Attached files
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2016
☐ 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
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23-2517953
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(State or other jurisdiction of incorporation or
organization)
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(IRS Employer Identification No.)
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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.
☒ Yes ☐ 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).
☒ Yes ☐ 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
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☐
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Accelerated filer
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☐
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Non-accelerated filer
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☐
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Smaller reporting company
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☒
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Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act).
☐ Yes ☒
No
At February 14, 2017, the number of shares outstanding of Common
Stock, $0.001 par value, was 109,540,477
shares.
1
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AFTERMASTER, INC.
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INDEX
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PART I - FINANCIAL INFORMATION
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PAGE NUMBER
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Item 1.
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Financial Statements
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3
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Condensed Consolidated Balance Sheets – December 31,
2016 (unaudited) and June 30, 2016
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3
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Condensed Consolidated Statements of Operations - For the three
months ended December 31, 2016 and 2015 (unaudited)
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4
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Condensed Consolidated Statements of Cash Flows - For the three
months ended December 31, 2016 and 2015 (unaudited)
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5
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Notes to Condensed Consolidated Financial Statements
(unaudited)
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6
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Item 2.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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18
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Item 3.
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Quantitative and Qualitative Disclosure About Market
Risks
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26
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Item 4T.
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Controls and Procedures
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26
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PART II - OTHER INFORMATION
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Item 1.
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Legal Proceedings
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26
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Item 1A.
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Risk Factors
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27
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Item 2.
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Unregistered Sales of Equity Securities and Use of
Proceeds
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27
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Item 3.
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Defaults Upon Senior Securities
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27
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Item 4.
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Submission of Matters to a Vote of Security Holders
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27
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Item 5.
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Other Information
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27
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Item 6.
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Exhibits
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28
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SIGNATURES
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29
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AFTERMASTER, INC.
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Consolidated
Balance Sheets
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December
31,
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June
30,
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2016
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2016
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(Unaudited)
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ASSETS
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Current
Assets
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Cash
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$224,120
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$394,325
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Accounts
receivable, net
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17,198
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11,389
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Inventory
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330,077
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-
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Available
for sale securities
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48,000
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63,600
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Prepaid
expenses
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804,778
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1,078,819
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Total
Current Assets
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1,424,173
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1,548,133
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Property
and equipment, net
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318,994
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294,557
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Intangible
assets, net
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117,024
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99,186
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Deposits
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33,363
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33,363
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Prepaid
expenses, net of current
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13,623
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18,217
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Total
Assets
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$1,907,177
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$1,993,456
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current
Liabilities
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Accounts
payable and other accrued expenses
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$244,069
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$225,001
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Accrued
interest
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105,047
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77,335
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Deferred
revenue
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762,658
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740,200
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Accrued
consulting services - related party
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47,066
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28,561
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Lease
payable
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22,536
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984
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Notes
payable - related party
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580,000
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575,000
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Notes
payable
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40,488
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40,488
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Convertible
notes payable - related party
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3,925,000
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3,925,000
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Convertible
notes payable, net of discount of $6,495 and $22,282,
respectively
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2,131,269
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1,029,718
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Total
Current Liabilities
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7,858,133
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6,642,287
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Total
Liabilities
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7,858,133
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6,642,287
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Stockholders'
Deficit
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Convertible
preferred stock, Series A; $0.001 par value; 100,000 shares
authorized, 15,500 shares issued and outstanding
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16
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16
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Convertible
preferred stock, Series A-1; $0.001 par value; 3,000,000 shares
authorized 2,735,000 and 2,185,000 shares issued and outstanding,
respectively
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2,735
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2,185
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Convertible
preferred stock, Series B; $0.001 par value; 200,000 shares
authorized, 3,500 shares issued and outstanding
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3
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3
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Convertible
preferred stock, Series C; $0.001 par value; 1,000,000 shares
authorized, 13,404 shares issued and outstanding
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13
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13
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Convertible
preferred stock, Series D; $0.001 par value; 375,000 shares
authorized, 130,000 shares issued and outstanding
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130
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130
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Convertible
preferred stock, Series E; $0.001 par value; 1,000,000 shares
authorized, 275,000 shares issued and outstanding
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275
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275
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Convertible
preferred stock, Series P; $0.001 par value; 600,000 shares
authorized, 86,640 shares issued and outstanding
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87
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87
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Convertible
preferred stock, Series S; $0.001 par value; 50,000 shares
authorized, -0- shares issued and outstanding
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-
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Common
stock, authorized 250,000,000 shares,
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par
value $0.001; 108,854,548 and 102,133,344 shares
issued
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and
outstanding, respectively
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108,861
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102,140
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Additional
paid In capital
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62,070,833
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58,997,912
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Accumulated
other comprehensive income
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18,000
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33,600
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Accumulated
Deficit
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(68,151,909)
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(63,785,192)
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Total
Stockholders' Deficit
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(5,950,956)
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(4,648,831)
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Total
Liabilities and Stockholders' Deficit
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$1,907,177
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$1,993,456
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The
accompanying notes are an integral part of these consolidated
financial statements.
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3
AFTERMASTER, INC.
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Consolidated
Statements of Operations
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(Unaudited)
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For the
Three Months Ended
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For the
Six Months Ended
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December
31,
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December
31,
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2016
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2015
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2016
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2015
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REVENUES
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AfterMaster
Revenues
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48,739
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36,154
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$103,225
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$55,934
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Licensing
Revenues
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-
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-
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-
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1,800,000
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Total
Revenues
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48,739
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36,154
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103,225
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1,855,934
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COSTS
AND EXPENSES
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Cost
of Revenues (Exclusive of Depreciation and
Amortization)
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157,680
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108,949
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319,775
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202,083
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Depreciation
and Amortization Expense
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45,015
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17,983
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85,554
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35,001
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Research
and Development
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26,020
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42,300
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93,015
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69,085
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Advertising
and Promotion Expense
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2,565
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142,867
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17,644
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144,385
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Legal
and Professional Expense
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30,804
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130,678
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55,070
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257,412
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Non-Cash
Consulting Expense
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659,938
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1,307,966
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1,531,909
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2,187,511
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General
and Administrative Expenses
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915,206
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980,387
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1,628,042
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2,112,369
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Total
Costs and Expenses
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1,837,228
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2,731,130
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3,731,009
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5,007,846
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Loss
from Operations
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(1,788,489)
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(2,694,976)
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(3,627,784)
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(3,151,912)
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Other
Expense
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Interest
Expense
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(378,522)
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(250,345)
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(747,595)
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(430,725)
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Change
in Fair Value of Derivative
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(463)
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-
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(574)
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4,374,585
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Loss
on Available for Sale Securities
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-
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(1,770,000)
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-
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(1,770,000)
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Gain
Loss on Extinguishment of Debt
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9,236
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47,897
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9,236
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143,344
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Total
Other Expense
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(369,749)
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(1,972,448)
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(738,933)
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2,317,204
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Loss
Before Income Taxes
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(2,158,238)
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(4,667,424)
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(4,366,717)
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(834,708)
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Income
Tax Expense
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-
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-
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-
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-
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NET
LOSS
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$(2,158,238)
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$(4,667,424)
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$(4,366,717)
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$(834,708)
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Preferred
Stock Accretion and Dividends
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(45,620)
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(16,789)
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(87,858)
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(19,427)
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NET
LOSS AVAILABLE TO COMMON SHAREHOLDERS
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$(2,203,858)
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$(4,684,213)
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$(4,454,575)
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$(854,135)
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Basic
and diluted Loss Per Share of Common Stock
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$(0.02)
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$(0.05)
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$(0.04)
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$(0.01)
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Weighted
Average Number of Shares Outstanding
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104,726,332
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98,587,644
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104,045,562
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97,041,083
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Other
Comprehensive Income, net of tax
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NET
LOSS AVAILABLE TO COMMON SHAREHOLDERS
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(2,203,858)
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(4,684,213)
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(4,454,575)
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(854,135)
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Unrealized
loss on AFS Securities
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(39,000)
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-
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(15,600)
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-
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COMPREHENSIVE
LOSS
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$(2,242,858)
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$(4,684,213)
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$(4,470,175)
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$(854,135)
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The
accompanying notes are an integral part of these consolidated
financial statements.
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4
AFTERMASTER,
INC.
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Consolidated
Statements of Cash Flows
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(Unaudited)
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For
the Six Months Ended
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December
31,
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2016
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2015
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OPERATING
ACTIVITIES
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Net
Loss
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$(4,366,717)
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$(834,708)
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Adjustments to
reconcile net loss to cash from operating activities:
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Depreciation and
amortization
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85,554
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35,001
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Share-based
compensation - Common Stock
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218,538
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158,537
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Share-based
compensation - warrants and options
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23,976
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-
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Share-based
compensation - warrants
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13,204
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452,960
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Common stock issued
for services and rent
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18,897
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208,959
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Common stock issued
for preferred dividends
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-
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11,981
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Common stock issued
to extend the maturity dates on debt
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120,000
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-
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Amortization of
debt discount and issuance costs
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152,513
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22,527
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Closing
fees
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-
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15,000
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(Gain)/Loss on
extinguishment of debt
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(9,236)
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(143,344)
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Gain (loss)
remeasurement of derivative
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574
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(4,374,585)
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Loss on Available
for Sale Securities
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-
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1,770,000
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Licensing Revenue
from the issuance of AFS Securities
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-
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(1,800,000)
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Changes in
Operating Assets and Liabilities:
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Accounts
receivables
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(5,809)
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(3,515)
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Inventory
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(330,077)
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-
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Other
assets
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1,086,909
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1,675,938
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Accounts payable
and accrued expenses
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19,068
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320,304
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Accrued
interest
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437,950
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(7,564)
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Deferred
revenue
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22,458
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301,805
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Accrued consulting
services - related party
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18,505
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1,891
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Net Cash Used in
Operating Activities
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(2,493,693)
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(2,188,813)
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INVESTING
ACTIVITIES
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Purchase of
property and equipment
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(96,029)
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(24,825)
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Purchase of
intangible assets
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(31,800)
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-
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Net Cash Used in
Investing Activities
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(127,829)
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(24,825)
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FINANCING
ACTIVITIES
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Offering costs for
Common shares sold
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-
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(104,910)
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Common Stock issued
for cash, conversion of options/warrants
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906,224
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-
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A-1 Preferred Stock
issued for cash
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373,541
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439,000
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Proceeds from
convertible notes payable - related party
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17,500
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-
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Repayments of
convertible notes payable - related party
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(12,500)
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-
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Proceeds from
convertible notes payable
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1,160,000
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585,000
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Repayments of
convertible notes payable
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(15,000)
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(17,500)
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Lease
Payable
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21,552
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(19,978)
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Net Cash Provided
by Financing Activities
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2,451,317
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881,612
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NET CHANGE IN
CASH
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(170,205)
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(1,332,026)
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CASH AT BEGINNING
OF PERIOD
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394,325
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2,185,702
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CASH AT END OF
PERIOD
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$224,120
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$853,676
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SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
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CASH PAID
FOR:
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Interest
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$-
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$-
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NON CASH FINANCING
ACTIVITIES:
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Beneficial
conversion feature
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$30,519
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$-
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Conversion
of notes and Interest into common stock
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$580,238
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$783,606
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Conversion of
preferred stock for common stock
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$-
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$50
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Conversion
of Derivative Liability
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$73,432
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$8,443,357
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MTM
on AFS securities
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$15,600
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$-
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Common stock issued
with convertible debt
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$33,349
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$-
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Common stock issued
for prepaid expenses
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$808,274
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$-
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Derivative
liability
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$72,858
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$-
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Original
Issue Discount
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$-
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$100,000
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Finder's
Fee
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$-
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$35,000
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The
accompanying notes are an integral part of these consolidated
financial statements.
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5
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and June 30, 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 December 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, 2016 audited financial statements. The results
of operations for the periods ended December 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 $68,151,909,
negative working capital of $6,433,960, and currently has revenues
which are insufficient to cover its operating costs, which raises
substantial doubt about its ability to continue as a going concern.
The Company has not yet established an ongoing source of revenues
sufficient to cover its operating costs and allow it to continue as
a going concern.
The future of the Company as an operating business will depend on
its ability to (1) obtain sufficient capital contributions and/or
financing as may be required to sustain its operations and (2) to
achieve adequate revenues from its ProMaster and AfterMaster
businesses. Management's plan to address these issues includes, (a)
continued exercise of tight cost controls to conserve cash, (b)
obtaining additional financing, (c) more widely commercializing the
AfterMaster and ProMaster products, and (d) identifying and
executing on additional revenue generating
opportunities.
The ability of the Company to continue as a going concern is
dependent upon its ability to successfully accomplish the plans
described in the preceding paragraph and eventually secure other
sources of financing and attain profitable operations. The
accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a
going concern. If the Company is unable to obtain adequate capital,
it could be forced to cease operations.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenue and expenses during the reporting
periods. Significant estimates are made in relation to the
allowance for doubtful accounts and the fair value of certain
financial instruments.
Principles of Consolidation
The consolidated financial statements include the accounts of
AfterMaster, Inc. and its subsidiaries. All significant
inter-Company accounts and transactions have been
eliminated.
Investments
Our available for securities are considered Level 1. Realized gains
and losses on these securities are included in “Other income
(expense) – net” in the consolidated statements of
income using the specific identification method. Unrealized gains
and losses, on available-for-sale securities are recorded in
accumulated other comprehensive income (accumulated OCI).
Unrealized losses that are considered other than temporary are
recorded in other income (expense) – net, with the
corresponding reduction to the carrying basis of the
investment.
Our short-term investments are recorded at amortized cost, and the
respective carrying amounts approximate fair values. Our available
for securities maturing within one year are recorded in
“Other current assets,” on the balance
sheets.
Accounts Receivables
Accounts receivables are stated at amounts management expects to
collect. An allowance for doubtful accounts is provided for
uncollectible receivables based upon management's evaluation of
outstanding accounts receivable at each reporting period
considering historical experience and customer credit quality and
delinquency status. Delinquency status is determined by contractual
terms. Bad debts are written off against the allowance when
identified.
6
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and June 30, 2016
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Fair Value Instruments
Cash is the Company’s only financial asset or liability
required to be recognized at fair value and is measured using
quoted prices for active markets for identical assets (Level 1 fair
value hierarchy). The carrying amounts reported in the
balance sheets for accounts receivable and accounts payable and
accrued expenses approximate their fair market value based on the
short-term maturity of these instruments.
The fair value of the Company’s notes payable at December 31,
2016 is approximately $6,676,757. 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, the Company used this sequencing
policy, all instruments convertible into common stock, including
warrants and the conversion feature of notes payable, issued
subsequent to July 5, 2016 until the note was converted on the same
day were derivative liabilities. The Company again used this
sequencing policy, all instruments convertible into common stock,
including warrants and the conversion feature of notes payable,
issued subsequent to August 19, 2016 until the note was converted
on August 22, 2016 were derivative liabilities.
The Company 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 December
31, 2016 and 2015 due to net operating losses for which there is no
benefit currently available.
At December 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. 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.
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 three
and six months ended December 31, 2016 and 2015 of $45,620 and
$16,789 and $87,858 and $19,427, 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.
7
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and June 30, 2016
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
-
continued
For the six months ended December 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 26,336,572 and 13,658,151 at
December 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:
|
December
31, 2016
|
|||||
|
Amortized
cost
|
Gross unrealized gains
|
Gross unrealized losses
|
Gross realized
gains
|
Gross realized losses
|
Fair
value
|
|
||||||
Equity
securities
|
$63,600
|
$-
|
$(15,600)
|
$-
|
$-
|
$48,000
|
|
June 30, 2016
|
|||||
|
Amortized
cost
|
Gross unrealized gains
|
Gross unrealized losses
|
Gross realized gains
|
Gross
realized losses
|
Fair
value
|
Equity
securities
|
$1,800,000
|
33,600
|
$-
|
$-
|
$(1,770,000)
|
$63,600
|
NOTE 5 – NOTES PAYABLE
Convertible Notes Payable
In accounting for its convertible notes payable, proceeds from the
sale of a convertible debt instrument with Common Stock purchase
warrants are allocated to the two elements based on the relative
fair values of the debt instrument without the warrants and of the
warrants themselves at time of issuance. The portions of the
proceeds allocated to the warrants are accounted for as paid-in
capital with an offset to debt discount. The remainder of
the proceeds are allocated to the debt instrument portion of the
transaction as prescribed by ASC 470-25-20. The
Company then calculates the effective conversion price of the note
based on the relative fair value allocated to the debt instrument
to determine the fair value of any beneficial conversion feature
(“BCF”) associated with the convertible note in
accordance with ASC 470-20-30. The BCF is recorded to
additional paid-in capital with an offset to debt
discount. Both the debt discount related to the issuance
of warrants and related to a BCF is amortized over the life of the
note.
Convertible Notes Payable – Related Parties
Convertible notes payable due to related parties consisted of the
following as of December 31, 2016 and June 30, 2016,
respectively:
Convertible Notes Payable – Related
Parties
|
|
|
|
December
31,
|
June
30,
|
|
2016
|
2016
|
|
|
|
Various term notes
with total face value of $3,925,000 issued from February 2010 to
April 2013, interest rates range from 10% to 15%, net of
unamortized discount of $0 as of December 31, 2016 and June 30,
2016.
|
$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
|
$-
|
$-
|
8
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and June 30, 2016
NOTE 5 – NOTES PAYABLE
-
continued
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 December 31, 2016 and June 30, 2016,
respectively:
|
December
31,
|
June
30,
|
|
2016
|
2016
|
$15,000
face value, issued in October 2011, interest rate of 10% and a
default rate of 15%, matures in June 2012, net of unamortized
discount of $0 as of December 31, 2016 and June 30, 2016,
respectively. The note is currently in default.
|
$15,000
|
$15,000
|
$50,000
face value of which $50,000 was converted.
|
-
|
50,000
|
$20,000
face value, issued in June 2014, interest rate of 6%, matures
December 2014, net unamortized discount of $0 as of December 31,
2016 and June 30, 2016, respectively. The note is currently in
default.
|
20,000
|
20,000
|
$7,000
face value, issued in July 2014, interest rate of 6%, matures
October 2014, net unamortized discount of $0 as of December 31,
2016 and June 30, 2016, respectively. The note is currently in
default.
|
7,000
|
7,000
|
$100,000
face value, issued in October 2015, interest rate of 6%, matures
February 2017.
|
100,000
|
100,000
|
$600,000
face value, issued in November 2015, interest rate of 0%, an OID of
$100,000, matures Jan 2017, net unamortized discount of $0 of
December 31, 2016 and June 30, 2016, respectively.
|
600,000
|
600,000
|
$100,000
face value, issued in February 2016, interest rate of 10%, matures
February 2017, net unamortized discount of $438 and $2,993 as of
December 31, 2016 and June 30, 2016, respectively.
|
99,562
|
97,007
|
$15,000
face value, issued in February 2016, interest rate of 10%, matures
February 2017, net unamortized discount of $65 and $462 as of
December 31, 2016 and June 30, 2016, respectively.
|
14,935
|
14,538
|
$25,000
face value, issued in February 2016, interest rate of 10%, matures
February 2017, net unamortized discount of $110 and $3,354 as of
December 31, 2016 and June 30, 2016, respectively.
|
24,890
|
21,646
|
$10,000
face value, issued in February 2016, interest rate of 10%, matures
February 2017, net unamortized discount of $147 and $1,382 as of
December 31, 2016 and June 30, 2016, respectively.
|
9,853
|
8,618
|
$100,000
face value, issued in March 2016, interest rate of 10%, matures
March 2017, net unamortized discount of $5,214 and $13,765 as of
December 31, 2016 and June 30, 2016, respectively.
|
94,786
|
86,235
|
$10,000
face value, issued in March 2016, interest rate of 10%, matures
March 2017, net unamortized discount of $521 and $462 and $326 as
of December 31, 2016 and June 30, 2016, respectively.
|
9,479
|
9,674
|
$50,000
face value, issued in July 2016, interest rate of 0%, matures
January 2017, a gain on extinguishment of debt was recorded
totaling $5,418 net unamortized discount of $0 as of December 31,
2016.
|
44,582
|
-
|
9
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and June 30, 2016
NOTE 5 – NOTES PAYABLE
-
continued
$30,000
face value, issued in August 2016, interest rate of 0%, matures
January 2017, net unamortized discount of $0 as of December 31,
2016.
|
15,000
|
-
|
$50,000
face value, issued in August 2016, interest rate of 0%, matures
August 2017.
|
50,000
|
-
|
$30,000
face value, issued in August 2016, interest rate of 0%, matures
January 2017, a gain on extinguishment of debt was recorded
totalling$3,818 net unamortized discount of $0 as of December 31,
2016. The note is currently in default.
|
26,182
|
-
|
$1,000,000
face value, issued in September 2016, interest rate of 10%, matures
December 2016, net unamortized discount of $0 as of December 31,
2016.
|
1,000,000
|
-
|
Total
convertible notes payable – non-related parties
|
2,131,269
|
1,029,718
|
Less
current portion
|
2,131,269
|
1,029,718
|
Convertible
notes payable – non-related parties, long-term
|
$-
|
$-
|
On October 27, 2015, the Company issued a convertible note to an
unrelated individual for $100,000 that matures on February 27,
2016. The note bears interest rate of 6% per annum and is
convertible into shares of the Company’s Common stock at
$0.50 per share. The note was amended on
May 23, 2016 to extend the maturity date to July 23, 2016 and
amended again on November 15, 2016 to extend the maturity date to
January 31, 2017. The Company evaluated amendment under ASC 470-50,
“Debt
- Modification and Extinguishment”, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the debt.
The note is currently in default.
On July 26, 2016, the Company issued a convertible note to an
unrelated individual for $50,000 that matures on September 26,
2016. The note bears interest rate of 0% per annum and
is convertible into shares of the Company’s Common stock at
$0.40 per share, as part of the note the company issued options to
purchase 35,000 shares of 144 restricted common stock at an
exercise price $0.50 for a two-year period. The note was amended on
November 21, 2016 to extend the maturity date to January 31, 2017.
The Company evaluated amendment under ASC 470-50,
“Debt
- Modification and Extinguishment”, and concluded that
the extension did result in significant and consequential changes
to the economic substance of the debt and thus resulted in a
extinguishment of the debt and not modification of the debt
resulting in a gain on extinguishment of debt of $5,418. The note
is currently in default.
On August 08, 2016, the Company issued a convertible note to an
unrelated individual for $30,000 that matures on October 08,
2016. The note bears interest rate of 0% per annum and
is convertible into shares of the Company’s Common stock at
$0.40 per share, as part of the note the company issued options to
purchase 21,000 shares of 144 restricted common stock at an
exercise price $0.50 for a two-year period. The note was amended on
November 21, 2016 to extend the maturity date to January 31, 2017.
The Company evaluated amendment under ASC 470-50,
“Debt
- Modification and Extinguishment”, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a extinguishment of the debt and not modification of the debt
resulting in a gain on extinguishment of debt of $3,818. The note
is currently in default.
On August 11, 2016, the Company issued a convertible note to an
unrelated individual for $30,000 that matures on October 11,
2016. The note bears interest rate of 0% per annum and
is convertible into shares of the Company’s Common stock at
$0.40 per share, as part of the note the company issued options to
purchase 21,000 shares of 144 restricted common stock at an
exercise price $0.50 for a two-year period. The Company paid
$15,000 of principal. The note was amended on November 15, 2016 to
extend the maturity date to January 31, 2017. The Company evaluated
amendment under ASC 470-50, “Debt
- Modification and Extinguishment”, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the
debt.
On August 26, 2016, the Company issued a convertible note to an
unrelated individual for $50,000 that matures on August 26,
2017. The note bears interest rate of 10% per annum and
is convertible into shares of the Company’s Common stock at
$0.40 per share.
On September 1, 2016, an unrelated individual converted a
convertible note entered into on August 21, 2012, with a principal
balance of $50,000 and $21,164 in accrued interest at a rate of
$0.25 per share of the Company’s Common stock for 280,650
shares.
On September 27, 2016, the Company issued a convertible note to an
unrelated individual for $1,000,000 that matures on December 22,
2016. The note was amended subsequently in February 2, 2017 to
extend the maturity date to February 2, 2020. The fund will be used
for the manufacturing of the companies AfterMaster Pro TV box. 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, as
part of the note the company issued 100,000 shares of 144
restricted common stock for a value of $33,349.
10
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and June 30, 2016
NOTE 5 – NOTES PAYABLE - continued
Notes Payable – Related Parties
Notes payable due to related parties consisted of the following as
of December 31, 2016 and June 30, 2016, respectively:
|
|
|
|
December
31,
|
June
30,
|
|
2016
|
2016
|
|
|
|
Various term notes
with total face value of $627,500, of which, $610,000 was issued
from April 2011 to January 2014 with a maturity date of June 2015,
and $17,500 issued in November 2016 payable on demand, interest
rates range from 0% to 15%, net of unamortized discount of $0 as of
December 31, 2016 and June 30, 2016, respectively, of which $47,500
has been paid. The notes issued from April 2011 to January 2014 are
currently in default.
|
$580,000
|
$575,000
|
Total notes payable
– related parties
|
580,000
|
575,000
|
Less current
portion
|
580,000
|
575,000
|
Notes payable -
related parties, long term
|
$-
|
$-
|
Notes Payable – Non-Related
Parties
Notes payable due to non-related parties consisted of the following
as of December 31, 2016 and June 30, 2016,
respectively:
|
December
31,
|
June
30,
|
|
2016
|
2016
|
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
|
2,735,000
|
290,668
|
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
|
3,259,044
|
$774,767
|
11
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and June 30, 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 six months ended December 31, 2016 the Company issued
550,000 shares of Series A-1 Preferred Stock for $550,000 in
cash and paid $176,459 in
cash offering costs.
During the fiscal years ended June 30, 2016 the Company issued
1,669,000 shares of Series A-1 Preferred Stock for $1,382,390 in
cash, net of $286,610 of issuance costs,
respectively. The Company had two
conversions of 100,000 shares of Series A-1 Preferred Stock for
200,000 shares of Common Stock, and issued 59,326 shares of Common
Stock of payment of $26,769 in accrued
dividends.
During the six months ended December 31, 2016 and 2015, the
outstanding Preferred Stock accumulated $45,620 and $16,789 in
dividends on outstanding Preferred Stock. The cumulative dividends
in arrears as of December 31, 2016 were approximately
$810,451.
12
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and June 30, 2016
NOTE 7 – COMMON STOCK
The Company has authorized 250,000,000 shares of $0.001 par value
per share Common Stock, of which 108,854,548 and 102,133,344 were
issued outstanding as of December 31, 2016 and June 30, 2016,
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 Six Months Ended December 31, 2016
The Company issued 848,755 shares of Common Stock for the
conversion of notes and accrued interest valued at
$190,164.
The Company also issued 100,000 shares of Common Stock as incentive
to notes valued at $33,349 and recorded $30,519 in beneficial
conversion features related to new issuances of debt.
The Company issued 1,149,860 shares of Common Stock as payment for
services and rent valued at $451,130.
The Company issued 3,020,750 shares of Common Stock for the
conversion warrants valued at $906,225.
As share-based compensation to employees and non-employees, the
Company issued 575,951 shares of common stock valued at $218,538,
based on the market price of the stock on the date of issuance. As
interest expense on outstanding notes payable, the Company issued
1,025,888, shares of common stock valued at $390,073 based on the
market price on the date of issuance.
Fiscal Year Ended June 30, 2016
The Company issued 2,667,919 shares of Common Stock for the
conversion of notes and accrued interest valued at
$446,757.
The Company also issued 200,000 shares of Common Stock for the
conversion of 100,000 shares of Series A-1 Preferred
Stock and issued
59,326 shares of Common Stock of payment of $26,769 in accrued
dividends.
The Company also issued 886,098 shares of Common Stock for the
conversion warrants valued at $175,914.
The Company also issued 26,000 shares of Common Stock as incentive
to notes valued at $10,284 and recorded $22,375 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 812,804 shares of common stock valued at $364,851,
based on the market price of the stock on the date of issuance. As
interest expense on outstanding notes payable, the Company issued
1,704,803 shares of common stock valued at $762,076 based on the
market price on the date of issuance.
NOTE 8 – STOCK PURCHASE OPTIONS AND WARRANTS
The Board of Directors on June 10, 2009 approved the 2009 Long-Term
Stock Incentive Plan. The purpose of the 2009 Long-term
Stock Incentive Plan is to advance the interests of the Company by
encouraging and enabling acquisition of a financial interest in the
Company by employees and other key individuals. The 2009
Long-Term Stock Incentive Plan is intended to aid the Company in
attracting and retaining key employees, to stimulate the efforts of
such individuals and to strengthen their desire to remain with the
Company. A maximum of 1,500,000 shares of the Company's
Common Stock is reserved for issuance under stock options to be
issued under the 2009 Long-Term Stock Incentive
Plan. The Plan permits the grant of incentive stock
options, nonstatutory stock options and restricted stock
awards. The 2009 Long-Term Stock Incentive Plan is
administered by the Board of Directors or, at its direction, a
Compensation Committee comprised of officers of the
Company.
Stock Purchase Options
During the six months ended December 31, 2016 and fiscal year ended
June 30, 2016, the Company did not issue any stock purchase
options.
The following table summarizes the changes in options outstanding
of the Company during the six months ended December 31,
2016.
13
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and June 30, 2016
NOTE 8 – STOCK PURCHASE OPTIONS AND WARRANTS
-
continued
Date
Issued
|
Number
of Options
|
Weighted
Average Exercise Price
|
Weighted
Average Grant Date Fair Value
|
Expiration
Date (yrs)
|
Value
if Exercised
|
Balance
June 30, 2016
|
25,000
|
$0.15
|
$0.24
|
2.00
|
$3,750
|
Granted
|
-
|
-
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
Cancelled/Expired
|
-
|
-
|
-
|
-
|
-
|
Outstanding
as of December 31, 2016
|
25,000
|
$0.15
|
$0.24
|
1.50
|
$3,750
|
The following table summarizes the changes in options outstanding
of the Company during the fiscal year ended June 30,
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 June 30, 2016
|
25,000
|
$0.15
|
$0.24
|
2.00
|
$3,750
|
Stock Purchase Warrants
During the six months ended December 31, 2016, the Company issued
warrants to purchase a total of 2,639,000. The Company issued
77,000 warrants in conjunction with three promissory notes executed
in July 2016 and August 2016. The Company also issued
1,100,000 warrants as part of a private placement. The Company
modified and exercised 3,020,750 warrants and recorded $10,797 in
prepaid expenses and $13,204 in interest expenses and received
$906,225 in cash. 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, 2016, the Company issued
warrants to purchase a total of 5,172,000. The Company issued
100,000 warrants in conjunction to an employment agreement entered
into in July 2015 and 1,244,000 warrants in conjunction with a
consulting agreement entered into December 2015 to June 2016. The
Company issued 75,000 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 3,338,000
warrants as part of a private placement and 190,000 warrants as
part a finder’s fee agreement. 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.
The following table presents the assumptions used to estimate the
fair values of the stock warrants and options granted:
|
|
December 31, 2016
|
|
June 30, 2016
|
Expected volatility
|
|
98-104%
|
|
106-114%
|
Expected dividends
|
|
0%
|
|
0%
|
Expected term
|
|
3 Years
|
|
2-5 Years
|
Risk-free interest rate
|
|
0.76-0.92%
|
|
0.71-1.01%
|
14
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and June 30, 2016
NOTE 8 – STOCK PURCHASE OPTIONS AND WARRANTS
-
continued
The following table summarizes the changes in warrants outstanding
issued to employees and non-employees of the Company during the six
months ended December 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, 2016
|
35,034,550
|
$0.36
|
$0.45
|
4.31
|
$12,767,108
|
Granted
|
2,639,000
|
0.43
|
0.34
|
2.02
|
706,433
|
Exercised
|
(3,020,750)
|
-
|
-
|
-
|
-
|
Cancelled/Expired
|
(1,695,199)
|
0.34
|
-
|
-
|
(1,698,921)
|
Outstanding
as of December 31, 2016
|
32,957,601
|
$0.36
|
$0.62
|
4.15
|
$11,774,620
|
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, 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
|
31,981,778
|
$0.43
|
$0.50
|
4.98
|
$13,585,289
|
Granted
|
5,172,000
|
0.45
|
0.33
|
3.52
|
2,316,000
|
Exercised
|
(813,360)
|
-
|
-
|
-
|
(630,364)
|
Cancelled/Expired
|
(1,175,868)
|
0.53
|
-
|
-
|
(2,513,817)
|
Outstanding
as of June 30, 2016
|
35,034,550
|
$0.36
|
$0.45
|
4.31
|
$12,767,108
|
NOTE 9 – FINANCIAL INSTRUMENTS
The Company has financial instruments that are considered
derivatives or contain embedded features subject to derivative
accounting. Embedded derivatives are valued separately from the
host instrument and are recognized as derivative liabilities in the
Company’s balance sheet. The Company measures these
instruments at their estimated fair value and recognizes changes in
their estimated fair value in results of operations during the
period of change. The Company has estimated the fair value of these
embedded derivatives for convertible debentures and associated
warrants using a multinomial lattice model as of December 31, 2016
and 2015. The fair values of the derivative instruments are
measured each quarter, which resulted in a gain (loss) of $(574)
and $4,374,585, and derivative expense of $0 and $0 during the six
months ended December 31, 2016 and 2015, respectively. As of
December 31, 2016 and June 30, 2016, the fair market value of the
derivatives aggregated $0 and $0, respectively, using the following
assumptions: estimated 3-0 year term, estimated volatility of
104.34 -71.93%, and a discount rate of 0.88-0.24%.
NOTE 10 – FAIR VALUE MEASUREMENTS
For asset and liabilities measured at fair value, the Company uses
the following hierarchy of inputs:
●
|
Level
one — Quoted market prices in active markets for identical
assets or liabilities;
|
|
|
●
|
Level
two — Inputs other than level one inputs that are either
directly or indirectly observable; and
|
|
|
●
|
Level
three — Unobservable inputs developed using estimates and
assumptions, which are developed by the reporting entity and
reflect those assumptions that a market participant would
use.
|
Liabilities measured at fair value on a recurring basis at December
31, 2016, are summarized as follows:
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Fair
value of derivatives
|
$-
|
$-
|
$-
|
$-
|
Securities
available-for-sale
|
$48,000
|
$-
|
$-
|
$48,000
|
15
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and June 30, 2016
NOTE 10 – FAIR VALUE MEASUREMENTS
-
continued
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
|
$-
|
$-
|
$-
|
$-
|
Securities
available-for-sale
|
$63,600
|
$-
|
$-
|
$63,600
|
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company may become involved in certain legal proceedings and
claims which arise in the normal course of business. The Company is
not a party to any litigation. To the best of the knowledge of our
management, there are no material litigation matters pending or
threatened against us.
Lease Agreements
We lease offices in Hollywood, California (located at 6671 Sunset
Blvd., Suite 1520, 1518 and 1550, Hollywood, California, 90028) for
corporate, research, engineering and mastering services. The lease
expires on December 31, 2017. The total lease expense
for the facility is approximately $15,375 per month, and the total
remaining obligations under these leases at December 31, 2016, were
approximately $226,769
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 per month, and the total remaining
obligations under these leases at December 31, 2016 were
approximately $56,685
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 per month, and the total remaining
obligations under these leases at December 31, 2016 were
approximately $437,455
Below is a table summarizing the annual operating lease obligations
over the next 5 years:
Year
|
Lease
Payments
|
2017
|
142,992
|
2018
|
208,117
|
2019
|
108,068
|
2020
|
94,547
|
2021
|
97,315
|
Total
|
$651,039
|
Other
The Company has not declared dividends on Series A or B Convertible
Preferred Stock or its Series A-1 Convertible Preferred Stock. The
cumulative dividends in arrears through December 31, 2016 were
approximately $810,451.
As of the date of this filing, the Company has not filed its tax
return for the fiscal year ended 2015 and 2016.
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:
16
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and June 30, 2016
NOTE 13 - SUBSEQUENT EVENTS
-
continued
On November 20, 2015, the Company issued a convertible note to an
unrelated company for $600,000 that matures on May 20, 2016. The
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. The Company extended the maturity date
for the sixth time by issuing additional $30,000 convertible notes
on January 1, 2017 to February 15, 2017 per the terms of the note
there are no derivatives until it becomes convertible on the
original note, however the $30,000 addition for the extension is to
be considered derivatives. The Lender released a
clarification of amendments to convertible promissory notes that
explained the $30,000 extension fees are the only portion that is
to be considered as convertible and converts within 2 days of
issuance. The intent of the amendment agreements were to
insure the original note dated November 20, 2015 in the amount of
$600,000 remain current and is not convertible until the borrower
defaulted under the amendment agreement dated January 1, 2017. Due
to the conversion into 145,929 shares of common stock on January 1,
2017 (extension date) and January 3, 2017 (conversion date)
sequencing is required on other instruments. Because the terms do
not dictate a maximum numbers of convertible shares, the ability to
settle these obligations with shares would be unavailable causing
these obligations to potentially be settled in cash. This condition
creates a derivative liability Under ASC 815-40.The Company has a
sequencing policy regarding share settlement wherein instruments
with the earliest issuance date would be settled first. The
sequencing policy also considers contingently issuable additional
shares, such as those issuable upon a stock split, to have an
issuance date to coincide with the event giving rise to the
additional shares. During the extension and conversion day period
no additional convertible instruments were issued, therefore on the
extension was considered in the derivative
calculation.
On February 2, 2017, the Company amended the convertible note dated
September 27, 2016 for $1,000,000 to extend the maturity date to
February 2, 2020 and issued 20,000 warrants valued at $31,822. The
Company evaluated amendment under ASC 470-50,
“Debt
- Modification and Extinguishment”, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the
debt.
On February 3, 2017, the Company issued a convertible note to an
unrelated company for $258,000 that matures on August 3, 2017. The
note bears 12% interest per annum and is convertible into
shares of the Company’s common stock at 57.5% of the lowest
price of the Company’s Common Stock during the thirty (30)
trading days immediately prior to the conversion date. Additionally, the note contains a ratchet
provision. he Company determined under ASC 815, that the embedded
conversion feature (if offering of common stock is at no
consideration or at a price that is lower than the effective
conversion price on the date shares are offered for sale, then a
ratchet down of effective exercise price to price per share offered
for common stock would be used to determine additional shares to be
issued). The Company has determined that this ratchet provision
indicates that these shares, if issued, are not indexed to the
Company’s own stock and, therefore, is an embedded derivative
financial liability, which requires bifurcation and to be
separately accounted for. At each reporting period, the Company
will mark this derivative financial instrument to its estimated
fair value.
In conjunction with the note, the Company issued to the holder
550,000 refundable shares of restricted Common Stock to be held in
a treasury account and will be returned to the company if the note
is paid on or before the due date. The value of the BCF recorded
was $163,749 and the debt discount related to the attached relative
fair value of the restricted Common Stock was $94,251, for a total
debt discount of $258,000, and a derivative expense of
$65,750.
17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report (the “Report”) includes
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934, as amended, and as contemplated
under the Private Securities Litigation Reform Act of
1995. These forward-looking statements may relate to
such matters as the Company’s (and its
subsidiaries) business strategies, continued growth in the
Company’s markets, projections, and anticipated trends in the
Company’s business and the industry in which it operates
anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services,
anticipated market performance and similar matters. All
statements herein contained in this Report, other than statements
of historical fact, are forward-looking statements.
When used in this Report, the words “may,”
“will,” “expect,” “anticipate,”
“continue,” “estimate,”
“project,” “intend,” “budget,”
“budgeted,” “believe,” “will,”
“intends,” “seeks,” “goals,”
“forecast,” and similar words and expressions are
intended to identify forward-looking statements regarding events,
conditions, and financial trends that may affect our future plans
of operations, business strategy, operating results, and financial
position. These forward-looking statements are based largely on the
Company’s expectations and are subject to a number of risks
and uncertainties, certain of which are beyond the Company’s
control. We caution our readers that a variety of
factors could cause our actual results to differ materially from
the anticipated results or other matters expressed in the forward
looking statements, including those factors described under
“Risk Factors” and elsewhere herein. In
light of these risks and uncertainties, there can be no assurance
that the forward-looking information contained in this Report will
in fact transpire or prove to be accurate. These risks
and uncertainties, many of which are beyond our control,
include:
|
●
|
the sufficiency of existing capital resources and our ability to
raise additional capital to fund cash requirements
for future operations;
|
|
●
|
uncertainties involved in growth and growth rate of our operations,
business, revenues, operating margins, costs,
expenses and acceptance of any products or services;
|
|
●
|
uncertainties involved in growth and growth rate of our operations,
business, revenues, operating margins, costs,
expenses and acceptance of any products or services;
|
|
●
|
volatility of the stock market, particularly within the technology
sector;
|
|
●
|
our dilution related to all equity grants to employees and
non-employees;
|
|
●
|
that we will continue to make significant capital expenditure
investments;
|
|
●
|
that we will continue to make investments and
acquisitions;
|
|
●
|
the sufficiency of our existing cash and cash generated from
operations;
|
|
●
|
the increase of sales and marketing and general and administrative
expenses in the future;
|
|
●
|
the growth in advertising revenues from our websites and studios
will be achievable and sustainable;
|
|
●
|
that seasonal fluctuations in Internet usage and traditional
advertising seasonality are likely to affect our business;
and
|
|
●
|
general economic conditions.
|
Although we believe the expectations reflected in these
forward-looking statements are reasonable, such expectations cannot
guarantee future results, levels of activity, performance or
achievements. We urge you not to place undue reliance on
these forward-looking statements, which speak only as of the date
of this Annual Report.
All references in this report to
“we,” “our,” “us,” the
“Company” or “AfterMaster” refer to
AfterMaster, Inc., and its subsidiary and
predecessors.
General
Corporate Background
We are a Delaware
public Company traded on the Over-The-Counter Bulletin Board
(ticker symbol: AFTM). As of February 14, 2017, there were
109,540,477 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.
18
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -
continued
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™,
Aftermaster Pro™ and MyStudio®. The Company also
operates recording and mastering studios at its Hollywood
facility.
AfterMaster holds an unparalleled position in the audio technology
industry and it is operated by a world-class team with successful
track records and extensive experience in music and audio
technology. The AfterMaster team has produced, engineered and
mastered more hit music than any other audio company in the world.
We believe that our expertise and technical skills have led us to
develop audio technologies unmatched in the audio
industry. www.aftermaster.com
Summary
The Company continued to record modest revenues for the quarter
ending December 31, 2016. The Company had expected to recognize
$762,688 in revenues (currently recorded as deferred revenue) in
the quarter from sales it has generated through presales of its
Aftermaster Pro devices. However, parts availability and
manufacturing challenges delayed the commencement of commercial
scale manufacturing during the quarter. This delay impacted not only the inclusion of the
deferred revenue but also revenue expected from retailers during
the quarter ending December 31, 2016.
In January of 2017, the Company engaged a new manufacturer who is
now both actively fulfilling our presale commitments and ramping up
production for our planned retail distribution through multiple
retailers. The Company has issued an initial purchase order and a
deposit for the electronic components and manufacturing of 100,000
circuit boards.
The Company recently completed an extensive renovation of a
recording studio built by music legends Crosby, Stills and Nash in
1977, which is located next to its existing studios in Hollywood.
The studio is now equipped with state-of-the-art recording and
mixing equipment and will be used for both audio research and
development as well as it will be offered for rental to musicians.
The Company considers it to be one of the finest recording studios
in the US and it is expected to begin generating revenue in the
first quarter of 2017.
AfterMaster Audio Technology
AfterMaster audio technology was created and developed pursuant to
a multi-year, multi-million dollar development effort to make
digital audio sound substantially better by developing proprietary
software, digital signal processing technology and consumer
products. The AfterMaster Audio Labs team is comprised of a
unique group of award-winning industry leaders in music, technology
and audio engineering which includes Ari Blitz, Peter Doell, Rodney
Jerkins, Larry Ryckman, Justin Timberlake, Paul Wolff, Andrew
Wuepper and Shelly Yakus. 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. 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.
19
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -
continued
Icon Health and Fitness
On December 9, 2016, the Company entered into a Consulting and
License Agreement with ICON Health & Fitness, Inc.
(“ICON”), pursuant to which the Company would act as
audio technology development consultant to develop an Aftermaster
based sound module for use or integration with ICON’s
exercise equipment and provide audio tuning services to provide
improved sound quality for ICON’s audio enabled equipment,
and pursuant to which ICON would pay the Company a per module fee
and receive a license from the Company to use or sell the modules
and use the software relating to each module.
ICON Health and Fitness, Inc. is
the world’s largest manufacturer and marketer of home fitness
equipment. ICON manufactures treadmills, elliptical
trainers, stationary
bicycles, weight machines
and
benches, and yoga and Pilates equipment. ICON has a wide range
of brands, products and technologies, and sells home fitness and
health club equipment under the following brands:
NordicTrack®, ProForm®,
Weider®, Gold's Gym® Home Fitness and
FreeMotion®. Their fitness technology brand, including
WiFi-enabled
fitness equipment
and fitness
wearables,
is iFit®.
Aftermaster Attends 2017 Consumer Electronics Show (CES) in Las
Vegas
Aftermaster attended the 2017 CES show in Las Vegas in early
January and showcased its technology both in an on-floor display
booth and in a private hotel suite. The booth contained five
listening stations to demonstrate Aftermaster technology for
television, consumer electronics and video games. The Company also
unveiled its new Aftermaster Pro, the world’s first personal
audio remastering device, which it has recently started to
manufacture.
During the 2016 CES show, the Company was awarded three
“Innovation & Design” awards during the
ShowStoppers product showcase. 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 $733 million from over 36.5 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.
Adobe Audition
Aftermaster's Promaster online audio mastering service will soon be
available on Adobe® Audition® CC, a professional audio
workstation for mixing, finishing and editing audio/video. The
integration of ProMaster will allow Adobe Audition CC users to
instantly master their original work directly within Adobe Creative
Cloud®. ProMaster infuses the clearest, deepest sound quality
into any recording, which elevates that audio to a studio
remastered sound experience. Adobe's Audition CC with ProMaster HD
will enable its users to substantially cut editing time and enhance
original audio work into fuller, deeper, louder and clearer tracks.
When ready, users will install the ProMaster extension from the
Adobe Add-ons marketplace.
Aftermaster Consumer Electronics Products
The
Company has assembled a world-class branding and design team who
has designed of the first consumer electronics product developed by
the Company, "Aftermaster Pro". AfterMaster Pro is the
world’s first personal audio re-mastering device and defines
a new category in consumer electronics products by offering a
product never before offered. AfterMaster Pro is a proprietary,
first-to-market product which has no direct
competition.
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 portable audio enhancement
device.
The Company has pre-sold
thousands of Aftermaster Pro's to buyers in over 60 countries, with
revenues totaling over $750,000. A majority of the sales were at
$150 per unit. www.aftermasterpro.com.
The Company had expected to begin large volume manufacturing in
December but was delayed by parts supply and manufacturing
challenges. The challenges led the Company to internally
manufacture small volume batches to begin to fulfil presale orders.
The Company recently engaged a new manufacturer and
is beginning to manufacture units in
commercially significant numbers. The Company has multiple retail
outlets lined up to carry the Aftermaster Pro beginning in the
first quarter of 2017.
Additional Aftermaster branded products are under development,
which we expect to introduce in the coming year.
20
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -
continued
ON
Semiconductor/AfterMaster Audio Chip and Software
The Company is party to a multi-year joint development and
marketing agreement with ON Semiconductor ("ON") of Phoenix,
Arizona, to commercialize its technology through audio
semiconductor chips. ON is a multi-billion dollar, multi-national
semiconductor designer and manufacturer.
The agreement calls for ON to implement and support our AfterMaster
technology in a Digital Signal Processor (DSP) semiconductor chip
that is being marketed to their current OEM customers, distributors
and others. We selected ON for its technical capabilities, sales
support and deep customer pool.
In conjunction with ON, we have completed the development of an
AfterMaster software algorithm that is designed to be used in
semiconductor chips or as a standalone software product. We believe
the sound quality from our algorithm provides a superior audio
experience relative to other products on the market.
Now branded the BelaSigna 300 AM chip, it is one of the smallest,
high power/low voltage DSP chips available. It is small enough to
fit into a hearing aid but equally effective in any size device
with audio capability.
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. The Company currently
has several sales and licensing agreements pending which it expects
to finalize during of the year.
ProMaster
ProMaster is an online music mastering, streaming, and storage
service designed for independent artists which utilizes proprietary
audio technologies developed by AfterMaster. ProMaster 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 $9.99
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.
ProMaster on-line music mastering product is in the final stages of
beta testing of its newly designed website and will be aggressively
marketing during 2017.
Recording and Mastering Studios
Aftermaster operates 6 recording and mastering studios at its
Hollywood California facility. The Company’s engineers mix
and master music for both independent and high profile artists and
is currently mastering the music for the hit TV show
"Empire".
The Company recently took over the former recording studio built by
music legends Crosby, Stills and Nash in 1977, which is located
next to its existing studios. The Company recently completely
renovated the studio and installed state-of-the-art equipment. The
Company considers the new studio to be one of the finest recording
studios in the US and expects it to begin generating revenues in
the first quarter of 2017.
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. During the
year, the Company engaged Mr. Morgan Chu of Irell and Manella, to
represent its intellectual property interests along with IP
attorneys Farjami & Farjami LLP, and, Arnold Weintraub, of the
Weintraub Group. Mr. Weintraub serves on the Board of the
Company.
21
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -
continued
Employees
As
of December 31, 2016, we employed thirteen full-time and one
part-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, 1518 and 1550, Hollywood, California, 90028) for
corporate, research, engineering and mastering services. The lease
expires on December 31, 2017. The total lease expense
for the facility is approximately $15,375 per month, and the total
remaining obligations under these leases at December 31, 2016, were
approximately $202,957
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 per month, and the total remaining
obligations under these leases at December 31, 2016 were
approximately $51,224
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 per month, and the total remaining
obligations under these leases at December 31, 2016 were
approximately $416,013.
RESULTS OF OPERATIONS
|
|
|
|
|
|
Revenues
|
|
|
|
Three
Months Ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
AfterMaster
Revenues
|
$48,739
|
$36,154
|
Total
Revenues
|
$48,739
|
$36,154
|
Revenues
|
|
|
|
Six
Months Ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
AfterMaster
Revenues
|
$103,225
|
$55,934
|
Licensing
Revenues
|
-
|
1,800,000
|
Total
Revenues
|
$103,225
|
$1,855,934
|
We currently generate revenue from our operations through two
activities: AfterMaster revenues, and licensing
revenues.
AfterMaster revenues are generated primarily from AfterMaster audio
services provided to producers and artists on a contract basis. We
hope this source of revenue grows in coming years, and the Company
is expecting to generate additional revenues in this category from
on-line mastering downloads and the development of the AfterMaster
software algorithm and chip, although such growth and additional
revenues are not assured and may not occur. AfterMaster revenues
for the quarter ending December 31, 2016, increased to $103,225, as
compared to $55,934 for the comparable quarter ending December 31,
2015, the increases were due primarily to an increase in the
mastering and remastering of music and licensing by our
customers.
Licensing revenues are generated by licensing certain technologies,
intellectual property, and patents to third parties. Our
licensing revenues decreased to $0 during the quarter ending
December 31, 2016, as compared to the $1,800,000 for the comparable
quarter ending December 31, 2015, due primarily to a licensing
contract with bBooth no longer being in place.
22
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -
continued
In the aggregate, total Company revenues decreased to $103,225 for
the quarter ending December 31, 2016, as compared to total revenues
of $1,855,934 for the quarter ending December 31, 2015, due to a
decrease in licensing revenues.
Cost of Revenues
|
|
|
|
Three
Months Ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Cost
of Revenues (excluding depreciation and amortization)
|
$157,680
|
$108,949
|
Cost of Revenues
|
|
|
|
Six
Months Ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Cost
of Revenues (excluding depreciation and amortization)
|
$319,775
|
$202,083
|
Cost of sales consists primarily of AfterMaster Studio Rent,
Consultants, senior engineers, and Internet connectivity and
excludes depreciation and amortization on the studios. The increase
in cost of sales for the six months ended December 31, 2016, over
the comparable period for the prior fiscal year, is attributable,
primarily, to the Company hiring a new senior engineer and increase
in studio rent for new state-of-the-art recording
studio.
Other Operating Expenses
|
|
|
|
Three
Months Ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Depreciation
and Amortization Expense
|
$45,015
|
$17,983
|
Research
and Development
|
26,020
|
42,300
|
Advertising
and Promotion Expense
|
2,565
|
142,867
|
Legal
and Professional Expense
|
30,804
|
130,678
|
Non-Cash
Consulting Expense
|
659,938
|
1,307,966
|
General
and Administrative Expenses
|
915,206
|
980,387
|
Total
|
$1,679,548
|
2,622,181
|
Other Operating Expenses
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Depreciation
and Amortization Expense
|
$85,554
|
$35,001
|
Research
and Development
|
93,015
|
69,085
|
Advertising
and Promotion Expense
|
17,644
|
144.385
|
Legal
and Professional Expense
|
55,070
|
257,412
|
Non-Cash
Consulting Expense
|
1,531,909
|
2,187,511
|
General
and Administrative Expenses
|
1,628,042
|
2,112,369
|
Total
|
$3,411,234
|
$4,805,763
|
23
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -
continued
General and administrative expenses consist
primarily of compensation and related costs for our finance, legal,
human resources, investor relation, Public relations
and information technology personnel;
advertising and promotion expenses; rent and facilities; and
expenses related to the issuance of stock
compensation.
During the three months ending
December 31, 2016, Research and
Development costs decreased by $16,280, Advertising and Promotion
decreased by $140,302, Legal and Professional fees decreased by
$99,874 and consulting services decreased by $648,028, as
compared to the three months
ending December 31, 2015. The
decreases in Research and Development, Advertising and Promotion,
and consulting services are primarily due to the design,
development and marketing of its Aftermaster Pro consumer hardware
product. Legal and Professional fees decrease are primarily to the
company only using one attorney on a monthly retainer to handle all
the company’s legal needs.
During the six months ending
December 31, 2016, Research and
Development costs increased by $23,930, Advertising and Promotion
decreased by $126,741, Legal and Professional fees decreased by
$202,342 and consulting services decreased by $655,602, as
compared to the six months
ending December 31, 2015. The
increases in Research and Development, and decreases in Advertising
and Promotion, and consulting services are primarily due to the
design, development and marketing of its Aftermaster Pro consumer
hardware product. Legal and Professional fees decrease are
primarily to the company only using one attorney on a monthly
retainer to handle all the company’s legal
needs.
Other Income and Expenses
|
|
|
|
Three
Months Ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Interest
Expense
|
$(378,522)
|
$(250,345)
|
Change in Fair
Value of Derivative
|
(463)
|
-
|
Loss
on Available for Sale Securities
|
-
|
(1,770,000)
|
Gain
on Extinguishment of Debt
|
9,236
|
47,897
|
Total
|
$(369,749)
|
$(1,972,448)
|
Other Income and Expenses
|
|
|
|
Six
Months Ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Interest
Expense
|
$(747,595)
|
$(430,725)
|
Change in Fair
Value of Derivative
|
(574)
|
4,374,585
|
Loss on Available
for Sale Securities
|
|
(1,770,000)
|
Gain
on Extinguishment of Debt
|
9,236
|
143,344
|
Total
|
$(738,933)
|
$2,317,204
|
The other income and expenses during the quarter ended December 31,
2016, totaling $(738,933) of net expenses, which consists of change
in fair value of derivative and interest. During the comparable
period in 2015, other income and expenses totaled
$2,317,204.
Net Loss
|
|
|
|
Three
Months Ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Net
Loss
|
$(2,158,238)
|
$(4,667,424)
|
Net Loss
|
|
|
|
Six
Months Ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Net
Loss
|
$(4,366,717)
|
$(834,708)
|
|
|
|
24
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -
continued
Due to the Company’s cash position, we use our Common Stock
as currency to pay many employees, vendors and
consultants. Once we have raised additional capital from
outside sources, as well as generated cash flows from operations,
we expect to reduce the use of Common Stock as a significant means
of compensation. Under FASB ASC 718, “ Accounting for Stock-Based
Compensation” , these
non-cash issuances are expensed at the equity instruments fair
market value.
LIQUIDITY AND CAPITAL RESOURCES
The Company had revenues of $103,225 during the six months ended
December 31, 2016 as compared to $1,855,934
in the comparable quarter of
2015. The Company has incurred losses since inception of
$68,151,909. At December 31, 2016, the Company has
negative working capital of $6,433,960, which was a decrease in
working capital of $1,339,806 from June 30,
2016.
The Company had cash of $224,120 as of December 31, 2016, as
compared to $394,325 as
of June 30, 2016. The company entering into eleven (11)
Share Purchase Agreements with individual accredited investors
resulting in net proceeds of $373,588 to the Company compared to
six (6) Share Purchase Agreements with individual accredited
investors resulting in net proceeds of $439,000 to the Company from
the prior period. This amount was partially offset by operational
costs, purchases of assets, and payments of obligations from
convertible notes, notes, and lease payables.
The Company had prepaid expense of $818,401 as of December 31,
2016, as compared to $1,097,036 as of June 30, 2016. The
decrease is due to the Company amortizing the prepaid expenses
totaling $1,531,909 over the six months ended December 31, 2016,
partially offset by the issuance of nine consulting agreements
entered into in the current year.
The future of the Company as an operating business will depend on
its ability to obtain sufficient capital contributions and/or
financing as may be required to sustain its
operations. Management’s plan to address these
issues includes a continued exercise of tight cost controls to
conserve cash and obtaining additional debt and/or equity
financing.
As we continue our activities, we will continue to experience net
negative cash flows from operations, pending receipt of significant
revenues that generate a positive sales
margin.
The Company expects that additional operating losses will occur
until net margins gained from sales revenue is sufficient to offset
the costs incurred for marketing, sales and product development.
Until the Company has achieved a sales level sufficient to break
even, it will not be self-sustaining or be competitive in the areas
in which it intends to operate.
In addition, the Company will require substantial additional funds
to continue production and installation of the additional studios
and to fully implement its marketing
plans.
As of December 31, 2016, the existing capital and anticipated funds
from operations were not sufficient to sustain Company operations
or the business plan over the next twelve months. We
anticipate substantial increases in our cash requirements which
will require additional capital to be generated from the sale of
Common Stock, the sale of Preferred Stock, equipment financing,
debt financing and bank borrowings, to the extent available, or
other forms of financing to the extent necessary to augment our
working capital. In the event we cannot obtain the
necessary capital to pursue our strategic business plan, we may
have to significantly curtail our operations. This would
materially impact our ability to continue operations. There is no
assurance that the Company will be able to obtain additional
funding when needed, or that such funding, if available, can be
obtained on terms acceptable to the
Company.
Recent global events, as well as domestic economic factors, have
recently limited the access of many companies to both debt and
equity financings. As such, no assurance can be made that financing
will be available or available on terms acceptable to the Company,
and, if available, it may take either the form of debt or equity.
In either case, any financing will have a negative impact on our
financial condition and will likely result in an immediate and
substantial dilution to our existing
stockholders.
Although the Company intends to engage in a subsequent equity
offering of its securities to raise additional working capital for
operations, the Company has no firm commitments for any additional
funding, either debt or equity, at the present time.
Insufficient financial resources may require the Company to delay
or eliminate all or some of its development, marketing and sales
plans, which could have a material adverse effect on the
Company’s business, financial condition and results of
operations. There is no certainty that the expenditures to be
made by the Company will result in a profitable business proposed
by the Company.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not required.
ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer, President, and Chief Financial Officer
(the “Certifying Officers”) are responsible for
establishing and maintaining disclosure controls and procedures for
the Company. The Certifying Officers have designed such
disclosure controls and procedures to ensure that material
information is made known to them, particularly during the period
in which this Report was prepared.
The Certifying Officers responsible for establishing and
maintaining adequate internal control over financial reporting for
the Company used the “Internal Control over Financial
Reporting Integrated Framework” issued by Committee of
Sponsoring Organizations (“COSO”) to conduct an
extensive review of the Company’s “disclosure controls
and procedures” (as defined in the Exchange Act, Rules
13a-15(e) and 15-d-15(e)) as of the end of each of the periods
covered by this Report (the “Evaluation
Date”). Based upon that evaluation, the Certifying
Officers concluded that, as of December 31, 2016, and June 30,
2016, our disclosure controls and procedures were not effective in
ensuring that the information we were required to disclose in
reports that we file or submit under the Securities and Exchange
Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission
(“SEC”) rules and forms.
The Certifying Officers based their conclusion on the fact that the
Company has identified material weaknesses in controls over
financial reporting, detailed below. In order to reduce
the impact of these weaknesses to an acceptable level, hawse have
contracted with consultants with expertise in U.S. GAAP and SEC
financial reporting standards to review and compile all financial
information prior to filing that information with the
SEC. However, even with the added expertise of these
consultants, we still expect to be deficient in our internal
controls over disclosure and procedures until sufficient capital is
available to hire the appropriate internal accounting staff and
individuals with requisite GAAP and SEC financial reporting
knowledge. There have been no significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting for the
Company. Management used the “Internal Control
over Financial Reporting Integrated Framework” issued by COSO
to conduct an extensive review of the Company’s internal
controls over financial reporting to make that
evaluation. As of June 30, 2016 and June 30, 2015, the
Company had identified deficiencies in internal controls that
constituted material weaknesses in internal controls. Due to these
material weaknesses, management concluded that internal controls
over financial reporting as of December 31, 2016 and June 30, 2016
were not effective, based on COSO’s
framework.
The deficiencies are attributed to the fact that the Company does
not have adequate resources to address complex accounting issues,
as well as an inadequate number of persons to whom it can segregate
accounting tasks within the Company so as to ensure the
segregation of duties between those persons who approve and
issue payment from those persons who are responsible to record and
reconcile such transactions within the Company’s accounting
system. These control deficiencies will be monitored and
attention will be given to the matter as we continue to accelerate
through our current growth stage.
Management has concluded that these control deficiencies constitute
a material weakness that continued throughout fiscal year
2017. In order to reduce the impact of these weaknesses
to an acceptable level, we have contracted with consultants with
expertise in U.S. GAAP and SEC financial reporting standards to
review and compile all financial information prior to filing that
information with the SEC. However, even with the added
expertise of these consultants, we still expect to be deficient in
our internal controls over disclosure and procedures until
sufficient capital is available to hire the appropriate internal
accounting staff and individuals with requisite GAAP and SEC
financial reporting knowledge. There were no significant changes in
our internal control over financial reporting or in other factors
that occurred during our most recent fiscal year that have
materially affected, or are reasonably likely to materially affect,
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal Proceedings
26
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
During the six months ended December 31, 2016, no matters were
submitted to the shareholders for a vote.
ITEM 5. OTHER INFORMATION
Subsequent Events
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. The Company extended the maturity date
for the sixth time by issuing additional $30,000 convertible notes
on January 1, 2017 to February 15, 2017 per the terms of the note
there is not derivatives until it becomes convertible on the
original note, however the $30,000 addition for the extension is to
be considered derivatives. The Lender released a clarification of
amendments to convertible promissory notes that explained the
$30,000 extension fees are the only portion that is to be
considered as convertible and converts within 2 days of issuance.
The intent of the amendment agreements were to insure the original
note dated November 20, 2015 in the amount of $600,000 remain
current and is not convertible until the borrower defaulted under
the amendment agreement dated January 1, 2017. Due to the
conversion into 145,929 shares of common stock on January 1, 2017
(extension date) and January 3, 2017 (conversion date) sequencing
is required on other instruments. Because the terms do not dictate
a maximum numbers of convertible shares, the ability to settle
these obligations with shares would be unavailable causing these
obligations to potentially be settled in cash. This condition
creates a derivative liability Under ASC 815-40. The Company has a
sequencing policy regarding share settlement wherein instruments
with the earliest issuance date would be settled first. The
sequencing policy also considers contingently issuable additional
shares, such as those issuable upon a stock split, to have an
issuance date to coincide with the event giving rise to the
additional shares. During the extension and conversion day period
no additional convertible instruments were issued, therefore on the
extension was considered in the derivative
calculation.
On February 2, 2017, the Company amended the convertible note dated
September 27, 2016 for $1,000,000 to extend the maturity date to
February 2, 2020 and issued 20,000 warrants valued at $31,822. The
Company evaluated amendment under ASC 470-50,
“Debt
- Modification and Extinguishment”, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the
debt.
On February 3, 2017, the Company issued a convertible note to an
unrelated company for $258,000 that matures on August 3, 2017. The
note bears 12% interest per annum and is convertible into
shares of the Company’s common stock at 57.5% of the lowest
price of the Company’s Common Stock during the thirty (30)
trading days immediately prior to the conversion date. Additionally, the note contains a ratchet
provision. he Company determined under ASC 815, that the embedded
conversion feature (if offering of common stock is at no
consideration or at a price that is lower than the effective
conversion price on the date shares are offered for sale, then a
ratchet down of effective exercise price to price per share offered
for common stock would be used to determine additional shares to be
issued). The Company has determined that this ratchet provision
indicates that these shares, if issued, are not indexed to the
Company’s own stock and, therefore, is an embedded derivative
financial liability, which requires bifurcation and to be
separately accounted for. At each reporting period, the Company
will mark this derivative financial instrument to its estimated
fair value.
In
conjunction with the note, the Company issued 550,000 refundable
shares of restricted Common Stock that will be held in a treasury
account and will be returned to the company if the note is paid in
full on or before the due date. The value of the BCF recorded was
$163,749 and the debt discount related to the attached relative
fair value of the restricted Common Stock was $94,251, for a total
debt discount of $258,000, and a derivative expense of
$65,750.
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
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: February 14, 2017
|
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: February 14, 2017
|
By:
|
/s/ Larry Ryckman
|
|
Larry Ryckman,
|
|
|
Title: Director, President, Chief Executive
Officer
|
|
|
|
|
AFTERMASTER, INC.
|
|
|
|
|
Date: February 14, 2017
|
By:
|
/s/ Mirella Chavez
|
|
Mirella Chavez
|
|
|
Title: Chief Financial Officer,
Secretary
|
29