
|
Expected volatility
|
|
125-211%
|
|
105-304%
|
Expected dividends
|
|
0%
|
|
0%
|
Expected term
|
|
0-5 Years
|
|
0-5 Years
|
Risk-free interest rate
|
|
2.00-2.91%
|
|
0.96-2.73%
|
The following table summarizes the changes in warrants outstanding
issued to employees and non-employees of the Company during the
three months ended September 30, 2018.
|
|
Weighted Average Exercise Price
|
Weighted Average Grant Date Fair
Value
|
|
|
Balance
June 30, 2018
|
41,759,597
|
$
0.32
|
$
0.40
|
3.01
|
$
13,291,022
|
Granted
|
6,593,750
|
0.07
|
0.04
|
4.09
|
443,750
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
Cancelled/Expired
|
(3,628,068
)
|
0.33
|
-
|
-
|
(1,214,034
)
|
Outstanding
as of September 30, 2018
|
44,725,279
|
$
0.28
|
$
0.33
|
3.17
|
$
12,520,738
|
NOTE 8 – 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 September 30, 2018 and June 30,
2018. The fair values of the derivative instruments are measured
each quarter, which resulted in a gain of $612,212 and $202,820,
and derivative expense of $1,043,090 and $137,466 during the three
months ended September 30, 2018 and 2017, respectively. As of
September 30, 2018, and June 30, 2018, the fair market value of the
derivatives aggregated $2,864,661 and $2,815,520, respectively,
using the following assumptions: estimated 5-0 year term, estimated
volatility of 210.59 – 124.95%, and a discount rate of 2.91
– 2.00%.
NOTE 9 – 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.
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 9 – FAIR VALUE MEASUREMENTS
-
continued
Liabilities measured at fair value on a recurring basis at
September 30, 2018, are summarized as follows:
|
|
|
|
|
Fair
value of derivatives
|
$
-
|
$
-
|
$
2,864,661
|
$
2,864,661
|
Liabilities measured at fair value on a recurring basis at June 30,
2018, are summarized as follows:
|
|
|
|
|
Fair
value of derivatives
|
$
-
|
$
-
|
$
2,815,520
|
$
2,815,520
|
NOTE 10 – 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
expired on December 31, 2017 and now is on a month to month basis.
The total lease expense for the facility is approximately
$20,573.50 per month, and the total remaining obligations under
these leases at September 30, 2018, were approximately
$0.
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
$1,993 per month, and the total remaining obligations under this
lease at September 30, 2018, were approximately
$8,720.
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
$7,450 per month, and the total remaining obligations under this
lease at September 30, 2018, were approximately
$180,720.
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
$3,100 per month, and the total remaining obligations under this
lease at September 30, 2018, were approximately
$76,945.
During the three months ended September 30, 2018 and 2017, the
operating lease expense totaled $90,586 and $90,209.
Below is a table summarizing the annual operating lease obligations
over the next 5 years:
Year
|
|
2019
|
110,833
|
2020
|
131,475
|
2021
|
24,077
|
2022
|
-
|
2023
|
-
|
Total
|
$
266,385
|
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 September 30, 2018 were
approximately
$1,190,773.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
NOTE 11 – INVENTORIES
Inventories are stated at the first in first out and consisted of
the following:
|
|
|
|
|
|
Components
|
$
2,568
|
$
-
|
Finished
Goods
|
-
|
-
|
Allowance
/ Reserve
|
-
|
-
|
Totals
|
$
2,568
|
$
-
|
NOTE 12 - 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:
During the subsequent
period,
one note was amended to
extend the maturity date. The Company paid $6,500 as additional
consideration to extend the note.
The Company evaluated
the 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 March 28, 2018, the
Company issued a convertible note to an unrelated party for $26,000
that matures May 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. On October 16, 2018, the Company paid
principal of $26,000 and accrued interest of $1,284 and converted
$8,085
as an early out payment
for 700,000 shares of common stock fully paying off the
note.
On May 12, 2017, the Company issued a convertible note to an
unrelated company for $265,000 that matures on February 17, 2018.
The note bears 10% interest per annum and is convertible into
shares of the Company’s common stock at the lesser of $.31
and 60% of the lowest closing bids 25 days prior to the conversion
date. On November 7, 2018, the note converted principal of $3,377,
$8,383 in interest, and $250 in conversion fees for 1,000,000
shares of common stock.
On August 2, 2018, the Company issued a convertible note to an
unrelated party for $106,795 that matures August 2, 2019 in
exchange for an existing note for $100,000 issued on November 21,
2017 and $6,795 in accrued interest. 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. On October
16, 2018, the note converted a principal of $30,143 and accrued
interest of $6,795 for 3,697,237 shares of common
stock.
On October 19, 2018, the Company issued a
convertible note to an unrelated company for $270,000, which
includes proceeds of $249,750 and $20,250 in OID, that matures on
October 19, 2019. The note bears 10% interest per annum and is
convertible into shares of the Company’s common stock at
equal the lesser of $0.12 and 70% of the lowest Trading Price for
the Common Stock during the thirty Trading Day period ending on the
latest complete Trading Day prior to the Conversion Date. As
additional consideration
the Company also issued
1,814,516 warrants. The warrants are considered derivative
liabilities under ASC 815-40 under the Company’s sequencing
policy and were valued using the
multinomial lattice model
.
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.
General
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 September 30, 2018, there were 184,782,500 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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
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™, Aftermaster Studio 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 its
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
Highlights for the period ending September 30, 2018, over the
comparable period last year:
●
Revenue
more than doubled to $534,522
●
Current liabilities were reduced
by over $2,000,000
(net of derivative
liabilities)
●
The
Company received purchase orders for 15,000 Aftermaster Pro units
to supply the Home Shopping Network (HSN).
During the quarter, the Company received purchase orders for 15,000
Aftermaster Pro units. 3,000 of the 15,000 units have been shipped.
The balance of 12,000 units are expected to be supplied in the
coming months.
The Company’s ability to deliver on the
purchase orders and other sales is subject to the Company
continuing to secure sufficient manufacturing and operating
capital, as well as reliable product manufacturing. With such
resources, the Company expects to see substantial growth in the
coming year from both its existing operations and the new products
that it plans to introduce.
The Company’s share price continued to be depressed during
the quarter primarily due to share sales arising from various
convertible notes that the Company had entered into over
approximately the last eighteen months. The Company is actively
working to reduce its note debt and over the last nine months it
has reduced such debt by $3,750,000.
In
October of 2018, the Company hired a new head of marketing and an
accompanying team to focus on licensing the Company’s unique
and award winning audio technology, as well as build sales for its
current and future products.
Business and Products
Adventego Strategic Partnership
On May 6, 2018 the Company entered into a Strategic Partnership
Agreement with Advantego Corporation of Denver, Colorado, wherein
Adventego will have the rights to promote and distribute
Aftermaster’s proprietary consumer TV audio product,
Aftermaster Pro (patents issued and pending), to thousands of
professional clinics serving people with hearing loss
(audiological) market in North America. Advantego Corporation
designs, develops and implements digital communications and
intelligent software solutions as a specialized Business Process as
a Service (BPaaS). The Aftermaster Pro will be added to a marketing
campaign that Adventego is undertaking with its strategic partners
to promote public awareness about hearing loss and provide support
products to patients and family members visiting up to 15,000+
audiological hearing aid clinics in North America.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
The
Aftermaster Pro is especially coveted by those with hearing loss
for watching TV. Aftermasters new HearClear TV™ product is
aimed specifically at those with hearing loss and it not only
boosts and clarifies TV dialogue but also delivers unparalleled
clarity, depth, fullness and volume throughout the entire frequency
range without any compromises. Unlike other audio post-production
processes, Aftermaster preserves the original intention of an audio
event and brings greater clarity, depth and amplitude to all audio
elements without changing the integrity of the underlying
production.
Muzik Headphones
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 expects its technology to be
implemented in Muzik products in the first quarter of
2018.
Recording 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. When
available, the Company also rents its studios to third party
artists and producers.
The
Company 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
the Crossroads of the World complex. 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 such as Usher and Joe Perry. It is the
largest of the recording studios that Aftermaster operates at its
studio facilities in Hollywood.
www.aftermaster.com/studios
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. The Company
has 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.
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 over a billion dollar from 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
On
April 15, 2017, the Company introduced its Aftermaster Pro personal
TV re-mastering device on national television on the Home Shopping
Network (HSN) during two 15-minute infomercials. The Home Shopping
Network is one of the world’s largest television retailers.
The launch was considered very successful and HSN has subsequently
issued multi purchase orders for thousands more units. New airing
dates began on June 9, 2017, and have been followed by multiple
airings with the latest being in October, 2018. HSN provides a
unique format which providesthe 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. The Company expects that Aftermaster Pro will
continue to be featured on HSN and other television, online and
store based retailers.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
Aftermaster Consumer and Professional Electronics
Products
The
Company has assembled a world-class branding, technical and design
team who have design the Company’s consumer and professional
electronics products. The first consumer electronics product to be
introduced was 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 the
difficulty in hearing dialogue in certain programming.
Smaller
than an iPhone, the Aftermaster Pro transforms the audio of a TV to
sound clearer, fuller, deeper, and more exciting. Aftermaster Pro
connects easily via HDMI cables with virtually any A/V media source
(i.e., cable, satellite box, etc.). Aftermaster Pro raises and
clarifies TV dialogue in programming while significantly enhancing
the quality of the overall audio content. This solves the
longstanding need to continually adjust volume during a TV show to
hear the dialogue.
The Aftermaster Pro is for sale on HSN TV and HSN.com and several
other prominent online retail outlets including Amazon.com,
Walmart.com, Hammacher Schlemmer, as well as through the
Company’s own website,
Aftermasterpro.com.
The
Company has also recently 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 near future.
In addition, the Company also completed the development of a new
portable TV audio remastering product called HearClear TV™,
which is based on its Aftermaster Pro product. HearClear is aimed
at people with hearing loss and will initially be available through
audiological clinics. In addition, the Company also completed the
development of a product called the Aftermaster Superbar™
which is the Company's first soundbar product. The new
Superbar™ will include Aftermasters award winning and
patented Aftermaster audio technology. The Company expects to begin
manufacturing the Superbar™ late this year or in the first
quarter of 2019.
Additional
Aftermaster branded consumer electronics products are under
development, which we expect to introduce in the coming
year.
ON Semiconductor/Aftermaster Audio Chip and
Software
The
Company entered into a 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 called for ON to implement and support our Aftermaster
technology in a Digital Signal Processor (DSP) semiconductor chip
to be 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.
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 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. The service also offers additional features such as
file storage. Based on the enormous addressable market for this
product, we believe that with effective marketing Promaster has the
potential to generate significant revenues for the
Company.
www.promasterhd.com
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, Andrew Wuepper and
Shelly Yakus. See www.Aftermaster.com.
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.
Intellectual Property and Licensing
The Company has been awarded eight patents and multiple 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. The Company has 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 Directors of the Company.
Employees
As of September 30, 2018, we employed ten full-time
employees. We expect to seek additional employees in the next
year to handle anticipated potential growth.
We believe that our relationship with our employees are
good. None of our employees are members of any union,
nor have they entered into any collective bargaining
agreements.
Facilities
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
expired on December 31, 2017 and now is on a month to month basis.
The total lease expense for the facility is approximately
$20,573.50 per month, and the total remaining obligations under
these leases at September 30, 2018, were approximately
$0.
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
$1,993 per month, and the total remaining obligations under this
lease at September 30, 2018, were approximately
$8,720.
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
$7,450 per month, and the total remaining obligations under this
lease at September 30, 2018, were approximately
$180,720.
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
$3,100 per month, and the total remaining obligations under this
lease at September 30, 2018, were approximately
$76,945.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
RESULTS OF OPERATIONS
|
|
|
|
|
|
Revenues
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
Aftermaster
Revenues
|
$
145,413
|
$
120,715
|
Product
Revenues
|
389,109
|
94,681
|
Total
Revenues
|
$
534,522
|
$
215,396
|
We currently generate revenue from our operations through three
activities: Aftermaster Pro consumer electronic product,
Aftermaster recording studios, and mastering services.
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. Product revenues for
the three months ended September 30, 2018, increased to $389,109,
as compared to $94,681 for the comparable the three months ended
September 30, 2017, respectively. The increase in product revenues
are due to the company selling Aftermaster Pro through our website
(www.Aftermasterpro.com) and through consumer retail distribution
channels.
In the aggregate, total Company revenues increased to $534,522 for
the three months ended September 30, 2018, as compared to total
revenues of $215,396 for the three months ended September 30, 2017,
due to the company launching the Aftermaster TV Pro online sales
and recognition of deferred revenues from presales.
Cost of Revenues
|
|
|
|
|
|
|
|
|
Cost
of Revenues (excluding depreciation and amortization)
|
$
417,757
|
$
156,328
|
Cost of sales consists primarily of manufacturing
cost of the Aftermaster Pro TV consumer electronic product,
Aftermaster Studio Rent, Consultants, senior engineers, and
excludes depreciation and amortization on fixed assets. The
increase in cost of sales for the three months ending September 30,
2018, over the comparable quarter, is attributable, primarily, to
an increase in manufacturing cost for the Aftermaster Pro TV. The
company had cost of revenues in the amount of $417,757 for the
three months ending September 30, 2018,
as compared
to $156,328 for the three months
ending September 30, 2017.
Other Operating Expenses
|
|
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
Depreciation
and Amortization Expense
|
$
23,467
|
$
38,969
|
Research
and Development
|
2,600
|
2,194
|
Advertising
and Promotion Expense
|
54,369
|
2,016
|
Legal
and Professional Expense
|
11,030
|
14,190
|
Non-Cash
Consulting Expense
|
65,116
|
76,438
|
General
and Administrative Expenses
|
849,187
|
786,990
|
Total
|
$
1,005,769
|
$
920,797
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
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; rent and facilities; and expenses related to
the issuance of stock compensation. During
the three months ended
September 30, 2018
, General and
administrative expenses increase by $62,197 as compared to
the
three months ended
September 30
, 2017. The
increase is primarily due to the company using a third-party
consulting to help with the business
operations.
During
the
three months ended
September 30, 2018
, Research
and Development costs increased to $2,600 from $2,194, Advertising
and Promotion increased to $54,369 from $2,016, Legal and
Professional fees decreased to $11,030 from $14,190 and consulting
services decreased to $65,116 from $76,438, as compared
t
o
the three months ended September 30, 2017
. The increase is primarily due to the company
using social media advertising to help generate sales. The increase
in Research and Development was not material compared to the
three
months ended September 30, 2017
. The increases in Advertising and Promotion 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. The decrease in consulting expenses are primarily due to
issuing fewer stock for services compared to the
three
months ended September 30, 2017.
Other Expense
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
Interest
Expense
|
$
(806,650
)
|
$
(855,451
)
|
Derivative
Expense
|
(1,043,090
)
|
(137,466
)
|
Change in Fair
Value of Derivative
|
612,212
|
202,820
|
Gain
on Extinguishment of Debt
|
-
|
90,042
|
Total
|
$
(1,237,528
)
|
$
(700,055
)
|
The
other expenses during the quarter ended September 30, 2018,
totaling $1,237,528 of expenses, which consists of interest
expense, derivative expense, change in fair value of derivative.
During the comparable period in 2017, other expenses totaled
$700,055. Interest expense has decreased primarily due to an
decrease in non-cash interest expense relating to amortization of
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.
Gain on extinguishment of debt decreased in the current period due
to there being no notes extinguished in the current
period.
Net Loss
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
Net
Loss
|
$
(2,126,532
)
|
$
(1,561,784
)
|
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” and ASC 505,
Equity
Based Payments to Non-Employees”
,
these non-cash issuances are expensed at the
equity instruments fair market value.
Absent these large
stock-based compensations of $65,116 and $76,438, derivative
expense of $1,043,090 and $137,466, loss on the change in the
derivative liability of $612,212 and $202,820 for the three months
ended September 30, 2018 and 2017, our net loss would have been
$1,630,538 and $1,556,919 for three months ended September 30, 2018
and 2017, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company had revenues of $
534,522
during the three months ended
September 30, 2018 as compared to $
215,396
in the comparable quarter of 2017. The
Company has incurred losses since inception of $78,683,282. At
September 30, 2018, the Company has negative working capital of
$7,990,353, which was a decrease in working capital of $347,206
from June 30, 2018.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
The Company had cash of $135,873 as of September 30, 2018, as
compared to $
390,191
as of June 30, 2018. The decrease is a
result of the company entering into two (2) notes payable resulting
in net proceeds of $125,000, four (4) related notes payable
resulting in net proceeds of $39,000, and five (5) convertible
notes payable resulting in net proceeds of $577,850 compared to ten
(10) Share Purchase Agreements with individual accredited investors
resulting in net proceeds of $168,500, three (3) notes payable
resulting in net proceeds of $175,000, one (1) related notes
payable resulting in net proceeds of $18,000, and ten (10)
convertible notes payable resulting in net proceeds of $438,500 to
the Company in the prior year. This amount was also decreased by
operational costs, payments of obligations from convertible notes,
notes, and lease payables.
The
company had more expenses during the quarter then the funding which
resulted in a decrease in cash. The decrease is related to the
company having less funding during the quarter ending September 30,
2018 as compared to June 30, 2018.
The
Company had prepaid expense of $809,273 as of September 30, 2018,
as compared to $388,374 as of June 30, 2018. The increase is due to
the Company entering into a consulting agreement prepaid with
9,385,000 shares of common stock valued at $366,015 and an advisory
agreement in the form of a $120,000 convertible note payable,
offset by amortizing the prepaid expenses totaling $65,116 over the
three months ended September 30, 2018.
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 September 30, 2018, 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.