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, 2019, 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, 2019
audited financial statements. The results of operations for the period ended September 30, 2019 is 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 $87,724,551, negative working capital of $15,309,891 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.
|
AFTERMASTER,
INC.
|
|
Notes
to Consolidated Financial Statements
|
|
September
30, 2019 (Unaudited)
|
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.
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, including standalone warrants, 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.
Leases
The
Company adopted ASC 842 as of October 1, 2019 using a modified retrospective transition approach for all leases existing at October
1, 2019, the date of the initial application. Consequently, financial information will not be updated, and disclosures required
under ASC 842 will not be provided for dates and periods before October 1, 2019.
As
of October 1, 2019, the Company recognized operating lease liabilities of $154,541 based on the present value of the remaining
minimum rental payments determined under prior lease accounting standards and corresponding ROU assets of $154,541.
The
Company determines if a contract is a lease or contains a lease at inception. Right of use assets related to operating type leases
are reported in other noncurrent assets and the present value of remaining lease obligations is reported in accrued and other
liabilities and other noncurrent liabilities on the Condensed Consolidated Balance Sheets. The Company does not currently have
any financing type leases.
Operating
lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement
date. The Company’s leases do not provide an implicit rate and the Company could not determine the incremental borrowing
rates applicable to the economic environment; therefore, the Company uses the risk free interest rates applicable to the duration
of the lease, based on the information available at commencement date, in determining the present value of future payments. The
right of use asset for operating leases is measured using the lease liability adjusted for the impact of lease payments made prior
to commencement, lease incentives received, initial direct costs incurred and any asset impairments. Lease terms may include options
to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for minimum lease
payments is recognized on a straight-line basis over the lease term.
|
AFTERMASTER,
INC.
|
|
Notes
to Consolidated Financial Statements
|
|
September
30, 2019 (Unaudited)
|
The
Company remeasures and reallocates the consideration in a lease when there is a modification of the lease that is not accounted
for as a separate contract. The lease liability is remeasured when there is a change in the lease term or a change in the assessment
of whether the Company will exercise a lease option. The Company assesses right of use assets for impairment in accordance with
its long-lived asset impairment policy.
The
Company accounts for lease agreements with contractually required lease and non-lease components on a combined basis. Lease payments
made for cancellable leases, variable amounts that are not based on an observable index and lease agreements with an original
duration of less than twelve months are recorded directly to lease expense.
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.
|
AFTERMASTER,
INC.
|
|
Notes
to Consolidated Financial Statements
|
|
September
30, 2019 (Unaudited)
|
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, 2019 and 2018 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, 2019 and 2018, 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 656,776,405 and 129,530,326 at September
30, 2019 and 2018, respectively.
Recent
Accounting Pronouncements
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
June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting. The new ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods
and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific
guidance on inputs to an option pricing model and the attribution of cost. The new ASU will be effective for the Company beginning
in the fiscal quarter of 2020, and early adoption is permitted. The Company is evaluating the effect that the updated standard
will have on its financial statements and related disclosures.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement. The amendment modifies, removes, and adds certain disclosure requirements on fair value
measurements. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after
December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments
should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. We are currently
evaluating the impact of ASU No. 2018-13 on our consolidated financial statements.
|
AFTERMASTER,
INC.
|
|
Notes
to Consolidated Financial Statements
|
|
September
30, 2019 (Unaudited)
|
Management
has considered all recent accounting pronouncements issued since the last audit of our consolidated financial statements. The
Company’s management has evaluated recent pronouncements and have not included those that were note applicable.
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, 2019 and June 30, 2019, respectively:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
$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, matured June 30, 2019. The note is currently in default.
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Various term notes with total face value of $89,500 issued from September 2017 to February 2018, interest rates of 0% and are convertible into shares of the Company’s common stock at $0.10 per share, matured from January 2019 to June 30, 2019. The notes are currently in default.
|
|
|
89,500
|
|
|
|
89,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable – related parties
|
|
|
119,500
|
|
|
|
119,500
|
|
|
Less current portion
|
|
|
119,500
|
|
|
|
119,500
|
|
|
Convertible notes payable – related parties, long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
|
AFTERMASTER,
INC.
|
|
Notes
to Consolidated Financial Statements
|
|
September
30, 2019 (Unaudited)
|
Convertible
Notes Payable - Non-Related Parties
Convertible
notes payable due to non-related parties consisted of the following as of September 30, 2019 and June 30, 2019, respectively:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2019
|
|
|
Various term notes with total face value of $2,049,000, issued from July 2014 to March 2018, interest rates from 0% to 10% and are convertible into shares of the Company’s common stock from $0.10 to $0.40 per share, matured from October 2018 to June 2019. One of the notes and accrued interest was assigned to non-related party notes payable in September 2019. The notes are currently in default.
|
|
$
|
2,029,000
|
|
|
$
|
2,049,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Term notes with total face value of $373,000, issued in February 2017, interest rates of 10% and are convertible into shares of the Company’s common stock at lesser of 40% of the average three lowest closing bids twenty (20) days prior to the conversion date or $0.40 per share, matured June 2018, with additional extension fees of $81,000 added to principal. A total of $187,403 has been converted and $85,654 has been paid. The note is currently in default.
|
|
|
180,943
|
|
|
|
186,597
|
|
|
|
|
|
|
|
|
|
|
|
|
$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 $0.31 or 60% of the lowest closing bids twenty-five (25) days prior to the conversion date, matured February 2018, of which $116,328 was converted. The note is currently in default.
|
|
|
104,845
|
|
|
|
104,845
|
|
|
|
|
|
|
|
|
|
|
|
|
Two term notes with total face value of $131,000 face value, issued on July 2017 and August 2017, interest rates of 12% and are 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, matured May 2018 and June 2018, of which $72,000 was converted. The note is currently in default.
|
|
|
59,000
|
|
|
|
59,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$115,000 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 thirty (30) days prior to the conversion per share, matured August 2018. The note is currently in default.
|
|
|
115,000
|
|
|
|
115,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$115,000 face value, issued in January 2018, interest rate of 10% and is convertible into shares of the Company’s common stock at the lesser of $0.12 and 57.5% of the lowest trading price during the prior thirty (30) days, matured October 2018. The note is currently in default.
|
|
|
115,000
|
|
|
|
115,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$150,000 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 or 57.5% of the lowest closing bids twenty (20) days prior to the conversion date, matured January 2019. The note is currently in default.
|
|
|
160,000
|
|
|
|
160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Two term notes with total face value of $415,000 face value, issued from an assignment in April 2018 of $370,000 in principal and an OID of $45,000, interest rates of 10% and are convertible into shares of the Company’s common stock at rate of 55% of the average trading price for the prior three (3) trading days, matured April 2019, of which $223,198 has been converted. The notes are currently in default.
|
|
|
191,802
|
|
|
|
191,802
|
|
|
|
|
|
|
|
|
|
|
|
|
Various term notes with total face value of $502,504, issued from May 2018 to June 2018, interest rates of 12% and are 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, matured from October 2018 to June 2019, of which $69,898 has been converted and $164,499 has been paid. The note is currently in default.
|
|
|
268,137
|
|
|
|
268,137
|
|
|
|
|
|
|
|
|
|
|
|
|
$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% of the lowest trading price during the previous twenty (20) days to the date of conversion, matured June 30, 2019. The note is currently in default.
|
|
|
15,651
|
|
|
|
15,651
|
|
|
AFTERMASTER,
INC.
|
|
Notes
to Consolidated Financial Statements
|
|
September
30, 2019 (Unaudited)
|
|
$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 twenty (20) days prior to the conversion per share, matures July 2019. The note is currently in default.
|
|
|
120,000
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$39,759 face value, issued from an assignment in August 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 (25) consecutive trading days immediately preceding the conversion date, matured November 2018. The note is currently in default.
|
|
|
39,759
|
|
|
|
39,759
|
|
|
|
|
|
|
|
|
|
|
|
|
$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 three (3) lowest closing price during the 25 days prior to the conversion per share, matures August 2019, net unamortized discount of $0 and $3,214 as of September 30, 2019 and June 30, 2019, respectively.
|
|
|
23,000
|
|
|
|
19,786
|
|
|
|
|
|
|
|
|
|
|
|
|
Various term notes total value of $1,115,646 face value, issued from August 2018 to December 2018, of which $995,500 in principal and an OID of $160,146, interest rates of 10% and are 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 (30) trading day period ending on the latest complete trading day prior to the conversion date, matures from August 2019 to December 2019, net unamortized discount of $69,201 and $273,843 as of September 30, 2019 and June 30, 2019, respectively. One note totaling $575,000 in principal is currently in default.
|
|
|
1,042,695
|
|
|
|
838,053
|
|
|
|
|
|
|
|
|
|
|
|
|
Two term notes total value of $64,850, issued in August 2018, of which $61,850 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 (15) trading days immediately preceding the conversion date, matures August 2019, net unamortized discount of $0 and $6,998 as of September 30, 2019 and June 30, 2019, respectively, of which $26,000 has been paid.
|
|
|
60,300
|
|
|
|
57,852
|
|
|
|
|
|
|
|
|
|
|
|
|
Two term notes total value of $178,000, issued from March 2019 to August 2019, of $160,000 in principal and an OID of $18,000, interest rate of 10% and is convertible into shares of the Company’s common stock at 58% of the lowest trading price for the common stock during the twenty-five (25) trading day period ending on the latest complete trading day prior to the conversion date, matures from March 2020 and August 2020, net unamortized discount of $118,180 and $65,899 as of September 30, 2019 and June 30, 2019, respectively.
|
|
|
59,820
|
|
|
|
23,101
|
|
|
|
|
|
|
|
|
|
|
|
|
Various term notes with total value of $562,500, issued from March 2019 to June 2019, of which $535,500 in principal and an OID of $27,000, interest rates of 12% and are convertible into shares of the Company’s common stock at 58% of the lowest trading price for the common stock during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date, matures from March 2020 and June 2020, net unamortized discount of $367,950 and $509,344 as of September 30, 2019 and June 30, 2019, respectively, of which $100,000 has been paid.
|
|
|
94,550
|
|
|
|
53,156
|
|
|
|
|
|
|
|
|
|
|
|
|
Two term notes with total value of $154,000, issued in April 2019 and June 2019,of which $143,000 in principal and an OID of $11,000, interest rates of 12% and is convertible into shares of the Company’s common stock at 60% of the lowest trading price for the common stock during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date, matures April 2020, net unamortized discount of $95,725 and $134,435 as of September 30, 2019 and June 30, 2019, respectively.
|
|
|
58,275
|
|
|
|
19,565
|
|
|
|
|
|
|
|
|
|
|
|
|
Two term notes total value $71,500, issued from April 2019 to July 2019 of $58,750 in principal and an OID of $12,750, interest rate of 12% and is convertible into shares of the Company’s common stock at the lesser of 55% of the lowest trading price for the common stock during the twenty (20) trading day period ending on the latest complete trading day prior to the issuance date or 55% of the lowest trading price for the common stock during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date, matures from February 2020 to July 2020, net unamortized discount of $43,921 and $30,967 as of September 30, 2019 and June 30, 2019, respectively.
|
|
|
27,579
|
|
|
|
7,533
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable – non-related parties
|
|
|
4,765,356
|
|
|
|
4,443,837
|
|
|
Less current portion
|
|
|
4,765,356
|
|
|
|
4,443,837
|
|
|
Convertible notes payable – non-related parties, long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
|
AFTERMASTER,
INC.
|
|
Notes
to Consolidated Financial Statements
|
|
September
30, 2019 (Unaudited)
|
During
the three months ended September 30, 2019, one
note was amended to extend the maturity dates. The Company evaluated the amendments
under ASC 470-50, “Debt - Modification and Extinguishment”, and concluded that the extension did not result
in significant and consequential changes to the economic substance of the debt and thus resulted in a modification of the debt
and not extinguishment of the debt.
From
July 12, 2019 through August 2, 2019, the Company issued two convertible notes to non-related parties for a total of $122,000,
of which $107,250 in principal and $14,750 in OID, that mature from July 12, 2020 to August 2, 2020. The notes bear between 10%
to 12% interest per annum.
During
the three months ended September 30, 2019, the Company made cash payment of $110,204 toward principal various notes discussed
above and assigned one note for 20,000 in principal and $3,468 in accrued interest into a non-related party note payable.
Notes
Payable – Related Parties
Notes
payable due to related parties consisted of the following as of September 30, 2019 and June 30, 2019, respectively:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
$5,000 face value, issued in November 2016, interest rate of 0%, which is due on demand.
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Various term notes with total face value of $213,000, issued from February 2017 to April 2019, interest rates of 0%, matured June 30, 2019. The notes are currently in default.
|
|
|
213,000
|
|
|
|
213,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$52,000 face value, issued from June 2019 to August 2019, interest rate of 0%, matures June 2020.
|
|
|
52,000
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable – related parties
|
|
|
270,000
|
|
|
|
230,000
|
|
|
Less current portion
|
|
|
270,000
|
|
|
|
230,000
|
|
|
Notes payable – related parties, long term
|
|
$
|
-
|
|
|
$
|
-
|
|
From
July 15, 2019 through August 30, 2019, the Company issued notes to a related party for a total of $40,000 that all mature on June
30, 2020. The notes bear 0% interest per annum. The Company evaluated the notes for imputed interest and found it to be immaterial.
Notes
Payable – Non-Related Parties
Notes
payable due to non-related parties consisted of the following as of September 30, 2019 and June 30, 2019, respectively:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2019
|
|
|
Various term notes with a total face value of $252,250 issued from August 2017 to September 2019, of which $300,000 in principal, $2,750 of extension fees, and an OID of $3,250, interest rate of 0%, matured from December 2018 to October 2019 net of unamortized discount of $1,000 and $992 as of September 30, 2019 and June 30, 2019, respectfully. A total of $41,500 has been paid on principal. All but two notes are currently in default.
|
|
$
|
263,500
|
|
|
$
|
209,758
|
|
|
|
|
|
|
|
|
|
|
|
|
Two term notes with a total face value of $102,000 issued from August 2017 to March 2018, interest rate of 10%, matured from December 2018 through February 2019 net of unamortized discount of $0 as of September 30, 2019 and June 30, 2019. The notes are currently in default.
|
|
|
102,000
|
|
|
|
102,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Two term notes with total face value of $107,000, issued from September 2017 through March 2019, interest rate of 8% per month, matured from September 2018 and April 2019 net of unamortized discount of $0 as of September 30, 2019 and June 30, 2019. One of the notes and accrued interest were assigned in September 2019. The note is currently in default.
|
|
|
26,000
|
|
|
|
107,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$225,000 face value, issued in March 2018, interest rate of 30%, matured March 2019 net of unamortized discount of $0 as of September 30, 2019 and June 30, 2019. The note and accrued interest were assigned in September 2019.
|
|
|
-
|
|
|
|
225,000
|
|
|
AFTERMASTER, INC.
|
|
Notes to Consolidated Financial Statements
|
|
September 30, 2019 (Unaudited)
|
|
$260,000 face value, issued in June 2018, an additional $21,000 was added to principal by the noteholder, interest rate of 0%, matured December 2018 net of unamortized discount of $0 as of September 30, 2019 and June 30, 2019, of which $31,000 has been paid. The note and accrued interest were assigned in September 2019.
|
|
|
-
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$160,000 face value, issued in November 2018, interest rate of 5% per month, matured February 2019 net of unamortized discount of $0 as of September 30, 2019 and June 30, 2019. The note and accrued interest were assigned in September 2019.
|
|
|
-
|
|
|
|
160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Four notes and one convertible note were assigned totaling $900,204 were issued in September 2019, interest rate of 15%, matures April 2020 net of unamortized discount of $0 as of September 30, 2019.
|
|
|
900,204
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total note payable – non-related parties
|
|
|
1,291,704
|
|
|
|
1,053,758
|
|
|
Less current portion
|
|
|
1,291,704
|
|
|
|
1,053,758
|
|
|
Notes payable – non-related parties, long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
During
the three months ended September 30, 2019, two
notes were amended to extend the maturity dates for payments totaling $2,750. The Company
evaluated the amendments under ASC 470-50, “Debt - Modification and Extinguishment”, and concluded that the
extension did not result in significant and consequential changes to the economic substance of the debt and thus resulted in a
modification of the debt and not extinguishment of the debt.
On
September 30, 2019, the Company issued a note to non-related parties for a total of $51,000, of which $50,000 in principal and
$1,000 in OID, that matures October 14, 2019. The notes bear a 0% interest per annum. The Company evaluated the notes for imputed
interest and found it to be immaterial.
During
the three months ended September 30, 2019, the Company assigned five non-related party notes totaling $716,000 in principal and
$160,736 in accrued interest as well as a non-related party convertible note for 20,000 in principal and $3,468 in accrued interest
into a non-related party note payable totaling $900,204.
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:
|
|
|
Shares
|
|
|
Shares
|
|
|
Liquidation
|
|
|
|
|
Allocated
|
|
|
Outstanding
|
|
|
Preference
|
|
|
Series A Convertible Preferred
|
|
|
100,000
|
|
|
|
15,500
|
|
|
$
|
-
|
|
|
Series A-1 Convertible Preferred
|
|
|
3,000,000
|
|
|
|
2,585,000
|
|
|
|
3,663,824
|
|
|
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 H Preferred
|
|
|
5
|
|
|
|
2
|
|
|
|
-
|
|
|
Series P Convertible Preferred
|
|
|
600,000
|
|
|
|
86,640
|
|
|
|
-
|
|
|
Series S Convertible Preferred
|
|
|
50,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Total Preferred Stock
|
|
|
6,325,005
|
|
|
|
3,109,046
|
|
|
$
|
3,698,824
|
|
The
Company’s Series A Convertible Preferred Stock (“Series A Preferred”) is convertible into Common Stock at the
rate of 0.025 per 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, 2019 in shares of the Company’s
Common Stock (at the option of the Company).
Due
to the fact that the Series A-1 Preferred has certain features of debt and is redeemable, the Company analyzed the Series A-1
Preferred in accordance with ASC 480 and ASC 815 to determine if classification within permanent equity was appropriate. Based
on the fact that the redeemable nature of the stock and all cash payments are at the option of the Company, it is assumed that
payments will be made in shares of the Company’s Common Stock and therefore, the instruments are afforded permanent equity
treatment.
The
Company’s Series B Convertible 8% Preferred Stock (“Series B Preferred”) is convertible at the rate of 0.067
per 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.
|
AFTERMASTER,
INC.
|
|
Notes
to Consolidated Financial Statements
|
|
September
30, 2019 (Unaudited)
|
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 H Preferred Stock shall not be convertible into the Corporation’s Common Stock, nor shall such shares
have any liquidation or dividend preference over the Corporation’s Common Stock. Series H Preferred Stock shall have the
right to take action by written consent or vote based on the number of votes equal to four times the number of votes of all outstanding
shares of capital stock of the Corporation such that the holders of outstanding shares of Series H Preferred Stock shall always
constitute eighty percent (80%) of the voting rights of the Corporation.
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 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, 2019, the Company has not issued any shares of Series A-1 Preferred.
During
the year ended June 30, 2019, the Company has not issued any shares of Series A-1 Preferred.
On
February 5, 2019, the Company issued 1 share of its Series H Preferred Stock to both the Company’s CEO and director and
the Company’s Senior Vice President and director in consideration of $50,000 of accrued and unpaid wages, the Company’s
failure to timely pay current and past salaries. The issuance was made in reliance on the exemption from registration provided
by Section 4(a)(2) of the Securities Act as there was no general solicitation, and the transaction did not involve a public offering.
The shares were valued at $198,116 and the remaining $148,116 was recorded as additional compensation. The Company used an outside
valuation firm who applied traditional valuation techniques and methodologies in determining the fair value of the Company’s
Series H Preferred Stock, including market, income, and cost valuation approaches. The valuation firm also utilized commonly accepted
allocation methods in determining the final value of the Company’s Series H Preferred Stock.
During
the three months ended September 30, 2019 and 2018, 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, 2019 were approximately $1,417,468.
|
AFTERMASTER,
INC.
|
|
Notes
to Consolidated Financial Statements
|
|
September
30, 2019 (Unaudited)
|
NOTE 6
– COMMON STOCK
On
February 8, 2019, the Company increased the number of authorized shares of Common Stock from 250,000,000 up to 1,000,000,000
shares in the sole discretion of the board. The Company has authorized 503,407,666 shares of $0.001 par value per share Common
Stock, of which 306,736,038 issued (of which 3,885,000 are to be issued) as of September 30, 2019. The activity surrounding the
issuances of the Common Stock is as follows:
For
the Three Months Ended September 30, 2019
The
Company issued 18,900,000 shares of Common
Stock for $189,000 in cash as part of a private placement. in conjunction with the
private placements, the Company issued 75,600,000 warrants valued at $755,117.
As
share-based compensation to employees and non-employees, the Company issued 8,328,043 shares of common stock valued at $91,608,
based on the market price of the stock on the date of issuance.
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.
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.
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, 2019, the Company did not issue any stock purchase options.
During
the three months ended September 30, 2018, the Company did not issue any stock purchase options, and 25,000 expired.
The
following table summarizes the changes in options outstanding of the Company during the three months ended September 30, 2019.
|
Date Issued
|
|
Number of Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Grant Date Fair Value
|
|
|
Expiration Date
(yrs)
|
|
|
Value if Exercised
|
|
|
Balance June 30, 2019
|
|
|
500,000
|
|
|
$
|
0.05
|
|
|
$
|
0.17
|
|
|
|
3.00
|
|
|
$
|
25,000
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding as of September 30, 2019
|
|
|
500,000
|
|
|
$
|
0.05
|
|
|
$
|
0.16
|
|
|
|
2.75
|
|
|
$
|
25,000
|
|
During
the three months ended September 30, 2019, the Company issued three-year warrants to purchase a total of 100,000
with an exercise price of $0.10 per shares into the Company’s Common Stock, in
conjunction with issuance of a promissory notes, valued at $648. The Company also issue 75,600,000 five-year warrants with
exercise prices of $0.02 and $0.05 per shares into the Company’s Common Stock, in
conjunction with issuance of 17 private placements, valued at $755,117. The warrants are considered derivative liabilities under
ASC 815-40 under the Company’s sequencing policy and were valued using the multinomial lattice model.
|
AFTERMASTER,
INC.
|
|
Notes
to Consolidated Financial Statements
|
|
September
30, 2019 (Unaudited)
|
The
following table presents the assumptions used to estimate the fair values of the stock warrants and options granted:
|
|
|
September 30,
2019
|
|
|
Expected volatility
|
|
|
149-222%
|
|
|
Expected dividends
|
|
|
0%
|
|
|
Expected term
|
|
|
0-5 Years
|
|
|
Risk-free interest rate
|
|
|
1.32-1.97%
|
|
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, 2019.
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Grant Date Fair Value
|
|
|
(yrs)
|
|
|
Value if Exercised
|
|
|
Balance as of June 30, 2019
|
|
|
41,900,718
|
|
|
$
|
0.15
|
|
|
$
|
0.36
|
|
|
|
3.43
|
|
|
$
|
6,308,991
|
|
|
Granted
|
|
|
75,700,000
|
|
|
|
0.04
|
|
|
|
0.01
|
|
|
|
5.00
|
|
|
|
2,656,000
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled/Expired
|
|
|
(1,115,000
|
)
|
|
|
0.36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(403,250
|
)
|
|
Outstanding as of September 30, 2019
|
|
|
116,485,718
|
|
|
$
|
0.07
|
|
|
$
|
0.13
|
|
|
|
4.34
|
|
|
$
|
8,561,741
|
|
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, 2019 and June 30, 2019.
For amounts over proceeds in the initial derivative measurement, the Company recorded a derivative expense of $71,359 and $1,043,090
during the three months ended September 30, 2019 and 2018, respectively. The fair values of the derivative instruments are measured
each quarter, which resulted in a (loss)gain of ($324,692) and $612,212 during the three months ended September 30, 2019 and 2018,
respectively. As of September 30, 2019, and June 30, 2019, the fair market value of the derivatives aggregated $6,267,392 and
$5,009,094, respectively, using the following assumptions: estimated 5-0 year term, estimated volatility of 221.69 – 149.39
%, and a discount rate of 1.97 – 1.32%.
Financial
instruments measured at fair value on a recurring basis at September 30, 2019, are summarized as follows:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Fair value of derivatives
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,267,392
|
|
|
$
|
6,267,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
measured at fair value on a recurring basis at June 30, 2019, are summarized as follows:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Fair value of derivatives
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,009,094
|
|
|
$
|
5,009,094
|
|
|
Series H Preferred Stock
|
|
$
|
-
|
|
|
$
|
198,116
|
|
|
$
|
-
|
|
|
$
|
198,116
|
|
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.
1.
The Company became a defendant in an employment related lawsuit filed by a former employee, who was terminated for cause in October
2018. The Company believes it is without merit and has filed a defense and a Motion to move the matter to Arbitration. The Motion
to move the matter to arbitration was subsequently granted. The complaint revolves around alleged unpaid commissions and the Company
does not consider it to be material.
2.
On May 2019, a Company subsidiary was named in a lawsuit filed in the Superior Court of Arizona County of Maricopa by the Company’s
prior manufacturer, Infinity Power and Controls, LLC. (Infinity), alleging non-payment of invoices totaling $414,000 and an undetermined
amount of parts inventory. On July 5, 2019, the Company was added as a defendant in the action. Infinity was the Company’s
manufacturer until they were dismissed in December 2018, due to quality and reliability issues, which resulted in unacceptable
product returns. On July 2, 2019, the Company commenced an action against Infinity Power and Controls LLC in the United States
District Court Central District of California for Breach of Contract, Negligence and Fraud. The lawsuit asks for direct and punitive
damages of $30 million from Infinity. As a both plaintiff and defendant in matters relating to its prior manufacturer, the Company
believes it sustained substantial damage from the poor-quality product manufactured by Infinity.
3.
A lender for two term notes with total value of $154,000, issued in April 2019 and June 2019, has issued an notice of default
on the conversion of the notes into stock.
|
AFTERMASTER,
INC.
|
|
Notes
to Consolidated Financial Statements
|
|
September
30, 2019 (Unaudited)
|
Lease
Agreements
The
Company has operating type leases for real estate. As of September 30, 2019, the Company had no finance type leases. The Company’s
leases have remaining lease terms of up to 1.58 years, some of which may include options to extend the leases for up to 5 years.
Operating lease expense was $21,021 for the three months ended September 30, 2019, inclusive of period cost for short-term, cancellable
and variable leases, not included in lease liabilities, of $63,054 for the three months ended September 30, 2019.
|
Supplemental cash flow information related to operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
September 30, 2019
|
|
|
Operating cash paid to settle lease liabilities
|
|
$
|
15,351
|
|
|
Right of use asset additions in exchange for lease liabilities
|
|
|
154,541
|
|
|
|
|
|
|
|
|
Supplemental
balance sheet information related to operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
September 30,
|
|
|
|
|
Location
|
|
2019
|
|
|
Right of use assets
|
|
Other noncurrent assets
|
|
$
|
133,520
|
|
|
|
|
|
|
|
|
|
|
Lease payable
|
|
Current liabilities
|
|
$
|
93,121
|
|
|
Lease payable
|
|
Long-term liabilities
|
|
|
46,069
|
|
|
Total lease payable
|
|
|
|
$
|
139,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
Weighted average remaining lease term (in years)
|
|
|
1.58
|
|
|
Weighted average discount rate
|
|
|
12.15
|
%
|
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 $20,574 per month, and the total remaining obligations under
these leases at September 30, 2019, were approximately $0.
We
lease warehouse space located at 8260 E Gelding Drive, Suite 102, Scottsdale, Arizona, 85260. The lease expired on January 31,
2019 and now is on a month to month basis. The total lease expense for the facility is approximately $1,993 per month, and the
total remaining obligations under this lease at September 30, 2019, were approximately $0.
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 $7,799 per month, and the total remaining obligations under this
lease at September 30, 2019, were approximately $171,570.
Below
is a table summarizing the annual operating lease obligations over the next 5 years:
|
Year
|
|
Lease Payments
|
|
|
2020
|
|
$
|
92,558
|
|
|
2021
|
|
|
79,012
|
|
|
2022
|
|
|
-
|
|
|
2023
|
|
|
-
|
|
|
2024
|
|
|
-
|
|
|
Total
|
|
$
|
171,570
|
|
|
AFTERMASTER, INC.
|
|
Notes to Consolidated Financial Statements
|
|
September 30, 2019 (Unaudited)
|
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, 2019 were approximately $1,417,468.
NOTE
11 – RELATED PARTY TRANSACTIONS
On
August 8, 2016, the Company issued a convertible note to a daughter of a director of the Company, for $30,000 as of September
30, 2019 and June 30, 2019. The note bears an interest rate of 0% per annum and is convertible into shares of the Company’s
Common Stock at $0.40 per share.
From
September 2017 to June 2019, the Company issued convertible notes to a director and officer of the Company for $89,500 as of September
30, 2019 and June 30, 2019. The notes bear an average interest rate of 0% per annum and is convertible into shares of the Company’s
Common Stock at $0.10 per share.
On
November 15, 2016, the Company issued notes to a director and officer of the Company, for $5,000. The note bears an average interest
rate of 0% per annum.
From
February 2017 to August 2019, the Company issued notes to a director and officer of the Company for $270,000 and $255,000 as of
September 30, 2019 and June 30, 2019, respectively. The notes bear an average interest rate of 0% per annum.
As
share-based compensation to employees and non-employees, the Company issued 9,328,043 and 2,168,226 shares of common stock valued
at $91,068 and $65,407 for three months ended September 30, 2019 and 2018, respectively, based on the market price of the stock
on the date of issuance.
The
company has accrued consulting services in the amount of $194,890 and $161,124 payable to directors for services rendered as of
September 30, 2019 and June 30, 2019, respectively.
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:
From
October through November 2019, the Company issued 3,500,000
shares of Common Stock for $35,000 in cash as part of a private placement. As part of a private placement the Company also
issued 14,000,000 warrants to purchase shares of Common Stock. As share-based compensation to employees and non-employees, the
Company issued 6,000,000 shares of common stock valued at $60,000, based on the market price of the stock on the date of issuance.
The Company also issued 1,000,000 warrants as part of a 90-day advisory agreement. The Company also paid $5,000 in cash and issued
2,500,000 shares of Common Stock valued at $32,250 for settlement of $22,500 in accrued legal services.
From
October through November 2019, various holders of the unrelated convertible notes converted $54,000 of principal and $3,537 of
accrued interest into 11,083,692 shares of common stock.
On
October 16, 2019, the Company issued a convertible note to an unrelated company for $419,355, which includes proceeds of $356,500
and $62,855 in OID, that matures in October 2020. 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 (30) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. As additional consideration
the Company also issued 2,818,244 warrants.
On
October 15, 2019, the Company issued a note to an unrelated party for $15,125, which includes
proceeds of $14,000 and $1,125 in OID that matures in October 2020. The notes bear 0% interest per annum
From
August 2017 to October 2017, the Company issued three convertible notes to unrelated parties totaling $185,000 that matured in
February 2019. The notes bear interest rates from 0% to 10% per annum and are convertible into shares of the Company’s common
stock for $0.10 per share. From August 2018 to March 2019, the Company issued two notes to an unrelated party totaling $78,000
that matured from February 2019 to April 2019. The notes bear interest rates from 0% to 8% per annum. On October 18, 2019, the
Company assigned a convertible note to an unrelated party for $263,000 face value that that is due March 18, 2020. The note bears
interest rate of 10% per month and is convertible into shares of the Company’s common stock for $0.02 per share.
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.
All
references in this report to “we,” “our,” “us,” the “Company” or “AfterMaster”
refer to AfterMaster, Inc., and its subsidiary and predecessors.
Corporate
Background
We
are a Delaware corporation, incorporated on about May 12, 1988, and traded on an over the counter market (ticker symbol OTCQB:
AFTM). As of September 30, 2019, there were 306,736,038 shares of Common Stock issued and outstanding. The Company’s office and
principal place of business, research, recording and mastering studios are located at 6671 Sunset Blvd., Suite 1520, Hollywood,
CA 90028 USA, and its telephone number is (310) 657-4886. The Company also has an office at 7825 E. Gelding Drive, Suite 101,
Scottsdale, Arizona 85260 USA, and its telephone number is (480) 556-9303.
Aftermaster,
Inc. (“the Company” or “Aftermaster”) is an audio technology company located in Hollywood, California and
Scottsdale, Arizona. The Company’s 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™, HearClearTV, the Superbar™, Aftermaster Studio Pro and MyStudio®. The Company also operates recording and mastering studios at
its Hollywood facilities.
The
name Aftermaster was derived from our technology being primarily utilized to remaster and improve audio that has already been
mastered. The Aftermaster audio process remasters an audio event to our standards, that has previously been finished or mastered,
hence “Aftermaster”. Aftermaster is unique among audio processes as it greatly enhances the entire frequency range
without distortion or changing the underlying intent of the audio. The Aftermaster process is also popular for mastering previously
un-mastered audio such as new recordings or live events.
Aftermaster,
Inc. is an award-winning audio laboratory whose unique expertise and approach to its audio technologies and products, is rooted
in its world class expertise in music related audio engineering, processing and mastering. The music industry has been responsible
for the biggest breakthroughs in audio techniques, inventions and technologies for over a century. Aftermaster’s team of
audio engineers and music industry veterans have produced, engineered and mastered more hit records than any other audio company
in the world, providing it with its leading edge expertise. The Aftermaster team includes well known industry veterans such as
Ari Blitz, Pete Doell, Rodney Jerkins, Larry Ryckman, Justin Timberlake, Andrew Wuepper and Shelly Yakus. For more information
visit. www.Aftermaster.com/team
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.
Summary
The
Company continued to underperform during the quarter ended September 30, 2019, due to the ongoing delay in having
its products available to sell. High return rates and quality and reliability issues with the Company’s Aftermaster
Pro product, led the Company to suspend sales and dismiss its manufacturer in December 2018. The suspension of manufacturing
has put substantial financial strain on the company as it has had no meaningful revenues from product sales since that time. The
Company commenced an action against the manufacturer, Infinity Power and Controls, LLC of Rock Springs, Wyoming for $30
million to recover direct and punitive damages in the United States District Court for the Central District of California.
The Company expects to resume sales sometime in the next two calendar quarters.
Since
suspending production, the Company undertook a complete redesign of its Aftermaster Pro unit and developed two new products, HearClear
TV and the “Superbar” soundbar. The Aftermaster Pro has new features including Bluetooth, optical in/out and a handheld
remote. It’s sister unit “HearClearTV” is designed to significantly improve television audio for those that
are hard of hearing. They all join the Aftermaster Studio Pro which is the Company’s first product aimed primarily at commercial
applications. www.aftermaster.com/products
During
the quarter, in order to address its ongoing financing and manufacturing challenges, the Company entered into a groundbreaking,
multi-year, Financing, Licensing, Manufacturing and Distribution agreement with Ritika Research Labs Pvt. Ltd. of Mumbai India.
Ritika is a private company which has interests in manufacturing, electronics and product distribution and marketing. The agreement
calls for Ritika to finance engineering, product development, manufacturing, inventory and the marketing and distribution of all
Aftermaster’s products worldwide (excluding the US and Canada). The Company will receive tiered royalty payments on worldwide
sales excluding the US and Canadian markets, which are retained by the Company. The agreement is expected to save the Company
significant resources both financially and operationally while raising the quality and reliability of all its products in markets
worldwide. The financing and manufacturing agreement that the Company entered into with Ritika is expected to significantly reduce
the requirement for the financing of product inventory and manufacturing going forward. During the quarter, the Company bundled
several high interest rate notes into one note for $900,204 at 15%, with interest payments deferred until 2020.
Business
and Products
Aftermaster
Consumer and Professional Electronics Products
The
Company has assembled a talented branding, technical and design team who design and develop the Company’s consumer and
professional electronics products. The first consumer electronic 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 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.
Once
the Company receives inventory of its products, Aftermaster Pro is for sale on HSN TV and HSN.com and other
online retail outlets as well as through the Company’s own website, Aftermasterpro.com.
The
Company has also developed 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 www.hearclear.tv.
In addition, the Company also completed the development of a product called the Superbar™ which is the Company’s first
soundbar product. The new Superbar™ will include Aftermaster’s award winning and patented Aftermaster audio technology.
The Company expects to begin manufacturing the Superbar™ late this year.
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
any 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 facilities 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 that they can currently do. The product is expected to be available
for pre-sale in the near future.
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 jointly developed a unique semi-conductor chip with ON Semiconductor (“ON”) of Phoenix, Arizona, to commercialize
its Aftermaster technology through audio semiconductor chips. ON is a multi-billion-dollar, multi-national semiconductor designer
and manufacturer.
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.
In
conjunction with ON, we also completed the development of an Aftermaster software algorithm that is designed to be a standalone
software product. We believe the sound quality from our algorithm provides a superior audio experience relative to other products
on the market.
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. We hope to generate significant
revenues through the sale of the ON/Aftermaster chips and software licensing.
Promaster
On-line Music Mastering
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.
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
TuneCore
Aftermaster offers both world-class, professional hands-on mastering services and instant online mastering
through its Promaster brand for music, TV and film 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 both professional hands-on mastering services and on-line instant mastering services through
its Promaster on-line to TuneCore’s customers.
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.
Muzik
Headphones
The
Company is party to 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 one of the worlds most advanced wireless headphones. 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 one of
the most important new headphone designer and manufacturer. The Company expects its technology to be implemented in Muzik products
in the future.
Recording
Studios
The Company operates 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 the Company’s 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 prominent musicians. It is the largest of the six recording studios that Aftermaster operates at its studio
facilities in Hollywood. www.aftermaster.com/studios
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 name Aftermaster was derived by
our technology being primarily utilized to remaster and improve audio that has already been mastered. The Aftermaster audio
process pulls an audio event apart that has previously been finished or mastered and then remasters it to our standards, hence
“Aftermaster”. Aftermaster is unique among audio processes as it enhances the entire frequency range without
distortion or changing the underlying intent of the audio. The Aftermaster process is also popular for mastering previously
un-mastered audio such as new recordings or live events.
Our
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 also 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, 2019, we employed nine 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 $20,574 per month, and the total remaining obligations under
these leases at September 30, 2019, were approximately $0.
We
lease warehouse space located at 8260 E Gelding Drive, Suite 102, Scottsdale, Arizona, 85260. The lease expired on January 31,
2019 and now is on a month to month basis. The total lease expense for the facility is approximately $1,993 per month, and the
total remaining obligations under this lease at September 30, 2019, were approximately $0.
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 $7,799 per month, and the total remaining obligations under this
lease at September 30, 2019, were approximately $171,570.
RESULTS
OF OPERATIONS
Revenues
|
|
|
For the Three Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
AfterMaster Revenues
|
|
$
|
131,880
|
|
|
$
|
145,413
|
|
|
Product Revenues
|
|
|
8,389
|
|
|
|
389,109
|
|
|
Total Revenues
|
|
$
|
140,269
|
|
|
$
|
534,522
|
|
We
currently generate revenue from our operations through two activities: AfterMaster revenues and AfterMaster product revenues.
AfterMaster
revenues are generated primarily from AfterMaster audio services provided to producers and artists on a contract basis. We hope
this source of revenue grows in coming years, and the Company is expecting to generate additional revenues in this category from
on-line mastering downloads and the development of the AfterMaster software algorithm and chip, although such growth and additional
revenues are not assured and may not occur. Product revenues for the three months ended September 30, 2019, decreased to
$8,389, as compared to $389,109 for the comparable the three months ended September 30, 2018, respectively. The decrease in product
revenues are due to the company selling fewer Aftermaster Pro through our website (www.Aftermasterpro.com) and through consumer
retail distribution channels.
In
the aggregate, total Company revenues decreased to $140,269 for the three months ended September 30, 2018, as compared to total
revenues of $534,522 for the three months ended September 30, 2018, the decrease is due to the company acquiring new overseas
manufacturer and the redesign of the Aftermaster Pro in order to lower the cost of goods sold.
Cost
of Revenues
|
|
|
For the Three Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Cost of Revenues (excluding depreciation and amortization)
|
|
$
|
114,066
|
|
|
$
|
417,757
|
|
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 decrease in cost of sales for the
three months ending September 30, 2019, over the comparable quarter, is attributable, primarily, to the decrease in product revenue
therefore the company had lower manufacturing cost of the Aftermaster Pro. The company had cost of revenues in the amount of $114,066
for the three months ending September 30, 2019, as compared to $417,757
for the three months ending September 30, 2018.
Other
Operating Expenses
|
|
|
For the Three Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Depreciation and Amortization Expense
|
|
$
|
8,416
|
|
|
$
|
23,467
|
|
|
Research and Development
|
|
|
-
|
|
|
|
2,600
|
|
|
Advertising and Promotion Expense
|
|
|
1,997
|
|
|
|
54,369
|
|
|
Legal and Professional Expense
|
|
|
43,154
|
|
|
|
11,030
|
|
|
Non-Cash Consulting Expense
|
|
|
25,387
|
|
|
|
65,116
|
|
|
General and Administrative Expenses
|
|
|
725,886
|
|
|
|
849,187
|
|
|
Total
|
|
$
|
804,840
|
|
|
$
|
1,005,769
|
|
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, 2019, General
and administrative expenses decrease by $123,301 as compared to the three months ended
September 30, 2018. The decrease is primarily due to the company using a third-party consultant to help with the business
operations in the prior period, which did not occur in the current period.
During the three
months ended September 30, 2019, Research and Development costs decreased to $0 from $2,600, Advertising and Promotion
decreased to $1,997 from $54,369, Legal and Professional fees increased to $43,154 from $11,030 and consulting services decreased
to $25,387 from $65,116, as compared to the three months ended September 30, 2018. The decrease is primarily due to the company
using social media advertising to help generate sales. The decrease in Research and Development was not material compared to the
three months ended September 30, 2018. The decreases in Advertising and Promotion for the three months ended September 30, 2019,
are primarily due to the design, development and marketing of its Aftermaster Pro consumer hardware product in the three months
ended September 30, 2018. Legal and Professional fees increases are primarily to the company only using one attorney on a monthly
retainer to handle all the company’s legal needs in the prior period compared to five in the three months ended September
30, 2019. The decreases in consulting expenses are primarily due to issuing fewer stock for services compared to the three months
ended September 30, 2018.
Other
Expense
|
|
|
For the Three Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Interest Expense
|
|
$
|
(690,374
|
)
|
|
$
|
(806,650
|
)
|
|
Derivative Expense
|
|
|
(71,359
|
)
|
|
|
(1,043,090
|
)
|
|
Change in Fair Value of Derivative
|
|
|
(324,692
|
)
|
|
|
612,212
|
|
|
Total
|
|
$
|
(1,086,425
|
)
|
|
$
|
(1,237,528
|
)
|
The
other expenses during the quarter ended September 30, 2019, totaling $1,086,425 of expenses, which consists of interest expense,
derivative expense, change in fair value of derivative. During the comparable period in 2018, other expenses totaled $1,237,528.
Interest expense has decreased primarily due to a 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.
Net
Loss
|
|
|
For the Three Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Net Loss
|
|
$
|
(1,865,062
|
)
|
|
$
|
(2,126,532
|
)
|
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 compensation of $25,387 and $65,116,
derivative expense of $71,359 and $1,043,090, gain (loss) on the change in the derivative liability of $(324,692) and $612,212
for the three months ended September 30, 2019 and 2018, our net loss would have been $1,443,624 and $1,630,538 for three
months ended September 30, 2019 and 2018, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company had revenues of $140,269 during the three months ended September 30,
2019 as compared to $534,522 in the comparable quarter of 2018. The Company has incurred
losses since inception of $87,724,551. At September 30, 2019, the Company has negative working capital of $15,309,891, which was
a decrease in working capital of $2,418,487 from June 30, 2019.
The
Company had cash of $64,093 as of September 30, 2019, as compared to $366,129 as
of June 30, 2019. The decrease is a result of the Company making payments on convertible notes payable totaling $110,204, which
was partially offset by the Company entered into seventeen (17) Share Purchase Agreements with individual accredited investors
resulting in net proceeds of $189,000, one (1) note payable resulting in net proceeds of $50,000, three (3) related notes payable
resulting in net proceeds of $40,000, and two (2) convertible notes payable resulting in net proceeds of $107,250 during the three
months ended September 30, 2019. The cash provided by financing activities decreased by $329,045 during the three
months ended September 30, 2019 as compared to the three months ended September 30,
2018. 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 than 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, 2019 as compared to June 30,
2019.
The
Company had prepaid expense of $285,909 as of September 30, 2019, as compared to $311,296 as of June 30, 2019. The decrease is
due to the Company amortizing the prepaid expenses totaling $25,387 over the three months ended September 30, 2019.
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, 2019, 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.