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EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - AFTERMASTER, INC.exhibit_32-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934, RULES 13A-14 AND 15D-14, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - AFTERMASTER, INC.exhibit_31-2.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934, RULES 13A-14 AND 15D-14, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - AFTERMASTER, INC.exhibit_31-1.htm


 
U.S. SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2016
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to __________
  
Commission file number 001-10196
AFTERMASTER, INC.

(Exact name of Registrant as specified in its charter)
 
  DELAWARE
  23-2517953
  (State or other jurisdiction of incorporation or organization)
  (IRS Employer Identification No.)
 
6671 Sunset Blvd., Suite 1520
Hollywood, CA 90028

(Address of principal executive offices) (Zip Code)
 
(310) 657-4886

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

x Yes    o No
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). 

x Yes    o No   (Not required)

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

o Yes    x No
 
At May 16, 2016, the number of shares outstanding of Common Stock, $0.001 par value, was 101,137,212 shares.
 


 
 
 
1

 

 
AFTERMASTER, INC.
 
     
 
  INDEX
 
 
PART I - FINANCIAL INFORMATION
 
   
 PAGE NUMBER
Item 1.
Financial Statements
3
     
 
Condensed Consolidated Balance Sheets – March 31, 2016 (unaudited) and June 30, 2015
3
     
 
Condensed Consolidated Statements of Operations - For the three months ended March 31, 2016 and 2015 (unaudited)
4
     
 
Condensed Consolidated Statements of Cash Flows - For the three months ended March 31, 2016 and 2015 (unaudited)
5
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
     
Item 3.
Quantitative and Qualitative Disclosure About Market Risks
26
     
Item 4T.
Controls and Procedures
27
 
 
 
PART II - OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
27
     
Item 1A.
Risk Factors
27
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
     
Item 3.
Defaults Upon Senior Securities
27
     
Item 4.
Submission of Matters to a Vote of Security Holders
27
     
Item 5.
Other Information
27
     
Item 6.
Exhibits
28
     
 
SIGNATURES
29



 
2

 
 
PART I - FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS.
 
AFTERMASTER, INC.
 
Consolidated Balance Sheets
 
             
 
March 31,
   
June 30,
 
 
2016
   
2015
 
 
(Unaudited)
       
ASSETS
 
             
Current Assets
           
Cash
  $ 547,134     $ 2,185,702  
Accounts receivable
    8,965       4,500  
Available for sale securities
    48,000       -  
Note receivable, net
    10,000       -  
Prepaid expenses
    1,881,995       3,319,258  
                 
Total Current Assets
    2,496,094       5,509,460  
                 
Property and equipment, net
    131,018       169,954  
                 
Intangible assets, net
    71,281       22,853  
                 
Note receivable
    -       10,000  
Deposits
    17,661       13,675  
Prepaid expenses, net of current
    20,492       1,092,038  
                 
Total Assets
  $ 2,736,546     $ 6,817,980  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
                 
Current Liabilities
               
Accounts payable and other accrued expenses
  $ 273,058     $ 344,451  
Accrued interest
    79,101       93,762  
Deferred revenue
    430,566       2,500  
Accrued consulting services - related party
    -       82,267  
Lease payable
    8,716       36,426  
Derivative Liability
    -       12,814,941  
Notes payable - related party
    625,000       625,000  
Notes payable
    40,488       40,488  
Convertible notes payable - related party
    3,925,000       3,925,000  
Convertible notes payable, net of discount of $58,104 and $0, respectively
    1,003,896       572,400  
                 
Total Current Liabilities
    6,385,825       18,537,235  
                 
                 
Total Liabilities
    6,385,825       18,537,235  
                 
Stockholders' Deficit
               
Convertible preferred stock, Series A; $0.001 par value; 100,000 shares authorized, 15,500 shares issued and outstanding
    16       16  
Convertible preferred stock, Series A-1; $0.001 par value; 3,000,000 shares authorized,1,510,000 and 616,000 shares issued and outstanding, respectively
    1510       616  
Convertible preferred stock, Series B; $0.001 par value; 200,000 shares authorized, 3,500 shares issued and outstanding
    3       3  
Convertible preferred stock, Series C; $0.001 par value; 1,000,000 shares authorized, 13,404 shares issued and outstanding
    13       13  
Convertible preferred stock, Series D; $0.001 par value; 375,000 shares authorized, 130,000 shares issued and outstanding
    130       130  
Convertible preferred stock, Series E; $0.001 par value; 1,000,000 shares authorized, 275,000 shares issued and outstanding
    275       275  
Convertible preferred stock, Series P; $0.001 par value; 600,000 shares authorized, 86,640 shares issued and outstanding
    87       87  
Convertible preferred stock, Series S; $0.001 par value; 50,000 shares authorized, -0- shares issued and outstanding
    -       -  
Common stock, authorized 250,000,000 shares,
               
par value $0.001; 101,082,637 and 95,280,257 shares issued
               
and outstanding, respectively
    101,090       95,287  
Subscription payable
    -       35,000  
Additional paid In capital
    57,737,305       46,314,765  
Accumulated other comprehensive income
    18,000       -  
Accumulated Deficit
    (61,507,708 )     (58,165,447 )
                 
Total Stockholders' Deficit
    (3,649,279 )     (11,719,255 )
                 
Total Liabilities and Stockholders' Deficit
  $ 2,736,546     $ 6,817,980  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
3

 
 
AFTERMASTER, INC.
 
Consolidated Statements of Operations
 
(Unaudited)
 
                         
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2016
   
2015
   
2016
   
2015
 
                         
REVENUES
                       
MyStudio Session Revenues
  $ -     $ 5,300     $ -     $ 9,030  
AfterMaster Revenues
   
19,320
      18,680      
75,254
      70,925  
Licensing Revenues
    -       -       1,800,000       200,000  
Total Revenues
    19,320       23,980       1,875,254       279,955  
                                 
COSTS AND EXPENSES
                               
Cost of Revenues (Exclusive of Depreciation and Amortization)
    115,345       70,872       317,428       238,493  
Depreciation and Amortization Expense
    18,927       9,809       53,928       53,702  
Research and Development
    177,315       23,789       331,681       28,052  
Advertising and Promotion Expense
    125,597       200       269,982       1,389  
Legal and Professional Expense
    85,390       62,390       342,803       87,522  
Warrant and Stock issued for services
    886,874       51,399       3,074,385       1,359,174  
General and Administrative Expenses
    841,976       855,006       2,869,063       2,018,239  
                                 
Total Costs and Expenses
    2,251,424       1,073,465       7,259,270       3,786,571  
                                 
Loss from Operations
    (2,232,104 )     (1,049,485 )     (5,384,016 )     (3,506,616 )
                                 
Other Expense
                               
Interest Expense
    (275,449 )     (252,341 )     (706,174 )     (2,342,338 )
Derivative Expense
    -       -       -       (126,126 )
Change in Fair Value of Derivative
    -       200,190       4,374,585       (552,948 )
Loss on Available for Sale Securities
    -       -       (1,770,000 )     -  
Gain (Loss) on Extinguishment of Debt
    -       -       143,344       (28,517 )
                                 
Total Other Expense
    (275,449 )     (52,151 )     2,041,755       (3,049,929 )
                                 
Loss Before Income Taxes
    (2,507,553 )     (1,101,636 )     (3,342,261 )     (6,556,545 )
Income Tax Expense
    -       -       -       -  
NET LOSS
  $ (2,507,553 )   $ (1,101,636 )   $ (3,342,261 )   $ (6,556,545 )
                                 
Preferred Stock Accretion and Dividends
    (27,565 )     (15,880 )     (67,712 )     (48,777 )
                                 
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
  $ (2,535,118 )   $ (1,117,516 )   $ (3,409,973 )   $ (6,605,322 )
                                 
Basic and diluted Loss Per Share of Common Stock
  $ (0.03 )   $ (0.01 )   $ (0.03 )   $ (0.08 )
                                 
Weighted Average Number of Shares Outstanding-Basic & Diluted
    99,896,132       86,878,895       97,988,045       81,235,026  
                                 
Other Comprehensive Income, net of tax
                               
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
    (2,535,118 )     (1,117,516 )     (3,409,973 )     (6,605,322 )
Unrealized gain on AFS Securities
    18,000       -       18,000       -  
COMPREHENSIVE LOSS
  $ (2,517,118 )   $ (1,117,516 )   $ (3,391,973 )   $ (6,605,322 )
                                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
4

 
 
AFTERMASTER, INC.
 
Consolidated Statements of Cash Flows
 
(Unaudited)
 
             
   
For the Nine Months Ended
 
   
March 31,
 
   
2016
   
2015
 
             
OPERATING ACTIVITIES
           
             
Net Loss
  $ (3,342,261 )   $ (6,556,545 )
Adjustments to reconcile net loss to cash from operating activities:
               
Depreciation and amortization
    53,928       53,702  
Share-based compensation - Common Stock
    277,012       720,333  
Share-based compensation - warrants
    525,803       1,329,791  
Common stock issued for services and rent
    225,413       146,017  
Common stock issued as incentive with Convertible debt
    -       10,261  
Common stock issued for preferred dividends
    11,981       8,613  
Common stock issued to extend the maturity dates on debt
    -       15,750  
Closing fees
    15,000       -  
Amortization of debt discount and issuance costs
    75,416       659,803  
(Gain)/Loss on extinguishment of debt
    (143,344 )     28,517  
Derivative expense
    -       126,126  
Gain (loss) remeasurement of derivative
    (4,374,585 )     552,948  
Licensing Revenue from the issuance of AFS Securities
    (1,800,000 )     -  
Changes in Operating Assets and Liabilities:
               
Accounts receivable, net
    (4,465 )     (49,858 )
Loss on Available for Sale Securities
    1,770,000       -  
Other assets
    2,508,809       (30,300 )
Deposits
    (3,986 )     (17,750 )
Accounts payable and accrued  expenses
    586,082       1,200,217  
Accrued interest
    8,456       45,421  
Deferred revenue
    428,066       2,500  
Accrued consulting services - related party
    (82,267 )     (196,300 )
                 
 
    (3,264,942 )     (1,950,754 )
                 
INVESTING ACTIVITIES
               
                 
Purchase of property and equipment
    (63,420 )     (94,686 )
                 
Net Cash Used in Investing Activities
    (63,420 )     (94,686 )
                 
FINANCING ACTIVITIES
               
                 
Common Stock issued for exercise of warrants
    155,915       -  
Common Stock issued for cash, net of offering costs of $0 and $20,125, respectively
    -       1,876,025  
A-1 Preferred Stock issued for cash, net of offering costs of $209,910 and $0, respectively
    734,089       50,000  
Proceeds from convertible notes payable
    845,000       527,000  
Repayments of convertible notes payable
    (17,500 )     (9,000 )
Repayments of notes payable
    -       (35,000 )
Lease Payable
    (27,710 )     (38,984 )
Net Cash Provided by Financing Activities
    1,689,794       2,370,041  
                 
NET INCREASE IN CASH
    (1,638,568 )    
324,601
 
CASH AT BEGINNING OF PERIOD
    2,185,702       77,876  
                 
CASH AT END OF PERIOD
  $ 547,134     $
402,477
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
                 
CASH PAID FOR:
               
Interest
  $ -     $ 918  
                 
NON CASH FINANCING ACTIVITIES:
               
Conversion of notes and Interest into common stock
  $ 990,147       1,922,230  
Conversion of warrants for common stock
  $ -     $ 10,000  
Conversion of preferred stock for common stock
  $ 50     $ 100  
Common Stock and warrants issued for interest
  $ -     $ 527,000  
Derivative Liability
  $ 8,440,357     $
1,532,627
 
Beneficial conversion feature
  $
23,236
    $ -  
Original Issue Discount
  $ 100,000     $ -  
Initial Derivative Liability
  $ -     $ -  
Conversion of Derivative Liability
  $ -     $ -  
MTM on AFS securities
  $ (18,000 )   $ -  
Common Stock issued as incentive with convertible debt
  $ 10,284     $ -  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 

 
5

 
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
June 30, 2015 and March 31, 2016

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 March 31, 2016, 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, 2015 audited financial statements.  The results of operations for the periods ended March 31, 2016 and 2015 are not necessarily indicative of the operating results for the full years.

NOTE 2 – GOING CONCERN

The Company's financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has an accumulated deficit of $61,507,708, negative working capital of $3,937,731, 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 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) placing in service additional studios (d) more widely commercializing the AfterMaster and ProMaster products, and (e) identifying and executing on additional revenue generating opportunities.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates are made in relation to the allowance for doubtful accounts and the fair value of certain financial instruments.  

Principles of Consolidation
The consolidated financial statements include the accounts of AfterMaster, Inc. and its subsidiaries. All significant inter-Company accounts and transactions have been eliminated.

Investments
Investment securities consist of readily marketable equity securities. Unrealized gains or losses on securities classified as available-for-sale are generally recorded in shareholders’ equity. If an available-for-sale security is other than temporarily impaired, the loss is charged to either earnings or shareholders’ equity depending on our intent and ability to retain the security until we recover the full cost basis and the extent of the loss attributable to the creditworthiness of the issuer. Investments in certain companies over which we exert significant influence, but do not control the financial and operating decisions, are accounted for as equity method investments.

Notes and Other Receivables
Notes and other receivables are stated at amounts management expects to collect. An allowance for doubtful accounts is provided for uncollectible receivables based upon management's evaluation of outstanding accounts receivable at each reporting period considering historical experience and customer credit quality and delinquency status. Delinquency status is determined by contractual terms. Bad debts are written off against the allowance when identified.
 
Fair Value Instruments
Cash is the Company’s only financial asset or liability required to be recognized at fair value and is measured using quoted prices for active markets for identical assets (Level 1 fair value hierarchy).  The carrying amounts reported in the balance sheets for notes receivable and accounts payable and accrued expenses approximate their fair market value based on the short-term maturity of these instruments.

 
6

 
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
June 30, 2015 and March 31, 2016

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
The fair value of the Company’s notes payable at March 31, 2016 is approximately $5,594,384.  Market prices are not available for the Company’s loans due to related parties or its other notes payable, nor are market prices of similar loans available.  The Company determined that the fair value of the notes payable based on its amortized cost basis due to the short term nature and current borrowing terms available to the Company for these instruments.
 
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses.
 
Derivative Liabilities
The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Company’s balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. The Company has a sequencing policy regarding share settlement wherein instruments with the earliest issuance date would be settled first. The sequencing policy also considers contingently issuable additional shares, such as those issuable upon a stock split, to have an issuance date to coincide with the event giving rise to the additional shares.

Using this sequencing policy, all instruments convertible into common stock, including warrants and the conversion feature of notes payable, issued subsequent to August 14, 2014 are derivative liabilities.

The Company values these convertible notes payable using the multinomial lattice method that values the derivative liability within the notes based on a probability weighted discounted cash flow model. The resulting liability is valued at each reporting date and the change in the liability is reflected as change in derivative liability in the statement of operations.

Income Taxes
There is no income tax provision for the six months ended March 31, 216 and 2015 due to net operating losses for which there is no benefit currently available.
 
At March 31, 2016, the Company had deferred tax assets associated with state and federal net operating losses. The Company has recorded a corresponding full valuation allowance as it is more likely than not that some portion of all of the deferred tax assets will not be realized.
 
Revenue Recognition
The Company applies the provisions of FASB ASC 605, “Revenue Recognition in Financial Statements,” which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. ASC 605 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue related to goods and services provided when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.
 
The Company's revenues are generated from AfterMaster products and services, and licensing fees.  ProMaster HD generates revenues through online music mastering, streaming, and storage service designed for independent artists which utilizes proprietary audio technologies developed by AfterMaster.  Revenues related to licensing fees generated per a term sheet with bBooth are recorded when payment is received as there is no current executed agreement in place and the term of use is indefinite, pursuant to which bBooth agreed to acquire exclusive rights to license certain technologies, intellectual property, and patents from AfterMaster.
 
 
 
7

 
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
June 30, 2015 and March 31, 2016

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
Loss Per Share
Basic earnings (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 nine months ended March 31, 2016 and 2015 of $67,712 and $48,777, respectively.

Diluted earnings per Common Share is computed by dividing income (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 nine months ended March 31, 2016 and 2015, 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 24,274,055 and 21,174,420 at March 31, 2016 and 2015, respectively.
 
Recent Accounting Pronouncements
Management has considered all recent accounting pronouncements issued since the last audit of our consolidated financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s consolidated financial statements.

NOTE 4 – SECURITIES AVAILABLE-FOR-SALE

On November 10, 2014, the Company received 600,000 shares of b Booth stock as part of an Asset License agreement with b Booth. The following table presents the amortized cost, gross unrealized gains, gross unrealized losses, and fair market value of available-for-sale equity securities, nearly all of which are attributable to the Company's investment in b Booth stock, as follows:
 
 
March 31, 2016
 
Amortized
 
Gross unrealized gains
 
Gross unrealized losses
 
Gross realized gains
 
Gross realized losses
 
Fair
cost
 
value
   
Equity securities
$
1,800,000
 
$
         18,000
 
$
           -
 
$
                     -
 
$
      (1,770,000)
 
$
48,000
                       
 
June 30, 2015
 
Amortized
 
Gross unrealized gains
 
Gross unrealized losses
 
Gross realized gains
 
Gross realized losses
 
Fair
cost
 
value
   
Equity securities
$
                      -
 
$
                      -
 
$
                      -
 
$
                      -
 
$
                      -
 
$
               -
                                   
 
 
 
 

 
8

 
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
June 30, 2015 and March 31, 2016
 
NOTE 5 – NOTES PAYABLE

Convertible Notes Payable
In accounting for its convertible notes payable, proceeds from the sale of a convertible debt instrument with Common Stock purchase warrants are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portions of the proceeds allocated to the warrants are accounted for as paid-in capital with an offset to debt discount. The remainder of the proceeds are allocated to the debt instrument portion of the transaction as prescribed by ASC 470-25-20.  The Company then calculates the effective conversion price of the note based on the relative fair value allocated to the debt instrument to determine the fair value of any beneficial conversion feature (“BCF”) associated with the convertible note in accordance with ASC 470-20-30.  The BCF is recorded to additional paid-in capital with an offset to debt discount.  Both the debt discount related to the issuance of warrants and related to a BCF is amortized over the life of the note.
 
Convertible Notes Payable – Related Parties
Convertible notes payable due to related parties consisted of the following as of March 31, 2016 and June 30, 2015, respectively:
 
 
March 31,
 
June 30,
 
 
2016
 
2015
 
         
Various term notes with total face value of $3,925,000 issued from February 2010 to April 2013, interest rates range from 10% to 15%, net of unamortized discount of $0 as of March 31, 2016 and June 30, 2015.
  $ 3,925,000     $ 3,925,000  
Total convertible notes payable – related parties
    3,925,000       3,925,000  
Less current portion
    3,925,000       3,925,000  
Convertible notes payable – related parties, long-term
  $ -     $ -  
 
The notes were amended on February 15, 2016 to March 16, 2016. The Company evaluated amendment under ASC 470-50, “Debt - Modification and Extinguishment”, and concluded that the extension did not result in significant and consequential changes to the economic substance of the debt and thus resulted in a modification of the debt and not extinguishment of the debt.

Convertible Notes Payable - Non-Related Parties
Convertible notes payable due to non-related parties consisted of the following as of March 31, 2016 and June 30, 2015, respectively:
 
   
March 31,
   
June 30,
 
   
2016
   
2015
 
$15,000 face value, issued in October 2011, interest rate of 10%, matures in June 2012, net of unamortized discount of $0 and $0 as of March 31, 2016 and June 30, 2015, respectively.
  $ 15,000     $ 15,000  
$50,000 face value, issued in August 2012, interest rate of 10%, matures in February 2013, net of unamortized discount of $0 and $0 as of March 31, 2016 and June 30, 2015, respectively.
    50,000       50,000  
$10,000 face value, issued in September 2012, interest rate of 10%, matures in March 2013, net of unamortized discount of $0 and $0 as of March 31, 2016 and June 30, 2015, respectively.
    10,000       10,000  
$50,000 face value of which $17,500 was paid, $9,600 was converted, and $22,900 was forgiven.
    -       40,400  
$30,000 face value of which $30,000 was forgiven.
    -       30,000  
$20,000 face value of which $20,000 was forgiven.
    -       20,000  
$30,000 face value of which $30,000 was converted.
    -       30,000  
$15,000 face value of which $15,000 was converted.
    -       15,000  
$20,000 face value, issued in June 2014, interest rate of 6%, matures December 2014, net unamortized discount of $0 and $0 as of March 31, 2016 and June 30, 2015, respectively.
    20,000       20,000  
$20,000 face value of which $20,000 was converted.
    -       20,000  
$25,000 face value of which $25,000 was converted.
    -       25,000  
$10,000 face value of which $10,000 was converted.
    -       10,000  

 
9

 
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
June 30, 2015 and March 31, 2016

NOTE 5 – NOTES PAYABLE - continued
 
$7,000 face value, issued in July 2014, interest rate of 6%, matures October 2014, net unamortized discount of $0 and $0 as of March 31, 2016 and June 30, 2015, respectively.
   
7,000
   
7,000
$5,000 face value of which $5,000 was converted.
   
                -
   
5,000
$100,000 face value of which $100,000 was converted.
   
                   -
   
100,000
$100,000 face value of which $100,000 was converted.
   
                   -
   
100,000
$40,000 face value of which $40,000 was converted.
   
                -
   
40,000
$35,000 face value of which $35,000 was converted.
   
                   -
   
35,000
$100,000 face value, issued in October 2015, interest rate of 6%, matures February 2016.
   
          100,000
   
                   -
$600,000 face value, issued in November 2015, interest rate of 0%, an OID of $100,000, matures May 2016, net unamortized discount of $27,473 of March 31, 2016.
   
          572,527
   
                   -
$100,000 face value, issued in February 2016, interest rate of 10%, matures February 2017, net unamortized discount of $4,177 of March 31, 2016.
   
            95,823
   
                   -
$15,000 face value, issued in February 2016, interest rate of 10%, matures February 2017, net unamortized discount of $640 of March 31, 2016.
   
            14,360
   
                   -
$25,000 face value, issued in February 2016, interest rate of 10%, matures February 2017, net unamortized discount of $4,681 of March 31, 2016.
   
            20,319
   
                   -
$10,000 face value, issued in February 2016, interest rate of 10%, matures February 2017, net unamortized discount of $1,913 of March 31, 2016.
   
              8,087
   
                   -
$100,000 face value, issued in March 2016, interest rate of 10%, matures March 2017, net unamortized discount of $18,775 of March 31, 2016.
   
            81,225
   
                   -
$10,000 face value, issued in March 2016, interest rate of 10%, matures March 2017, net unamortized discount of $445 of March 31, 2016.
   
              9,555
   
                   -
Total convertible notes payable – non-related parties
   
1,003,896
   
572,400
Less current portion
   
       1,003,896
   
572,400
Convertible notes payable – non-related parties, long-term
 
$
                   -
 
$
                   -
 
On November 20, 2015, the Company issued a convertible note to an unrelated company for $600,000 that matures on May 20, 2016. The note bears 0% interest and had an original issue discount (OID) of $100,000. This note is not convertible unless there is a default event, so no BCF was valued. As of March 31, 2016 the balance of unamortized OID was $27,473.

On February 15, 2016, the Company issued a convertible note to an unrelated individual for $100,000 that matures on February 15, 2017. The note bears interest rate of 10% per annum and is convertible into shares of the Company’s Common stock at $0.50 per share. The Company valued a debt discount related to the 10,000 shares of common stock issued with the note at a relative fair value of $3,475.

On February 15, 2016, the Company issued a convertible note to an unrelated individual for $25,000 that matures on February 15, 2017. The note bears interest rate of 10% per annum and is convertible into shares of the Company’s Common stock at $0.40 per share. The Company valued a debt discount related to the 2,500 shares of common stock issued with the  note at a relative fair value of $869.

On February 15, 2016, the Company issued a convertible note to an unrelated individual for $15,000 that matures on February 15, 2017. The note bears interest rate of 10% per annum and is convertible into shares of the Company’s Common stock at $0.50 per share. The Company valued a debt discount related to the 1,500 shares of common stock issued with the note at a relative fair value of $521..

On February 22, 2016, the Company issued a convertible note to an unrelated individual for $10,000 that matures on February 22, 2017. The note bears interest rate of 10% per annum and is convertible into shares of the Company’s Common stock at $0.40 per share. The Company valued a BCF related to the note valued at $618 and debt discount related to the 1,000 shares of common stock issued with the note at a relative fair value of $393.
 
 

 
10

 
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
June 30, 2015 and March 31, 2016

NOTE 5 – NOTES PAYABLE - continued
 
On March 7, 2016, the Company issued a convertible note to an unrelated individual for $100,000 that matures on March 7, 2017. The note bears interest rate of 10% per annum and is convertible into shares of the Company’s Common stock at $0.40 per share.
 
The Company valued a BCF related to the note valued at $24,269 and debt discount related to the 10,000 shares of common stock issued with the note at a relative fair value of $4,569.

On March 7, 2016, the Company issued a convertible note to an unrelated individual for $10,000 that matures on March 7, 2017. The note bears interest rate of 10% per annum and is convertible into shares of the Company’s Common stock at $0.50 per share. The Company valued a debt discount related to the 1,000 shares of common stock issued with the note at a relative fair value of $457.

Notes Payable – Related Parties
Notes payable due to related parties consisted of the following as of March 31, 2016 and June 30, 2015, respectively:
 
   
March 31,
   
June 30,
 
   
2016
   
2015
 
             
Various term notes with total face value of $610,000 issued from April 11 to January 2014, interest rates range from 0% to 15%, net of unamortized discount of $0 as of June 30, 2015 and June 30, 2014, respectively, of which $35,000 has been paid.
  $ 575,000     $ 575,000  
Face value of $50,000, issued in December 2014, matures in January 2015, note bears interest at 0%.
    50,000       50,000  
Total notes payable – related parties
    625,000       625,000  
Less current portion
    625,000       625,000  
Notes payable - related parties, long term
  $ -     $ -  
                 
 
Notes Payable – Non-Related Parties
Notes payable due to non-related parties consisted of the following as of March 31, 2016 and June 30, 2015, respectively:

   
March 31,
   
June 30,
 
   
2016
   
2015
 
Various term notes with total face value of $40,488 due upon demand, interest rates range from 0% to 14%.
  $ 40,488     $ 40,488  
Total note payable – non-related parties
    40,488       40,488  
Less current portion
    40,488       40,488  
Notes payable – non-related parties, long-term
  $ -     $ -  

NOTE 6 – CONVERTIBLE PREFERRED STOCK

The Company has authorized 10,000,000 shares of $0.001 par value per share Preferred Stock, of which the following were issued outstanding:
 
   
Shares
 
Shares
 
Liquidation
   
Allocated
 
Outstanding
 
Preference
Series A Convertible Preferred
   
         100,000
 
           15,500
   
 -
Series A-1 Convertible Preferred
   
      3,000,000
 
      1,510,000
   
      1,661,804
Series B Convertible Preferred
   
         200,000
 
             3,500
   
           79,099
Series C Convertible Preferred
   
      1,000,000
 
           13,404
   
 -
Series D Convertible Preferred
   
         375,000
 
         130,000
   
         130,000
Series E Convertible Preferred
   
      1,000,000
 
         275,000
   
         275,000
Series P Convertible Preferred
   
         600,000
 
           86,640
   
 -
Series S Convertible Preferred
   
           50,000
 
 -
   
 -
Total Preferred Stock
   
      6,325,000
 
      2,034,044
 
$
      2,145,903


 
11

 
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
June 30, 2015 and March 31, 2016

NOTE 6 – CONVERTIBLE PREFERRED STOCK - continued
 
The Company's Series A Convertible Preferred Stock ("Series A Preferred") is convertible into Common Stock at the rate of 0.025 share of Common stock for each share of the Series A Preferred. Dividends of $0.50 per share annually from date of issue, are payable from retained earnings, but have not been declared or paid.
 
The Company’s Series A-1 Senior Convertible Redeemable Preferred Stock (“Series A-1 Preferred”) is convertible at the rate of 2 shares of Common Stock per share of Series A-1 Preferred. The dividend rate of the Series A-1 Senior Convertible Redeemable Preferred Stock is 6% per share per annum in cash, or commencing on June 30, 2009 in shares of the Company’s Common Stock (at the option of the Company).

Due to the fact that the Series A-1 Preferred has certain features of debt and is redeemable, the Company analyzed the Series A-1 Preferred in accordance with ASC 480 and ASC 815 to determine if classification within permanent equity was appropriate.  Based on the fact that the redeemable nature of the stock and all cash payments are at the option of the Company, it is assumed that payments will be made in shares of the Company’s Common Stock and therefore, the instruments are afforded permanent equity treatment.

The Company's Series B Convertible 8% Preferred Stock ("Series B Preferred") is convertible at the rate of 0.067 share of Common Stock for each share of Series B Preferred. Dividends from date of issue are payable on June 30 from retained earnings at the rate of 8% per annum but have not been declared or paid.

The Company's Series C Convertible Preferred Stock ("Series C Preferred") is convertible at a rate of 0.007 share of Common Stock per share of Series C Preferred.  Holders are entitled to dividends only to the extent of the holders of the Company’s Common Stock receive dividends.

The Company's Series D Convertible Preferred Stock ("Series D Preferred") is convertible at a rate of 0.034 share of Common Stock per share of Series D Preferred.  Holders are entitled to a proportionate share of any dividends paid as though they were holders of the number of shares of Common Stock of the Company into which their shares of are convertible as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such distribution.
 
The Company's Series E Convertible Preferred Stock ("Series E Preferred") is convertible at a rate of 0.034 share of Common Stock per share of Series E Preferred. Holders are entitled to a proportionate share of any dividends paid as though they were holders of the number of shares of Common Stock of the Company into which their shares of are convertible as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such distribution.

The Company's Series P Convertible Preferred Stock ("Series P Preferred") is convertible at a rate of 0.007 share of Common Stock for each share of Series P Preferred. Holders are entitled to dividends only to the extent of the holders of the Company’s Common Stock receive dividends.

In the event of a liquidation, dissolution or winding up of the affairs of the Company, holders of Series A Preferred Stock, Series P Convertible Preferred Stock, Series C Convertible Preferred Stock have no liquidation preference over holders of the Company’s Common Stock.  Holders of Second Series B Preferred Stock have a liquidation preference over holders of the Company’s Common Stock and the Company’s Series A Preferred Stock.  Holders of Series D Preferred Stock are entitled to receive, before any distribution is made with respect to the Company’s Common Stock, a preferential payment at a rate per each whole share of Series D Preferred Stock equal to $1.00.  Holders of Series E Preferred Stock are entitled to receive, after the preferential payment in full to holders of outstanding shares of Series D Preferred Stock but before any distribution is made with respect to the Company’s Common Stock, a preferential payment at a rate per each whole share of Series E Preferred Stock equal to $1.00.  Holders of Series A-1 Preferred Stock are superior in rank to the Company’s Common Stock and to all other series of Preferred Stock heretofore designated with respect to dividends and liquidation.

The activity surrounding the issuances of the Preferred Stock is as follows: 

During the nine months ended March 31, 2016 and the fiscal years ended June 30, 2015 the Company issued 944,000 and -0- shares of Series A-1 Preferred Stock for $944,000 and $-0- in cash, respectively. The Company had one conversion of 50,000 shares of Series A-1 Preferred Stock for 100,000 shares of Common Stock, and issued 27,863 shares of Common Stock of payment of $12,932 in accrued dividends.
 
During the nine months ended March 31, 2016 and 2015, the outstanding Preferred Stock accumulated $67,711 and $48,777 in dividends on outstanding Preferred Stock. The cumulative dividends in arrears as of March 31, 2016 were approximately $703,016.

 
12

 
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
June 30, 2015 and March 31, 2016

NOTE 7 – COMMON STOCK
 
The Company has authorized 250,000,000 shares of $0.001 par value per share Common Stock, of which 101,082,637 and 95,280,257 were issued outstanding as of March 31, 2016 and June 30, 2015, respectively. The Company amended its articles of incorporation on August 28, 2015 to increase the number of authorized shares to 250,000,000. The activity surrounding the issuances of the Common Stock is as follows:

For the Nine Months Ended March 31, 2016
 
The Company issued 2,489,398 shares of Common Stock for the conversion of notes and accrued interest valued at $403,113.

The Company also issued 100,000 shares of Common Stock for the conversion of 50,000 shares of Series A-1 Preferred Stock and issued 27,863 shares of Common Stock of payment of $12,932 in accrued dividends.

The Company also issued 819,431 shares of Common Stock for the conversion warrants valued at $155,914.

The Company also issued 26,000 shares of Common Stock as incentive to notes valued at $10,284 and recorded $23,236 in beneficial conversion features related to new issuances of debt.
 
The Company issued 496,137 shares of Common Stock as payment for services and rent valued at $225,413.

As share-based compensation to employees and non-employees, the Company issued 587,574 shares of common stock valued at $277,012, based on the market price of the stock on the date of issuance. As interest expense on outstanding notes payable, the Company issued 1,255,977 shares of common stock valued at $587,034 based on the market price on the date of issuance.

For the Nine Months Ended March 31, 2015

The Company issued 7,268,858 common shares for net cash proceeds of $1,876,025. The Company paid as offering costs $153,075 in cash offering costs. Offering costs have been recorded as reductions to additional paid-in capital from common stock proceeds and an increase in professional fees. Attached to the Common Shares, the Company issued 1,855,000 warrants to purchase shares of the Company’s Common Stock of which 215,000 warrants were issued to the placement agent. The Company recognized $1,329,758 for the amortization of warrants issued in prior periods.

The Company also issued 43,500 shares of Common Stock as incentive to notes valued at $10,261 to extend terms on two convertible notes payable and recorded $527,000 in beneficial conversion features related to new issuances of debt.

The Company also issued 5,190,947 shares of Common Stock for the conversion of notes and accrued interest valued at $603,455.

The Company also issued 110,000 shares of Common Stock for the conversion of 55,000 shares of Series A-1 Preferred Stock and issued 41,987 shares of Common Stock of payment of $37,130 in accrued dividends.

The Company also issued 50,000 shares of Common Stock for the conversion warrants.

The Company issued 356,375 shares of Common Stock as payment for services and rent valued at $146,017.

As share-based compensation to employees and non-employees, the Company issued 2,760,221 shares of common stock valued at $720,333, based on the market price of the stock on the date of issuance. As interest expense on outstanding notes payable, the Company issued 2,424,563 shares of common stock valued at $1,549,213 based on the market price on the date of issuance.

NOTE 8 – STOCK PURCHASE OPTIONS AND WARRANTS

The Board of Directors on June 10, 2009 approved the 2009 Long-Term Stock Incentive Plan.  The purpose of the 2009 Long-term Stock Incentive Plan is to advance the interests of the Company by encouraging and enabling acquisition of a financial interest in the Company by employees and other key individuals.  The 2009 Long-Term Stock Incentive Plan is intended to aid the Company in attracting and retaining key employees, to stimulate the efforts of such individuals and to strengthen their desire to remain with the Company.  A maximum of 1,500,000 shares of the Company's Common Stock is reserved for issuance under stock options to be issued under the 2009 Long-Term Stock Incentive Plan.  The Plan permits the grant of incentive stock options, nonstatutory stock options and restricted stock awards.  The 2009 Long-Term Stock Incentive Plan is administered by the Board of Directors or, at its direction, a Compensation Committee comprised of officers of the Company.
 
 
 
 

 
13

 
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
June 30, 2015 and March 31, 2016
 
NOTE 8 – STOCK PURCHASE OPTIONS AND WARRANTS - continued
 
Stock Purchase Options

During the nine months ended March 31, 2016 and fiscal year ended June 30, 2015, the Company did not issue any stock purchase options.  

The following table summarizes the changes in options outstanding of the Company during the nine months ended March 31, 2016.
 
Date Issued
 
Number of Options
   
Weighted Average Exercise Price
   
Weighted Average Grant Date Fair Value
   
Expiration Date (yrs)
   
Value if Exercised
 
Balance June 30, 2015
    80,000     $ 0.66     $ 0.59       1.20     $ 52,900  
Granted
    -       -       -       -       -  
Exercised
    -       -       -       -       -  
Cancelled/Expired
    (55,000 )     0.89       -       -       (49,150 )
Outstanding as of March 31, 2016
    25,000     $ 0.15     $ 0.24       2.53     $ 3,750  

The following table summarizes the changes in options outstanding of the Company during the fiscal year ended June 30, 2015.
 
Date Issued
 
Number of Options
   
Weighted Average Exercise Price
   
Weighted Average Grant Date Fair Value
   
Expiration Date (yrs)
   
Value if Exercised
 
Balance June 30, 2014
    381,429     $ 0.55     $ 0.12       0.62     $ 209,643  
Granted
    -       -       -       -       -  
Exercised
    -       -       -       -       -  
Cancelled/Expired
    (301,429 )     0.52       -       -       (156,743 )
Outstanding as of June 30, 2015
    80,000     $ 0.66     $ 0.59       1.20     $ 52,900  
 
Stock Purchase Warrants

During the nine months ended March 31, 2016, the Company issued warrants to purchase a total of 3,519,667. The Company issued 100,000 warrants in conjunction to an employment agreement entered into in July 2015 and 1,000,000 warrants in conjunction with a consulting agreement entered into December 2015. The Company issued 50,000 warrants in conjunction with a promissory note executed in October 2015. The Company issued 50,000 warrants as part of a commission’s agreement, 175,000 warrants as part of four advisory agreements. The Company also issued 1,888,000 warrants as part of a private placement and 190,000 warrants as part a finder’s fee agreement, and as part of an extension agreement for warrants, the Company issued 66,667 warrants. The warrants were valued using the Black-Scholes pricing model under the assumptions noted below. The Company apportioned value to the warrants based on the relative fair market value of the Common Stock and warrants.
 
During the fiscal year ended June 30, 2015, the Company issued warrants to purchase a total number of restricted shares of 26,434,199. The Company issued 50,000 warrants in conjunction to extended two convertible note payables and issued 5,876,133 warrants in conjunction to a consulting agreement entered into in July 2014 and 150,000 warrants issued in conjunction with a financial advisory agreement entered into on January 2015. The Company also issued 1,000,000 warrants related to the B Booth agreements which were expensed during the current year.  The Company also issued 8,657,701 warrants to purchases restricted shares as part of a private placement. The Company also converted 750,000 warrants for cash proceed of $75,000 in exchange for 750,000 shares of common stock. The warrants were valued using the Black-Scholes pricing model under the assumptions noted below. The Company apportioned value to the warrants based on the relative fair market value of the Common Stock and warrants.
 
 

 
14

 
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
June 30, 2015 and March 31, 2016

NOTE 8 – STOCK PURCHASE OPTIONS AND WARRANTS - continued
 
The following table presents the assumptions used to estimate the fair values of the stock warrants and options granted:
 
             
   
March 31, 2016
   
June 30, 2015
 
Expected volatility
    104-120 %     71-142 %
Expected dividends
    0 %     0 %
Expected term
 
1-5 Years
   
0.25-10 Years
 
Risk-free interest rate
    0.54-1.70 %     0.00-2.35 %

The following table summarizes the changes in warrants outstanding issued to employees and non-employees of the Company during the nine months ended March 31, 2016.
 
   
Number of Warrants
   
Weighted Average Exercise Price
   
Weighted Average Grant Date Fair Value
   
Expiration Date (yrs)
   
Value if Exercised
 
Outstanding as of June 30, 2015
    31,951,778     $ 0.43     $ 0.50       4.98     $ 13,585,289  
Granted
    3,519,667       0.54       0.35       3.63       1,905,100  
Exercised
    (746,693 )     -       -       -       (516,467 )
Cancelled/Expired
    (871,667 )     0.49       -       -       (436,050 )
Outstanding as of March 31, 2016
    33,853,085     $ 0.43     $ 0.48       4.30     $ 14,537,872  

The following table summarizes the changes in warrants outstanding issued to employees and non-employees of the Company during the fiscal year ended June 30, 2015.
 
   
Number of Warrants
   
Weighted Average Exercise Price
   
Weighted Average Grant Date Fair Value
   
Expiration Date (yrs)
   
Value if Exercised
 
Outstanding as of June 30, 2014
    8,332,579     $ 0.76     $ 0.70       2.96     $ 6,370,432  
Granted
    26,434,199       0.24       0.25       5.56       9,821,607  
Exercised
    (750,000 )     -       -       -       (160,000 )
Cancelled/Expired
    (2,065,000 )     -       -       -       (2,446,750 )
Outstanding as of June 30, 2015
    31,951,778     $ 0.43     $ 0.50       4.98     $ 13,585,289  

NOTE 9 – FINANCIAL INSTRUMENTS
 
The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Company’s balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. The Company has estimated the fair value of these embedded derivatives for convertible debentures and associated warrants using a multinomial lattice model as of March 31, 2016 and June 30, 2015. On August 28, 2015, the Company increased the number of authorized common shares from 100,000,000 to 250,000,000, which removed the derivative using the sequencing policy. The fair values of the derivative instruments are measured each quarter, which resulted in a gain (loss) of $(4,374,585) and $552,948, and derivative expense of $-0- and $126,126 during the nine months ended March 31, 2016 and 2015, respectively. As of March 31, 2016 and June 30, 2015, the fair market value of the derivatives aggregated $-0- and $12,814,941, respectively, using the following assumptions: estimated 10-0.10 year term, estimated volatility of 142.75 -96.65%, and a discount rate of 2.12-0.02%.
 

 
15

 
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
June 30, 2015 and March 31, 2016
 
NOTE 10 – FAIR VALUE MEASUREMENTS
 
For asset and liabilities measured at fair value, the Company uses the following hierarchy of inputs:
 
Level one — Quoted market prices in active markets for identical assets or liabilities;
   
Level two — Inputs other than level one inputs that are either directly or indirectly observable; and
   
Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
 
Liabilities measured at fair value on a recurring basis at March 31, 2016, are summarized as follows:
 
   
Level 1
   
Level 2
   
Level 3
 
Total
Fair value of derivatives
 
$
-
   
$
-
   
 $
 -
 
 $
-
Securities available-for-sale
 
$
           48,000
   
$
               -
   
 $
 -
 
 $
           48,000


Liabilities measured at fair value on a recurring basis at June 30, 2015, are summarized as follows:
 
   
Level 1
   
Level 2
   
Level 3
 
Total
Fair value of derivatives
 
$
-
   
$
(12,814,941
)  
$
-
 
$
(12,814,941)
Securities available-for-sale
 
$
 -
   
$
               -
   
$
 -
 
$
                   -
 
NOTE 11 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company may become involved in certain legal proceedings and claims which arise in the normal course of business. The Company is not a party to any litigation. To the best of the knowledge of our management, there are no material litigation matters pending or threatened against us.
 
Lease Agreements

We lease offices in Hollywood, California for corporate, research, engineering and mastering services. The lease expires on December 31, 2017.  The total lease expense for the facility is approximately $8,670 per month, and the total remaining obligations under these leases at March 31, 2016 were approximately $233,499.

Pursuant to a lease originally dated January, 2006, we currently occupy approximately 11,800 square feet of office and warehouse space located at 7650 E. Evans Rd., Suite C, Scottsdale, Arizona on a month-by month basis.  The total lease expense is approximately $9,609 per month, payable in cash and Common Stock of the Company.
  
Rent expense for the nine months ended March 31, 2016 was $183,583, of which $134,546 was paid in cash and $49,037 was paid in Common Stock.  Rent expense for the nine months ended March 31, 2015 was $195,200, of which $131,371 was paid in cash and $63,829 was paid in Common Stock.  
 
 
 

 
16

 
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
June 30, 2015 and March 31, 2016
 
NOTE 11 – COMMITMENTS AND CONTINGENCIES - continued
 
Below is a table summarizing the annual operating lease obligations over the next 5 years:
 
Year
 
Lease Payments
 
2016
    130,493  
Thereafter
    103,006  
Total
  $ 233,499  


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 March 31, 2016 were approximately $703,016.

As of the date of this filing, the Company has not filed its tax return for the fiscal year ended 2014 and 2015.
 
NOTE 12 – TENNMAN BRANDS AGREEMENT
 
On November 14, 2014, the Company became a party to a multi-year agreement for the consulting and advisory services of performing artist Justin Timberlake (through his company, Tennman Brands, Inc.). The agreement includes a provision wherein the Company will issue 10 year Warrants in an amount equal to 10% of the shares of the Company (on a fully diluted basis) at $0.18. The Company issued 10,579,665 warrants in conjunction with the consulting agreement resulting in prepaid expense of $6,930,262. 
 
During the nine months ended March 31, 2016, the company amortized $2,380,442 in non-cash consulting expenses and had $1,852,416 remaining in prepaid expenses related to the warrants.
 
NOTE 13 - SUBSEQUENT EVENTS

In accordance with ASC 855, Company’s management reviewed all material events through the date of this filing and determined that there were the following material subsequent events to report:
 
On September 4, 2012, the Company issued a convertible note to an unrelated individual for $10,000 that matured on March 4, 2013.  The note bears interest rate of 10% per annum and is convertible into shares of the Company’s Common stock at $0.25 per share. The Company booked a debt discount related to the warrants of $2,481 and a BCF of $5,681. On April 26, 2016, the note holder elected to convert the entire note of $10,000 and $3,644 in accrued interest. The total debt was converted into 54,575 shares of restricted common stock.




 


 
 
 
17

 
 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


FORWARD-LOOKING AND CAUTIONARY STATEMENTS

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.

 
 
 
18

 
 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
General

Corporate Background
 
We are a Delaware public Company traded on the Over-The-Counter Bulletin Board (ticker symbol: AFTM). As of March 31, 2016, there were 101,082,637 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, 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.
 

Business
 
Aftermaster, Inc. (“the Company") is an audio technology company located in Hollywood, California and Scottsdale, Arizona. The Company's wholly-owned subsidiaries include AfterMaster HD Audio Labs, Inc. and MyStudio, Inc.
 
The Company and its subsidiaries are engaged in the development and commercialization of proprietary (patents issued and pending), leading-edge audio and video technologies for professional and consumer use, including AfterMaster® audio, ProMaster™ and MyStudio®. 
 

Business Highlights
 
Aftermaster Revenue
 
The last six months have seen the Company begin generating its first meaningful revenues from its Aftermaster technology. The introduction of the Company's Aftermaster Pro product through pre-sales has proven to be successful and has generated cash revenues (deferred) of over $700,000 as of May 2016. Deferred pre-sale revenue will be recorded as earned when the products are shipped. In addition, the Company is now generating revenues from its recent mastering agreement with TuneCore and its ProMaster online music mastering service. Prior to the six months ending March 31, 2016, the Company had earned a majority or its revenues from the licensing of its non-Aftermaster IP, patents and assets.
  
The sales represent thousands of Aftermaster Pro systems sold through crowdfunding websites with an average price of $120 to buyers in over 30 countries. The Company believes that the favorable metrics and substantial positive feedback that it has received, demonstrates that AfterMaster Pro has a large and eager market worldwide. When manufacturing is complete (expected in June or July of 2016), the Company plans to market Aftermaster Pro through a combination of an aggressive online and partner driven distribution strategy. Further product information can be found at www.AfterMasterpro.com.
 

Aftermaster Wins Three Awards at the 2016 Consumer Electronics Show (CES) in Las Vegas
 
The Company was awarded three “Innovation & Design” awards during the ShowStoppers product showcase at the 2016 International Consumer Electronics Show (CES) in Las Vegas, Nevada on January 6, 2016. The Envisioneering international team of technologists, inventors, marketers and industrial designers recognized the Company for its innovation, design and revolutionary Aftermaster sound, AfterMaster TV and BelaSigna 300 AM Processor Chip. www.aftermaster.com/news
 

Aftermaster Enters Into Agreement with TuneCore for professional music mastering
 
In April of 2016, the Company announced a partnership with TuneCore, one of the world's largest independent digital music distribution and publishing administration service. Under the agreement, Aftermaster will serve as the new professional mastering service for TuneCore artists. TuneCore has one of the highest artist revenue-generating music catalogs in the world, earning TuneCore Artists $541 million from over 15.2 billion downloads and streams since inception. TuneCore 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 artists will have direct access to Aftermaster's world-class senior mastering engineers, and within 72 hours, they will be able to get their tracks mastered and ready for distribution. The new partnership builds upon TuneCore's mission to provide independent artists with key tools to build their careers, by granting access to unparalleled mastering that meets the industry's highest standards. 
 


 
 
 
19

 
 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Aftermaster Consumer Electronics Products
 
The Company intends to design, manufacture and market unique consumer electronics hardware products branded as AfterMaster products. The Company has assembled a world-class branding and design team who recently completed the design of the first consumer electronics product developed by the Company, Aftermaster Pro. AfterMaster Pro is the worlds 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.
 
Smaller than an iPhone, Aftermaster Pro transforms the audio of your TV, smartphone, headphones, laptop, tablet, gaming unit, or virtually any audio-enabled device to sound clearer, fuller, deeper, and more exciting. AfterMaster Pro connects easily via HDMI or 3.5mm audio cables with virtually any media source (cable, satellite box, cell phone, computer, tablet, etc.). When used with a Television, Aftermaster Pro raises and clarifies dialogue in programming while significantly enhancing the quality of the overall audio content. This solves the longstanding issue with TV audio of having to continually adjust volume during a TV show to hear dialogue. When used portably with its built-in battery, Aftermaster transforms music and video to standards that we believe are superior to any audio enhancement device. www.aftermasterpro.com
 
The Company expects to introduce additional products in the coming year.
 

Peter Doell and Andrew Wuepper Join The Aftermaster Team
 
Pete Doell
 
In February of 2016, renowned mastering engineer Peter Doell joined Aftermaster as a Senior Mastering Engineer. Doell joins AfterMaster to focus on the expansion of AfterMaster’s Recording and Mastering Studios division and help its team build upon its current technology; roll out partnerships, products and collaborations; and introduce new artists.
 
Doell comes to AfterMaster with more than 35 years of experience, having mastered and engineered numerous of chart-topping records, film scores and TV spots. Doell has served as a first-call engineer with some of the most prestigious and acclaimed studios including Universal Mastering, Sunset Sound, Capitol Studios and Sony Pictures. Doell’s credits include Josh Groban, Frank Sinatra, Kurupt, John Waite, Glenn Frye, Celine Dion, Dave Coz, Miss Saigon, Miles Davis, Brian McKnight, Toto, Dwight Yoakam, Marilyn Manson, Los Lobos, Harry Connick Jr., The Beach Boys, Dashboard Confessional, Willie Nelson and Sheryl Crow. He has also worked on feature film scores including Road To Perdition and Black Hawk Down, and prominent TV productions such as American Idol and The Voice.
 

Andrew Wuepper
 
In March of 2016, GRAMMY® Award-nominated mixer and engineer Andrew Wuepper joined Aftermaster as a Senior Mixer and Engineer. Beginning his career over a decade ago as a protégé to legendary mixer Dave Pensado and RedZone founder Tricky Stewart, Seattle native Wuepper’s credits span from mixing on Justin Bieber’s 2015 blockbuster "Purpose" album to engineering for Katy Perry, Snoop Dogg, Mariah Carey, Michael Jackson, Ciara, Jennifer Lopez, and Céline Dion in addition to work in film and TV such as Dr. Seuss’s The Lorax. Cumulative sales for albums he’s worked on exceed 50 million, while he’s garnered a total of three GRAMMY® Award nominations.
 
The Aftermaster team collectively boasts the largest discography of hit music of any audio technology company in the world.
 
 
AfterMaster Audio
 
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 digital signal processing technology and consumer products. The AfterMaster Audio Labs team is comprised of a unique group of award-winning industry leaders in music, technology and audio engineering which includes Ari Blitz, Peter Doell, Rodney Jerkins, Larry Ryckman, Justin Timberlake, Paul Wolff, Andrew Wuepper and Shelly Yakus. www.AfterMaster.com/team.
 
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.
 
 
20

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
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 any audio capable device through the addition of an AfterMaster DSP chip or AfterMaster software. Such uses are intended to include phones (mobile, home, business and VoIP); headphones; televisions; stereo speakers; stereos (home, portable, commercial and automobile); and computers (desktop, laptop and tablets).    
 
AfterMaster audio is also the only commercial audio enhancement technology available that is used for professional music mastering because it enhances the entire frequency range without distortion or changing the underlying intent of the music. The technology has been used to master music created by such artists as Lady Gaga, Nick Cannon, Janet Jackson, and many others. Further information on AfterMaster and AfterMaster products can be found at www.AfterMaster.com.
 
 
ON Semiconductor/AfterMaster Audio Chip
 
The Company is party to a multi-year joint development and marketing agreement with ON Semiconductor ("ON") of Phoenix, Arizona, to commercialize its technology through audio semiconductor chips. ON is a multi-billion dollar, multi-national semiconductor designer and manufacturer.
 
The agreement calls for ON to implement and support our AfterMaster technology in a Digital Signal Processor (DSP) semiconductor chip that is being marketed to their current OEM customers, distributors and others. We selected ON for its technical capabilities, sales support and deep customer pool.
 
In conjunction with ON, we have completed the development of an AfterMaster software algorithm that is designed to be used in semiconductor chips or as a standalone software product. We believe the sound quality from our algorithm provides a superior audio experience relative to other products on the market.
 
Now branded the BelaSigna 300 AM chip, it is one of the smallest, high power/low voltage DSP chips available. It is small enough to fit into a hearing aid but equally effective in any size device with audio capability.
 
Since entering into the agreement, both the Company and ON have identified a large number of prospective customers that will be key targets for this new and unprecedented technology. The algorithm and chips allow consumer product manufacturers an opportunity to offer a significantly improved and differential audio experience in their products without having to significantly change hardware and form factor designs. Through the combined relationships of the Company and ON, we hope to generate significant revenues for both parties through the sale of the ON/AfterMaster chips and software licensing. 
 
 
ProMasterHD
 
ProMaster HD is an online music mastering, streaming, and storage service designed for independent artists which utilizes proprietary audio technologies developed by AfterMaster.  ProMaster HD will master a user’s uploaded music and allow them to compare up to 90 seconds of their original to the newly mastered songs so they can make a decision to purchase.  
 
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 $34.99 per song.  
 
ProMaster creates a compelling offering for those seeking to significantly enhance the quality of their music for personal use, or with intent to showcase their music in hopes of advancing their career aspirations. Based on the enormous addressable market for this product, we believe that ProMaster has the potential to generate significant revenues for the Company.
 
ProMasterHD.com went live in a soft beta launch in the fourth quarter of 2015 to test functionality and generate feedback from users. The Company plans a high-profile worldwide marketing launch for ProMaster in the second quarter of 2016. 
 
 
Intellectual Property and Licensing
 
The Company has been awarded six patents and six trademarks with numerous others pending. The Company has an aggressive intellectual property strategy to protect the AfterMaster and the related technologies it has developed. We also enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with third parties, and we rigorously control access to proprietary technology.
 

 
 
 
21

 
 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Employees
 
As of March 31, 2016, we employed eleven 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 is 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, Hollywood, California, 90028) for corporate, research, engineering and mastering services. The lease expires on December 31, 2017.  The total lease expense for the facility is approximately $14,328.58 per month, and the total remaining obligations under these leases at March 31, 2016, were approximately $306,413.

We lease a warehouse space located at 8260 E Gelding Drive, Suite 102, Scottsdale, Arizona, 85260.  The lease expires on February 28, 2019.  The total lease expense for the facility is approximately $1,821.64 per month, and the total remaining obligations under these leases at March 31, 2016 were approximately $67,615.

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 $7,148.71 per month, and the total remaining obligations under these leases at March 31, 2016 were approximately $381,418.42.
 
 
Revenues

   
Three Months Ended
 
   
March 31,
 
   
2016
   
2015
 
MyStudio Session Revenues
  $ -     $ 5,300  
AfterMaster Revenues
   
19,320
      18,680  
Licensing Revenues
    -       -  
Total Revenues
  $ 19,320     $ 23,980  
 
 
Nine Months Ended
 
 
March 31,
 
 
2016
 
2015
 
MyStudio Session Revenues
  $ -     $ 9,030  
AfterMaster Revenues
   
75,254
      70,925  
Licensing Revenues
    1,800,000       200,000  
Total Revenues
  $ 1,875,254     $ 279,955  
 

 
 
22

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Our business model is currently designed to generates revenues from multiple sources:

 
1.
Sales of Aftermaster consumer electronics products (Aftermaster Pro, personal audio re-mastering device),
 
2
ProMaster online session music mastering services designed for independent artists,
 
3.
Aftermaster audio processing technology embedded in a proprietary DSP chip and through software applications,
 
4.
Professional music mastering,
 
5.
Licensing revenue.
 
Session revenues are generated from our ProMaster HD online music mastering service. Session revenues for the nine months ended March 31, 2016 increased to $9,069 from $0 over the comparable nine month period ended March 31, 2015. ProMaster was offline for several months for redesign and was reactivated in late 2015 as a beta site to help the Company collect user feedback to implement into the final design of which should be fully operational in the summer of 2016.

AfterMaster revenues are generated primarily from the pre-sale of AfterMaster Pro audio devices. However, such revenue is currently recorded as deferred revenue ($430,566) until the product is shipped. We expect this source of revenue to grow in coming years. The Company is expecting to generate additional revenues from its AfterMaster software algorithm and DSP chip in the coming months, although such growth and additional revenues are not assured and may not occur. AfterMaster and ProMaster Session revenues for the nine months ended March 31, 2016 increased to $75,254 from $70,925 over the comparable nine month period ended March 31, 2015. The Company recently hired a senior engineer that will solely be providing mastering services to producers and artists and we expect revenues to increase.
 
Licensing revenues are generated by licensing certain of our technologies, intellectual property, and patents to third parties.  Our licensing revenues increased to $1,800,000 during the nine months ended March 31, 2016, as compared to $200,000 for the nine months ended March 31, 2015, due primarily to a licensing contract with bBooth. The Company received $200,000 during the nine months ended March 31, 2015, and has been issued 600,000 shares of bBooth valued at $1,800,000 as bBooth stock. The amount of this stock was valued at $1,800,000 bBooth’s stock was trading at $3.00 per share on September 3, 2015, according to the historical stock on Nasdaq.com.

Session revenues are generated from our MyStudio interactive recording studios. The revenue for the three months ended March 31, 2016 decreased to 0 from $5,300 over the comparable three month period ended March 31, 2015 due the Company discounting the use of the MyStudio interactive recording studios. The revenue for the nine months ended March 31, 2016 decreased to 0 from $9,030 over the comparable nine month period ended March 31, 2015 due the Company discounting the use of the MyStudio interactive recording studios to focus on the development of AfterMaster and ProMaster HD.

In the aggregate, total Company revenues increased to $1,875,254 during the nine months ended March 31, 2016, from $279,955 over the comparable nine months ended March 31, 2015, due primarily to licensing fees generated per a with bBooth to license certain technologies, intellectual property, and patents from AfterMaster.
 
 
Cost of Revenues
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
 
Cost of Revenues (excluding depreciation and amortization)
  $ 115,345     $ 70,872  
                 
 
 
Nine Months Ended
 
 
March 31,
 
 
2016
 
2015
 
Cost of Revenues (excluding depreciation and amortization)
  $ 317,428     $ 238,493  
                 


 
23

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Cost of sales consist primarily of AfterMaster Studio rent, consultant fees, and internet connectivity expenses, and excludes depreciation and amortization on the Studios. The increase in cost of sales for the nine months ended March 31, 2016, over the comparable period for the prior fiscal year, is attributable, primarily, to the Company hiring two senior engineers, and the build out of new recording studio in the Company’s Hollywood office.
 
 
Other Operating Expenses
 
             
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
 
Depreciation and Amortization Expense
 
$
18,927
   
$
9,809
 
Research and Development
   
177,315
     
23,789
 
Advertising and Promotion Expense
   
125,597
     
200
 
Legal and Professional Expense
   
85,390
     
62,390
 
Warrant and Stock issued for services
   
886,874
     
51,339
 
General and Administrative Expenses
   
841,976
     
855,006
 
Total
 
$
2,136,079
   
$
1,002,593
 
 
   
Nine Months Ended
 
   
March 31,
 
   
2016
   
2015
 
Depreciation and Amortization Expense
 
$
53,928
   
$
53,702
 
Research and Development
   
331,681
     
28,052
 
Advertising and Promotion Expense
   
269,982
     
1,389
 
Legal and Professional Expense
   
342,803
     
87,552
 
Warrant and Stock issued for services
   
3,074,385
     
1,359,174
 
General and Administrative Expenses
   
2,869,063
     
2,018,239
 
Total
 
$
6,941,842
   
$
3,548,078
 
 
General and Administrative expenses consist primarily of compensation and related costs for our staff, finance, human resources, investor relations, public relations, information technology personnel and rent and facilities.  
 
During the three month period ending March 31, 2016, Research and Development costs increased by $153,526, Advertising and Promotion increased by $125,397, Legal and Professional fees increased by $23,000 and Non-Cash Warrant and Stock for Services fees increased by $835,475, as compared to the same quarter in the prior fiscal year. The increases in Research and Development and Advertising and Promotion are primarily due to the design, development and marketing of it's Aftermaster Pro consumer hardware product. The Non-Cash Warrant and Stock for Services fees increased over the quarter to $886,874 which was primarily due to warrant amortization of $787,710 for warrants issued to by Justin Timberlake in 2014.
 
During the nine month period ended March 31, 2016, Research and Development costs increased by $303,629, Advertising and Promotion increased by $268,593, Legal and Professional increased by $255,251, Non-Cash Warrant and Stock for Services fees increased by $1,715,211, as compared to the same period in the prior fiscal year. The increases in Research and Development and Legal and Professional fees are primarily due to the development and ramp up of the Company's ProMaster and Aftermaster Pro products, board restructuring and debt settlement negotiations. The Non-Cash Warrant and Stock for Services fees increased to $3,074,385 primarily due to warrant amortization of $2,380,442 for warrants issued for Justin Timberlake in 2014.
 

 
 
 
24

 
 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
The increase in professional fees is primarily attributable the development and marketing of AfterMaster TV and ProMasterHD.com

 
Other Income and Expenses
 
Net Income (Loss)
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
 
Interest Expense
 
$
(275,449
)
 
$
(252,341
)
Change in Fair Value of Derivative
   
-
     
200,190
 
Loss on Available for Sale Securities
   
-
     
-
 
Gain (Loss) on Extinguishment of Debt
   
-
     
-
 
Total
 
$
(275,449
)
 
$
(52,151
)
 
   
Nine Months Ended
 
   
March 31,
 
   
2016
   
2015
 
Interest Expense
 
$
(706,174
)
 
$
(2,342,338
)
Derivative Expense
   
-
     
(126,126
)
Change in Fair Value of Derivative
   
4,374,585
     
(552,948
)
Loss on Available for Sale Securities
   
(1,770,000
 )
   
-
 
Gain (Loss) on Extinguishment of Debt
   
143,344
     
(28,517
)
Total
 
$
2,041,755
   
$
(3,049,929
)
                 
The other income and expenses during the quarter ended March 31, 2016, totaling $2,041,755 of net expenses, which consists of change in fair value of derivative and loss on available for sale securities. The Company recognized the loss in the second quarter when the available for sale security had dropped in value from $3.00 per share to $0.05 per share. The Company recognized the loss as the investment had become significantly impaired. During the comparable period in 2015, other income and expenses totaled $(3,049,929).
 
 
Net Income (Loss)

             
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
 
Net Income (Loss)
 
$
(2,507,553
)
 
$
(1,101,636
)
 
 
Nine Months Ended
 
 
March 31,
 
 
2016
 
2015
 
Net Income (Loss)
 
$
(3,342,261
)
 
$
(6,556,545
)
 
Due to the Company’s cash position, we use our Common Stock to pay in full or in part many employees, vendors and consultants.  Once we have raised additional capital from outside sources, as well as generated cash flows from operations, we expect to reduce the use of Common Stock as a significant means of compensation. Under FASB ASC 718, “Accounting for Stock-Based Compensation”, these non-cash issuances are expensed at the equity instruments fair market value.  
 
 
 
 
 
 
 
 
25

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
LIQUIDITY AND CAPITAL RESOURCES
 
The Company had revenues of $1,875,254 during the nine months ended March 31, 2016, as compared to $279,955 in the comparable period of the prior fiscal year.  The Company has incurred losses since inception of $61,507,708.  At March 31, 2016, the Company has negative working capital of $3,937,731, which was a decrease in working capital of $8,080,044 from June 30, 2015.  

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. 

We require substantial capital to continue Aftermaster operations. Although we intend to engage in subsequent debt and equity offerings of our securities to raise additional working capital for Aftermaster operations, we have no firm commitments for any additional funding, either debt or equity, at the present time.  Insufficient financial resources may require us to delay or eliminate all or some of our sales and marketing efforts to generate revenues for AfterMaster, which could have a material adverse effect on our business, financial condition and results of operations.  There is no certainty that our expenditures will result in a profitable business as proposed.

As of March 31, 2016, we had an accumulated deficit of $61,507,708, negative working capital of 3,937,731.  In addition, for the nine months ended March 31, 2016, we had a loss of approximately $3,409,973 and negative cash flow from operating activities of approximately $3,264,942. 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 June 30, 2015 were approximately $703,016. Revenues generated from our current operations are not sufficient to pay our on-going operating expenses.  Therefore, we will have to obtain additional funding from the sale of our securities or from strategic transactions in order to fund our current level of operations.  In order to fund our working capital needs and our operational costs, during 2016, we entered into eight (8) separate Note, six (6) cash conversion of warrants, and thirteen (13) Share Purchase Agreements with individual accredited investors resulting in net proceeds of $1,735,004.  

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.  
 
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

 
 
 
26

 

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company does not currently maintain controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified by the Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2016, have been evaluated, and, based upon this evaluation, the Company’s Chief Executive Officer has concluded that these controls and procedures are not effective in providing reasonable assurance of compliance.

 
Changes in Internal Control over Financial Reporting
 
Management and directors will continue to monitor and evaluate the effectiveness of the Company's internal controls and procedures and the Company's internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.  There were no changes in Internal Control over Financial Reporting during the quarter ended March 31, 2016.

 
 
PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

The Company may become involved in certain legal proceedings and claims which arise in the normal course of business. The Company is not a party to any litigation. To the best of the knowledge of our management, there are no material litigation matters pending or threatened against us.
 
 
ITEM 1A - RISK FACTORS
 
Not required.
 
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.

 
ITEM 4. MINE SAFETY DISCLOSURE

During the nine months ended March 31, 2016, no matters were submitted to the shareholders for a vote.
 
 
ITEM 5. OTHER INFORMATION

Subsequent Events

None
 
 
 
 
 
27

 
 
ITEM 6. EXHIBITS
 
a) The following Exhibits are filed herein:
 
NO.
TITLE
 
 
 
 
101.INS*
XBRL Instance Document
   
101.SCH*
XBRL Taxonomy Extension Schema
   
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
   
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
   
101.LAB*
XBRL Taxonomy Extension Label Linkbase
   
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase
 

 

 
 
 
 
 
 


 
 
 
28

 
 
 
 
SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
   

     
 
AFTERMASTER, INC.
     
Date: May 16, 2016
By:  
/s/ Larry Ryckman
 
Larry Ryckman,
 
Title:   President and Chief Executive Officer
 
 
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
 
     
 
AFTERMASTER, INC.
     
Date: May 16, 2016
By:  
/s/ Larry Ryckman
 
Larry Ryckman,
 
Title:  Director, President, Chief Executive Officer
 
     
 
AFTERMASTER, INC.
     
Date: May 16, 2016
By:  
/s/ Mirella Chavez
 
Mirella Chavez
 
Title:   Chief Financial Officer, Secretary
 
 
29