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, 2019, and for all periods presented herein,
have been made.
Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America have been
condensed or omitted. It is suggested that these condensed
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company’s June
30, 2019 audited financial statements. The results of operations
for the period ended December 31, 2019 is not necessarily
indicative of the operating results for the full year.
NOTE 2 – GOING CONCERN
The
Company’s financial statements are prepared using generally
accepted accounting principles in the United States of America
applicable to a going concern which contemplates the realization of
assets and liquidation of liabilities in the normal course of
business. The Company has an accumulated deficit of $89,201,278,
negative working capital of $16,554,457 and currently has revenues
which are insufficient to cover its operating costs, which raises
substantial doubt about its ability to continue as a going concern.
The Company has not yet established an ongoing source of revenues
sufficient to cover its operating costs and allow it to continue as
a going concern.
The
future of the Company as an operating business will depend on its
ability to (1) obtain sufficient capital contributions and/or
financing as may be required to sustain its operations and (2) to
achieve adequate revenues from its Promaster and Aftermaster
businesses. Management’s plan to address these issues
includes, (a) continued exercise of tight cost controls to conserve
cash, (b) obtaining additional financing, (c) more widely
commercializing the Aftermaster and Promaster products, and (d)
identifying and executing on additional revenue generating
opportunities.
The
ability of the Company to continue as a going concern is dependent
upon its ability to successfully accomplish the plans described in
the preceding paragraph and eventually secure other sources of
financing and attain profitable operations. The accompanying
financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
If the Company is unable to obtain adequate capital, it could be
forced to cease operations.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Use of Estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenue and expenses during the reporting
periods. Significant estimates are made in relation to the
allowance for doubtful accounts and the fair value of certain
financial instruments.
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
Derivative Liabilities
The
Company has financial instruments that are considered derivatives
or contain embedded features subject to derivative accounting.
Embedded derivatives are valued separately from the host instrument
and are recognized as derivative liabilities in the Company’s
balance sheet. The Company measures these instruments at their
estimated fair value and recognizes changes in their estimated fair
value in results of operations during the period of
change. The Company has a sequencing policy regarding share
settlement wherein instruments with the earliest issuance date
would be settled first. The sequencing policy also considers
contingently issuable additional shares, such as those issuable
upon a stock split, to have an issuance date to coincide with the
event giving rise to the additional shares.
On
February 3, 2017, the company entered into a note payable with an
unrelated party at a percentage discount (variable) exercise price
which causes the number to be converted into a number of common
shares that “approach infinity”, as the underlying
stock price could approach zero. Accordingly, all convertible
instruments, including standalone warrants, issued after February
3, 2017 are considered derivatives according to the Company’s
sequencing policy.
The
Company values these convertible notes payable using the
multinomial lattice method that values the derivative liability
within the notes based on a probability weighted discounted cash
flow model. The resulting liability is valued at each reporting
date and the change in the liability is reflected as change in
derivative liability in the statement of operations.
Leases
The
Company adopted ASC 842 as of October 1, 2019 using a modified
retrospective transition approach for all leases existing at
October 1, 2019, the date of the initial application. Consequently,
financial information will not be updated, and disclosures required
under ASC 842 will not be provided for dates and periods before
October 1, 2019.
As of
October 1, 2019, the Company recognized operating lease liabilities
of $154,541 based on the present value of the remaining minimum
rental payments determined under prior lease accounting standards
and corresponding ROU assets of $154,541.
The
Company determines if a contract is a lease or contains a lease at
inception. Right of use assets related to operating type leases are
reported in other noncurrent assets and the present value of
remaining lease obligations is reported in accrued and other
liabilities and other noncurrent liabilities on the Condensed
Consolidated Balance Sheets. The Company does not currently have
any financing type leases.
Operating
lease liabilities are recognized based on the present value of the
future minimum lease payments over the lease term at commencement
date. The Company’s leases do not provide an implicit rate
and the Company could not determine the incremental borrowing rates
applicable to the economic environment; therefore, the Company uses
the risk free interest rates applicable to the duration of the
lease, based on the information available at commencement date, in
determining the present value of future payments. The right of use
asset for operating leases is measured using the lease liability
adjusted for the impact of lease payments made prior to
commencement, lease incentives received, initial direct costs
incurred and any asset impairments. Lease terms may include options
to extend or terminate the lease when it is reasonably certain that
the option will be exercised. Lease expense for minimum lease
payments is recognized on a straight-line basis over the lease
term.
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
The
Company remeasures and reallocates the consideration in a lease
when there is a modification of the lease that is not accounted for
as a separate contract. The lease liability is remeasured when
there is a change in the lease term or a change in the assessment
of whether the Company will exercise a lease option. The Company
assesses right of use assets for impairment in accordance with its
long-lived asset impairment policy.
The
Company accounts for lease agreements with contractually required
lease and non-lease components on a combined basis. Lease payments
made for cancellable leases, variable amounts that are not based on
an observable index and lease agreements with an original duration
of less than twelve months are recorded directly to lease
expense.
Revenue Recognition
The
Company applies the provisions of FASB ASC 606, Revenue Recognition in Financial
Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. ASC
606 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosure related to revenue
recognition policies. In general, the Company recognizes revenue in
accordance with that core principle by applying the following
steps: (i) identify the contract(s) with a customer, (ii) identify
the performance obligations in the contract, (iii) determine the
transaction price (iv) allocate the transaction price to the
performance obligations in the contract, and (v) recognize
revenue when (or as) the entity satisfies a performance obligation.
In general, the Company’s revenues are recognized when
control of the promised goods or services is transferred to our
customers, in an amount that reflects the consideration we expect
to be entitled to in exchange for those goods or
services.
The
Company’s revenues are generated from Aftermaster products
and services, Aftermaster Pro, sessions revenue, and
remastering. Revenues
related to Aftermaster Pro sells through consumer retail
distribution channels and through our website. For sales
through consumer retail distribution channels, revenue recognition
occurs when title and risk of loss have transferred to the customer
which usually occurs upon shipment to the customers. We established
allowances for expected product returns and these allowances are
recorded as a direct reduction to revenue. Return allowances are
based on our historical experience. Revenues related to sessions
and remastering are recognized when the event
occurred.
Loss Per Share
Basic
loss per Common Share is computed by dividing losses attributable
to Common shareholders by the weighted-average number of shares of
Common Stock outstanding during the period. The losses attributable
to Common shareholders was increased for accrued and deemed
dividends on Preferred Stock during the three and six months ended
December 31, 2019 and 2018 of $56,367 and $56,367 and $112,734 and
$112,734, respectively.
Diluted
earnings per Common Share is computed by dividing net loss
attributable to Common shareholders by the weighted-average number
of Shares of Common Stock outstanding during the period increased
to include the number of additional Shares of Common Stock that
would have been outstanding if the potentially dilutive securities
had been issued. Potentially dilutive securities include
outstanding convertible Preferred Stock, stock options, warrants,
and convertible debt. The dilutive effect of potentially dilutive
securities is reflected in diluted earnings per share by
application of the treasury stock method. Under the treasury stock
method, an increase in the fair market value of the Company’s
Common Stock can result in a greater dilutive effect from
potentially dilutive securities.
For the
three and six months ended December 31, 2019 and 2018, all of the
Company’s potentially dilutive securities (warrants, options,
convertible preferred stock, and convertible debt) were excluded
from the computation of diluted earnings per share as they were
anti-dilutive. The total number of potentially dilutive Common
Shares that were excluded were 3,525,005,256 and 234,671,382 at
December 31, 2019 and 2018, respectively.
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
Recent Accounting Pronouncements
In
January 2017, the FASB issued ASU 2017-04, Intangibles –
Goodwill and Other (Topic 350). The amendments in this update
simplify the test for goodwill impairment by eliminating Step 2
from the impairment test, which required the entity to perform
procedures to determine the fair value at the impairment testing
date of its assets and liabilities following the procedure that
would be required in determining fair value of assets acquired and
liabilities assumed in a business combination. The amendments in
this update are effective for public companies for annual or any
interim goodwill impairment tests in fiscal years beginning after
December 15, 2019. The Company is evaluating the effect that the
updated standard will have on its financial statements and related
disclosures.
In June
2018, the FASB issued ASU No. 2018-07, Compensation-Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting. The new ASU expands the scope of Topic 718 to
include share-based payment transactions for acquiring goods and
services from nonemployees. An entity should apply the requirements
of Topic 718 to nonemployee awards except for specific guidance on
inputs to an option pricing model and the attribution of cost. The
new ASU will be effective for the Company beginning in the fiscal
quarter of 2020, and early adoption is permitted. The Company is
evaluating the effect that the updated standard will have on its
financial statements and related disclosures.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value
Measurement (Topic 820) - Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement. The amendment
modifies, removes, and adds certain disclosure requirements on fair
value measurements. The ASU is effective for annual periods,
including interim periods within those annual periods, beginning
after December 15, 2019. The amendments on changes in unrealized
gains and losses, the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value
measurements, and the narrative description of measurement
uncertainty should be applied prospectively for only the most
recent interim or annual period presented in the initial fiscal
year of adoption. All other amendments should be applied
retrospectively to all periods presented upon their effective date.
Early adoption is permitted. We are currently evaluating the impact
of ASU No. 2018-13 on our consolidated financial
statements.
Management has considered all recent accounting pronouncements
issued since the last audit of our consolidated financial
statements. The Company’s management has evaluated recent
pronouncements and have not included those that were note
applicable.
NOTE 4 – NOTES PAYABLE
Convertible Notes Payable
In
accounting for its convertible notes payable, proceeds from the
sale of a convertible debt instrument with Common Stock purchase
warrants are allocated to the two elements based on the relative
fair values of the debt instrument without the warrants and of the
warrants themselves at time of issuance. The portions of the
proceeds allocated to the warrants are accounted for as paid-in
capital with an offset to debt discount. The remainder of
the proceeds are allocated to the debt instrument portion of the
transaction as prescribed by ASC 470-25-20. The Company then
calculates the effective conversion price of the note based on the
relative fair value allocated to the debt instrument to
determine the fair value of any beneficial conversion feature
(“BCF”) associated with the convertible note in
accordance with ASC 470-20-30. The BCF is recorded to additional
paid-in capital with an offset to debt discount. Both the debt
discount related to the issuance of warrants and related to a BCF
is amortized over the life of the note.
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
Convertible Notes Payable – Related
Parties
Convertible
notes payable due to related parties consisted of the following as
of December 31, 2019 and June 30, 2019, respectively:
|
Convertible Notes Payable – Related
Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$30,000
face value, issued in August 2016, interest rate of 0% and is
convertible into shares of the Company’s Common stock at
$0.40 per share, matured June 30, 2019, net unamortized discount of
$0 as of December 31, 2019 and June 30, 2019, respectively. The
notes are currently in default.
|
$30,000
|
$30,000
|
Various
term notes with total face value of $89,500 issued from September
2017 to February 2018, interest rates of 0% and are convertible
into shares of the Company’s common stock at $0.10 per share,
matured from January 2019 to June 30, 2019, net unamortized
discount of $0 as of December 31,2019 and June 30, 2019,
respectively. The notes are currently in default.
|
89,500
|
89,500
|
|
Total
convertible notes payable - related parties
|
119,500
|
119,500
|
|
Less
current portion
|
119,500
|
119,500
|
|
Convertible
notes payable – related parties, long-term
|
$-
|
$-
|
Convertible Notes Payable - Non-Related Parties
Convertible
notes payable due to non-related parties consisted of the following
as of December 31, 2019 and June 30, 2019,
respectively:
|
Convertible Notes Payable - Non-Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
Various
term notes with total face value of $2,049,000, issued from July
2014 to March 2018, interest rates from 0% to 10% and are
convertible into shares of the Company’s common stock from
$0.10 to $0.40 per share, matured from October 2018 to June 2019.
One of the notes and accrued interest was assigned to non-related
party notes payable in September 2019 and three of the notes and
accrued interest were assigned to a non-related convertible note
payable in October 2019 The notes are currently in default.
$
|
1,844,000
|
$2,049,000
|
|
Two
term notes with total face value of $373,000, issued in February
2017, interest rates of 10% and are convertible into shares of the
Company’s common stock at lesser of 40% of the average three
lowest closing bids twenty (20) days prior to the conversion date
or $0.40 per share, matured June 2018, with additional extension
fees of $81,000 added to principal. A total of $187,403 has been
converted and $85,654 has been paid. The notes are currently in
default.
|
180,943
|
186,597
|
|
$265,000
face value, issued in May 2017, interest rate of 10% and is
convertible into shares of the Company’s common stock at the
lesser of $0.31 or 60% of the lowest closing bids twenty-five (25)
days prior to the conversion date, matured February 2018, of which
$179,406 was converted. The note is currently in
default.
|
85,594
|
104,845
|
|
Two
term notes with total face value of $131,000 face value, issued on
July 2017 and August 2017, interest rates of 12% and are
convertible into shares of the Company’s common stock at 61%
of the lowest two trading prices during the fifteen (15) trading
day period ending to the date of conversion, matured May 2018 and
June 2018, of which $72,000 was converted. The notes are currently
in default.
|
59,000
|
59,000
|
|
$115,000
face value, issued in November 2017, interest rate of 10% and is
convertible into shares of the Company’s common stock at
57.5% of the lowest closing bids thirty (30) days prior to the
conversion per share, matured August 2018. The note is currently in
default.
|
115,000
|
115,000
|
|
$115,000
face value, issued in January 2018, interest rate of 10% and is
convertible into shares of the Company’s common stock at the
lesser of $0.12 and 57.5% of the lowest trading price during the
prior thirty (30) days, matured October 2018. The note is currently
in default.
|
115,000
|
115,000
|
|
$160,000
face value, issued in April 2018, of which $150,000 in principal
and $10,000 in additional fees, interest rate of 10% and is
convertible into shares of the Company’s common stock at the
lesser of $0.05 or 57.5% of the lowest closing bids twenty (20)
days prior to the conversion date, matured January 2019. The note
is currently in default.
|
160,000
|
160,000
|
|
Two
term notes with total face value of $415,000 face value, issued
from an assignment in April 2018 of $370,000 in principal and an
OID of $45,000, interest rates of 10% and are convertible into
shares of the Company’s common stock at rate of 55% of the
average trading price for the prior three (3) trading days, matured
April 2019, of which $223,198 has been converted. The notes are
currently in default.
|
191,802
|
191,802
|
|
Various
term notes with total face value of $502,534, issued from May 2018
to June 2018, interest rates of 12% and are convertible into shares
of the Company’s common stock at 61% of the lowest two
trading prices during the fifteen (15) trading day period prior to
the date of conversion, matured from October 2018 to June 2019, of
which $69,898 has been converted and $164,499 has been paid. The
note is currently in default.
|
268,137
|
268,137
|
|
$15,651
face value, issued in June 2018, interest rate of 12% and is
convertible into shares of the Company’s common stock at 60%
of the lowest trading price during the previous twenty (20) days to
the date of conversion, matured June 30, 2019. The note is
currently in default.
|
15,651
|
15,651
|
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
|
$120,000
face value, issued in July 2018 for prepaid services, interest rate
of 15% and is convertible into shares of the Company's common stock
at 70% of the lowest closing price per share during the twenty (20)
days prior to the conversion, matures July 2019. The note is
currently in default.
|
120,000
|
120,000
|
|
$39,759
face value, issued from an assignment in August 2018, interest rate
of 12% and is convertible into shares of the Company’s common
stock at 55% of the lowest sales price for common stock on
principal market during the twenty-five (25) consecutive trading
days immediately preceding the conversion date, matured November
2018. The note is currently in default.
|
39,759
|
39,759
|
|
$23,000
face value, issued in August 2018 of $20,000 in principal and an
OID of $3,000, interest rate of 12% and is convertible into shares
of the Company's common stock at 55% of the average of the three
(3) lowest closing price during the 25 days prior to the conversion
per share, matures August 2019, net unamortized discount of $0 and
$3,214 as of December 31, 2019 and June 30, 2019, respectively, of
which $23,000 was converted. The note is currently in
default.
|
-
|
19,786
|
|
Various
term notes total value of $1,575,001 face value, issued from August
2018 to October 2019, of which $1,352,000 in principal and an OID
of $223,001, interest rates of 10% and are convertible into shares
of the Company’s common stock at equal the lesser of $0.12
and 70% of the lowest trading price for the common stock during the
thirty (30) trading day period ending on the latest complete
trading day prior to the conversion date, matures from August 2019
to December 2020, net unamortized discount of $332,276 and $273,843
as of December 31, 2019 and June 30, 2019, respectively. A total of
$43,750 has been paid. Three notes totaling $1,111,896 in principal
are currently in default.
|
1,198,975
|
838,053
|
|
Two
term notes total value of $64,850, issued in August 2018, of which
$61,850 in principal and an OID of $3,000, interest rate of 12% and
is convertible into shares of the Company’s common stock at
61% of the lowest trading price for the prior fifteen (15) trading
days immediately preceding the conversion date, matures August
2019, net unamortized discount of $0 and $6,998 as of December 31,
2019 and June 30, 2019, respectively, of which $4,550 has been
paid. The notes are currently in default.
|
60,300
|
57,852
|
|
Two
term notes total value of $178,000, issued from March 2019 to
August 2019, of $160,000 in principal and an OID of $18,000,
interest rate of 10% and is convertible into shares of the
Company’s common stock at 58% of the lowest trading price for
the common stock during the twenty-five (25) trading day period
ending on the latest complete trading day prior to the conversion
date, matures from March 2020 and August 2020, net unamortized
discount of $73,437 and $65,899 as of December 31, 2019 and June
30, 2019, respectively, of which $10,000 has been
converted.
|
94,563
|
23,101
|
|
Various
term notes with total value of $562,500, issued from March 2019 to
June 2019, of which $535,500 in principal and an OID of $27,000,
interest rates of 12% and are convertible into shares of the
Company’s common stock at 58% of the lowest trading price for
the common stock during the twenty (20) trading day period ending
on the latest complete trading day prior to the conversion date,
matures from March 2020 and June 2020, net unamortized discount of
$226,558 and $509,344 as of December 31, 2019 and June 30, 2019,
respectively, of which $100,000 has been paid and $12,500 has been
converted.
|
223,442
|
53,156
|
|
Two
term notes with total value of $154,000, issued in April 2019 and
June 2019,of which $143,000 in principal and an OID of $11,000,
interest rates of 12% and is convertible into shares of the
Company’s common stock at 60% of the lowest trading price for
the common stock during the twenty (20) trading day period ending
on the latest complete trading day prior to the conversion date,
matures April 2020, net unamortized discount of $57,015 and
$134,435 as of December 31, 2019 and June 30, 2019,
respectively.
|
96,985
|
19,565
|
|
Two
term notes total value $103,289, issued from April 2019 to July
2019 of $58,750 in principal, $10,000 in extension fees, $21,789 in
additional fees, and an OID of $12,750, interest rate of 12% and is
convertible into shares of the Company’s common stock at the
lesser of 55% of the lowest trading price for the common stock
during the twenty (20) trading day period ending on the latest
complete trading day prior to the issuance date or 55% of the
lowest trading price for the common stock during the twenty (20)
trading day period ending on the latest complete trading day prior
to the conversion date, matures from January 2020 to July 2020, net
unamortized discount of $22,792 and $30,967 as of December 31, 2019
and June 30, 2019, respectively. A total of $10,000 has been
paid.
|
70,497
|
7,533
|
$263,000
face value, issued from an assignment in October 2019, interest
rates of 10% and is convertible into shares of the Company’s
common stock at $0.02 per share, matures March 2020.
|
263,000
|
-
|
|
Total
convertible notes payable – non-related parties
|
5,202,648
|
4,443,837
|
|
Less
current portion
|
5,202,648
|
4,443,837
|
|
Convertible
notes payable – non-related parties, long-term
|
$-
|
$-
|
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
During the six months ended December 31, 2019, one note
was amended to extend the maturity dates. The Company evaluated the amendments
under ASC 470-50, “Debt - Modification
and Extinguishment”, and concluded that the extension did
not result in significant and consequential changes to the economic
substance of the debt and thus resulted in a modification of the
debt and not extinguishment of the debt.
From
July 12, 2019 through October 18, 2019, the Company issued three
convertible notes to non-related parties for a total of $541,355,
of which $463,750 in principal and $77,605 in OID, that mature from
July 12, 2020 to August 2, 2020. The notes bear between 10% to 12%
interest per annum. The Company also assumed $21,789 in additional
fees added to principal during the period.
During the six months ended December 31, 2019, the Company made
cash payment of $120,204 toward principal various notes discussed
above, had $10,000 in extension fees, converted $64,751 in
principal, and assigned one note for $20,000 in principal and
$3,468 in accrued interest into a non-related party note
payable.
During the six months ended December 31, 2019, the Company also
assigned two non-related party notes totaling $78,000 in principal
as well as three non-related party convertible notes for $185,000
in principal into a non-related party note payable totaling
$263,000.
Notes Payable – Related Parties
Notes
payable due to related parties consisted of the following as of
December 31, 2019 and June 30, 2019, respectively:
|
Notes Payable – Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5,000
face value, issued in November 2016, interest rate of 0%, which is
due on demand.
|
$5,000
|
$5,000
|
|
Various
term notes with total face value of $213,000, issued from February
2017 to April 2019, interest rates of 0%, matured June 30, 2019.
The notes are currently in default.
|
213,000
|
213,000
|
|
$56,000
face value, issued from June 2019 to December 2019, interest rate
of 0%, matures June 2020.
|
56,000
|
12,000
|
|
Total
notes payable – related parties
|
274,000
|
230,000
|
|
Less
current portion
|
274,000
|
230,000
|
|
Notes
payable - related parties, long term
|
$-
|
$-
|
From
July 15, 2019 through December 31, 2019, the Company issued notes
to a related party for a total of $44,000 that all mature on June
30, 2020. The notes bear 0% interest per annum. The Company
evaluated the notes for imputed interest and found it to be
immaterial.
Notes Payable – Non-Related
Parties
Notes
payable due to non-related parties consisted of the following as of
December 31, 2019 and June 30, 2019, respectively:
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
|
Notes
Payable –
Non-Related
Parties
|
|
|
|
|
|
|
|
|
|
|
|
Various
term notes with a total face value of $353,625 issued from August
2017 to December 2019, of which $344,000 in principal, $4,250 of
extension fees, and an OID of $6,875, interest rate of 0%, matured
from December 2018 to April net of unamortized discount of $8,686
and $992 as of December 31, 2019 and June 30, 2019, respectfully. A
total of $138,625 has been paid on principal. One of the notes and
accrued interest with a total face value of $52,000 was assigned to
a non-related parties convertible note payable with a face value of
$263,000 in October 2019. All but two notes are currently in
default.
|
$155,814
|
$209,758
|
|
Various
notes with a total face value of $127,000 issued from August 2017
to December 2019, interest rate of 10%, matured from December 2018
through April 2020 net of unamortized discount of $7,034 and $0 as
of December 31, 2019 and June 30, 2019, respectively. All but one
note is currently in default.
|
119,966
|
102,000
|
|
Two
term notes with total face value of $107,000, issued from September
2017 through March 2019, interest rate of 8% per month, matured
from September 2018 and April 2019 net of unamortized discount of
$0 as of December 31, 2019 and June 30, 2019. One of the notes and
accrued interest with a total face value of $81,000 was assigned to
non-related parties notes payable with a total face value of
$900,204, and the other note and interest with a total face value
of $26,000 was assigned to non-related parties convertible notes
payable with a face value of $263,000 in September 2019 and October
2019, respectively.
|
-
|
107,000
|
|
$225,000
face value, issued in March 2018, interest rate of 30%, matured
March 2019 net of unamortized discount of $0 as of December 31,
2019 and June 30, 2019. The note and accrued interest were assigned
to non-related parties notes payable with a total face value of
$900,204 in September 2019.
|
-
|
225,000
|
|
$260,000
face value, issued in June 2018, an additional $21,000 was added to
principal by the noteholder, interest rate of 0%, matured December
2018 net of unamortized discount of $0 as of December 31, 2019 and
June 30, 2019, of which $31,000 has been paid. The note and accrued
interest were reassigned in September 2019.
|
-
|
250,000
|
|
$160,000
face value, issued in November 2018, interest rate of 5% per month,
matured February 2019 net of unamortized discount of $0 as of
December 31, 2019 and June 30, 2019. The note and accrued interest
were reassigned to non-related parties notes payable with a total
face value of $900,204 in September 2019.
|
-
|
160,000
|
|
Four
notes and one convertible note were assigned totaling $900,204 in
September 2019, interest rate of 15%, matures April 2020 net of
unamortized discount of $0 as of December 31, 2019.
|
900,204
|
-
|
|
Two
term notes with a face value of $100,000, issued in November 2019,
interest rate of 5%, matures April 2020, net of unamortized
discount of $9,555 as of December 31, 2019.
|
90,445
|
-
|
|
$425,000
face value, issued in November 2019 resulting from a settlement
agreement, interest rate of 0%, matures December 2022, net of
unamortized discount of $0 as of December 31, 2019, of which $22
has been paid.
|
424,978
|
-
|
|
Total
note payable – non-related parties
|
1,691,407
|
1,053,758
|
|
Less
current portion
|
1,691,407
|
1,053,758
|
|
Notes
payable – non-related parties, long-term
|
$-
|
$-
|
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
During the six months ended December 31, 2019, two
notes were amended to extend the maturity dates for payments
totaling $4,250. The
Company evaluated the amendments under ASC 470-50,
“Debt - Modification
and Extinguishment”, and concluded that the extension did
not result in significant and consequential changes to the economic
substance of the debt and thus resulted in a modification of the
debt and not extinguishment of the debt.
From
July 9, 2019 to December 20, 2019, the Company issued seven notes
to non-related parties for a total of $223,625, $219,000 in
principal and $4,625 in OID, that mature from October 14, 2019 to
April 12, 2020. The notes bear rates from 0% to 10% interest per
annum. The Company evaluated the non-interest-bearing notes for
imputed interest and found it to be immaterial. As additional
consideration, the Company issued 1,000,000 warrants to purchase
shares of Common Stock valued at $12,595.
During the six months ended December 31, 2019, the Company assigned
five non-related party notes totaling $716,000 in principal and
$160,736 in accrued interest as well as a non-related party
convertible note for $20,000 in principal and $3,468 in accrued
interest into a non-related party note payable totaling
$900,204.
On
November 4, 2019, the Company issued a note to a non-related party
for a total of $425,000 as part of a settlement agreement, that
matures December 1, 2022. The note bears a rate of 0% interest per
annum. The settlement agreement was for prior advertising services
totaling $527,767. The Company recorded a gain on settlement of
debt of $102,767.
NOTE 5 – CONVERTIBLE PREFERRED STOCK
The
Company has authorized 10,000,000 shares of $0.001 par value per
share Preferred Stock, of which the following were issued
outstanding:
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred
|
100,000
|
15,500
|
$-
|
|
Series
A-1 Convertible Preferred
|
3,000,000
|
2,585,000
|
3,663,824
|
|
Series
B Convertible Preferred
|
200,000
|
3,500
|
35,000
|
|
Series
C Convertible Preferred
|
1,000,000
|
13,404
|
-
|
|
Series
D Convertible Preferred
|
375,000
|
130,000
|
-
|
|
Series
E Convertible Preferred
|
1,000,000
|
275,000
|
-
|
|
Series
H Preferred
|
5
|
2
|
-
|
|
Series
P Convertible Preferred
|
600,000
|
86,640
|
-
|
|
Series
S Convertible Preferred
|
50,000
|
-
|
-
|
|
Total
Preferred Stock
|
6,325,005
|
3,109,046
|
$3,698,824
|
The
Company’s Series A Convertible Preferred Stock (“Series
A Preferred”) is convertible into Common Stock at the rate of
0.025 per share of Common stock for each share of the Series A
Preferred. Dividends of $0.50 per share annually from date of
issue, are payable from retained earnings, but have not been
declared or paid.
The
Company’s Series A-1 Senior Convertible Redeemable Preferred
Stock (“Series A-1 Preferred”) is convertible at the
rate of 2 shares of Common Stock per share of Series A-1 Preferred.
The dividend rate of the Series A-1 Senior Convertible Redeemable
Preferred Stock is 6% per share per annum in cash, or commencing on
June 30, 2019 in shares of the Company’s Common Stock (at the
option of the Company).
Due to
the fact that the Series A-1 Preferred has certain features of debt
and is redeemable, the Company analyzed the Series A-1 Preferred in
accordance with ASC 480 and ASC 815 to determine if classification
within permanent equity was appropriate. Based on the fact that the
redeemable nature of the stock and all cash payments are at the
option of the Company, it is assumed that payments will be made in
shares of the Company’s Common Stock and therefore, the
instruments are afforded permanent equity treatment.
The
Company’s Series B Convertible 8% Preferred Stock
(“Series B Preferred”) is convertible at the rate of
0.067 per share of Common Stock for each share of Series B
Preferred. Dividends from date of issue are payable on June 30 from
retained earnings at the rate of 8% per annum but have not been
declared or paid.
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
The
Company’s Series C Convertible Preferred Stock (“Series
C Preferred”) is convertible at a rate of 0.007 share of
Common Stock per share of Series C Preferred. Holders are entitled
to dividends only to the extent of the holders of the
Company’s Common Stock receive dividends.
The
Company’s Series D Convertible Preferred Stock (“Series
D Preferred”) is convertible at a rate of 0.034 share of
Common Stock per share of Series D Preferred. Holders are entitled
to a proportionate share of any dividends paid as though they were
holders of the number of shares of Common Stock of the Company into
which their shares of are convertible as of the record date fixed
for the determination of the holders of Common Stock of the Company
entitled to receive such distribution.
The
Company’s Series E Convertible Preferred Stock (“Series
E Preferred”) is convertible at a rate of 0.034 share of
Common Stock per share of Series E Preferred. Holders are entitled
to a proportionate share of any dividends paid as though they were
holders of the number of shares of Common Stock of the Company into
which their shares of are convertible as of the record date fixed
for the determination of the holders of Common Stock of the Company
entitled to receive such distribution.
The
Company’s Series H Preferred Stock shall not be convertible
into the Corporation’s Common Stock, nor shall such shares
have any liquidation or dividend preference over the
Corporation’s Common Stock. Series H Preferred Stock shall
have the right to take action by written consent or vote based on
the number of votes equal to four times the number of votes of all
outstanding shares of capital stock of the Corporation such that
the holders of outstanding shares of Series H Preferred Stock shall
always constitute eighty percent (80%) of the voting rights of the
Corporation.
The
Company’s Series P Convertible Preferred Stock (“Series
P Preferred”) is convertible at a rate of 0.007 share of
Common Stock for each share of Series P Preferred. Holders are
entitled to dividends only to the extent of the holders of the
Company’s Common Stock receive dividends.
In the
event of a liquidation, dissolution or winding up of the affairs of
the Company, holders of Series A Preferred Stock, Series P
Convertible Preferred Stock, Series C Convertible Preferred Stock
have no liquidation preference over holders of the Company’s
Common Stock. Holders of Series B Preferred Stock have a
liquidation preference over holders of the Company’s Common
Stock and the Company’s Series A Preferred Stock. Holders of
Series D Preferred Stock are entitled to receive, before any
distribution is made with respect to the Company’s Common
Stock, a preferential payment at a rate per each whole share of
Series D Preferred Stock equal to $1.00. Holders of Series E
Preferred Stock are entitled to receive, after the preferential
payment in full to holders of outstanding shares of Series D
Preferred Stock but before any distribution is made with respect to
the Company’s Common Stock, a preferential payment at a rate
per each whole share of Series E Preferred Stock equal to $1.00.
Holders of Series A-1 Preferred Stock are superior in rank to
the Company’s Common Stock and to all other series of
Preferred Stock heretofore designated with respect to dividends and
liquidation.
The
activity surrounding the issuances of the Preferred Stock is as
follows:
During
the six months ended December 31, 2019, the Company has not issued
any shares of Series A-1 Preferred.
During
the year ended June 2019, the Company has not issued any shares of
A-1 Preferred.
During
the three and six months ended December 31, 2019 and 2018, the
outstanding Preferred Stock accumulated $56,367 and $56,367 in
dividends on outstanding Preferred Stock. The cumulative dividends
in arrears as of December 31, 2019 were approximately
$1,417,468.
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
NOTE 6 – COMMON STOCK
On
February 8, 2019, the Company increased the number of
authorized shares of Common Stock from 250,000,000 up to
1,000,000,000 shares in the sole discretion of the board. The
Company has authorized 503,407,666 shares of $0.001 par value per
share Common Stock, of which 306,736,038 issued (of which 3,885,000
are to be issued) as of December 31, 2019. The activity surrounding
the issuances of the Common Stock is as follows:
For the Six months Ended December 31, 2019
The Company issued
27,300,000 shares of Common Stock for $273,000 in cash as part of a
private placement in
conjunction with the private placements, the Company issued
95,200,000 warrants valued at
$961,121.
The Company issued 53,693,804 shares of Common Stock for the
conversion of notes and accrued interest valued at $100,518. The
Company also issued 2,250,000 shares of Common Stock for the
conversion of payables valued at $31,725
As share-based compensation to employees and non-employees, the
Company issued 18,052,258 shares of common stock valued at
$112,029, based on the market price of the stock on the date of
issuance.
As part of a provision in a note payable, the Company issued
7,000,000 shares of common stock valued at $29,400 based on the
market price on the date of issuance.
For the Six months ended December 31, 2018
The Company issued 22,723,609 shares of Common Stock for the
conversion of notes and accrued interest valued at
$331,333.
The Company issued 11,885,000 shares of Common Stock as payment for
services valued at $415,765.
As share-based compensation to employees and non-employees, the
Company issued 5,199,699 shares of common stock valued at $125,676,
based on the market price of the stock on the date of
issuance.
As part of a provision in a note payable, the Company issued
3,000,000 shares of common stock valued at $90,000 based on the
market price on the date of issuance.
NOTE 7 – STOCK PURCHASE OPTIONS AND WARRANTS
The
Board of Directors on June 10, 2009 approved the 2009 Long-Term
Stock Incentive Plan. The purpose of the 2009 Long-term
Stock Incentive Plan is to advance the interests of the Company by
encouraging and enabling acquisition of a financial interest in the
Company by employees and other key individuals. The 2009
Long-Term Stock Incentive Plan is intended to aid the Company in
attracting and retaining key employees, to stimulate the efforts of
such individuals and to strengthen their desire to remain with the
Company. A maximum of 1,500,000 shares of the
Company’s Common Stock is reserved for issuance under stock
options to be issued under the 2009 Long-Term Stock Incentive
Plan. The Plan permits the grant of incentive stock
options, nonstatutory stock options and restricted stock
awards. The 2009 Long-Term Stock Incentive Plan is
administered by the Board of Directors or, at its direction, a
Compensation Committee comprised of officers of the
Company.
Stock Purchase Options
During
the six months ended December 31, 2019, the Company did not issue
any stock purchase options.
During
the six months ended December 31, 2018, the Company did not issue
any stock purchase options, and 25,000 expired.
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
The
following table summarizes the changes in options outstanding of
the Company during the three and six months ended December 31,
2019.
|
Date
Issued
|
|
Weighted
Average Exercise Price
|
Weighted
Average Grant Date Fair Value
|
|
|
|
Balance
June 30, 2019
|
500,000
|
$0.05
|
$0.17
|
3.00
|
$25,000
|
|
Granted
|
-
|
-
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
|
Cancelled/Expired
|
-
|
-
|
-
|
-
|
-
|
|
Outstanding
as of December 31, 2019
|
500,000
|
$0.05
|
$0.16
|
2.50
|
$25,000
|
During the six months ended December 31, 2019, the Company issued
three-year and five-year warrants to purchase a total of 2,918,244 shares with
exercise prices from $0.04 to $0.10 per share into the
Company’s Common Stock, in conjunction with issuance of two
promissory notes, valued at $36,578. The Company also issued
95,200,000 five-year warrants with exercise prices of $0.02
and $0.05 per shares into the Company’s Common Stock,
in conjunction with
issuance of 22 private placements, valued at $961,1212 and issued
32,268,725 warrants with exercise price of $0.01 per shares
into the Company’s Common Stock in conjunction to two consulting
agreements valued at $312,415. The warrants are considered
derivative liabilities under ASC 815-40 under the Company’s
sequencing policy and were valued using the multinomial
lattice model.
The
following table presents the assumptions used to estimate the fair
values of the stock warrants and options granted:
|
|
December
31,2019
|
|
|
Expected
volatility
|
|
153.09-341%
|
|
|
Expected
dividends
|
|
0%
|
|
|
Expected
term
|
|
0-5
Years
|
|
|
Risk-free interest
rate
|
|
1.48-1.74%
|
|
The
following table summarizes the changes in warrants outstanding
issued to employees and non-employees of the Company during the
three and six months ended December 31, 2019.
|
|
|
Weighted
Average Exercise Price
|
Weighted
Average Grant Date Fair Value
|
|
|
|
Balance
as of June 30, 2019
|
41,900,718
|
$0.15
|
$0.36
|
3.43
|
$6,308,991
|
|
Granted
|
130,386,969
|
0.03
|
0.01
|
4.99
|
3,777,417
|
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
|
Cancelled/Expired
|
(4,079,466)
|
0.27
|
-
|
-
|
(1,107,150)
|
|
Outstanding
as of December 31, 2019
|
168,208,221
|
$0.05
|
$0.09
|
4.40
|
$8,979,258
|
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
NOTE 8 – FINANCIAL INSTRUMENTS
The
Company has financial instruments that are considered derivatives
or contain embedded features subject to derivative accounting.
Embedded derivatives are valued separately from the host instrument
and are recognized as derivative liabilities in the Company’s
balance sheet. The Company measures these instruments at their
estimated fair value and recognizes changes in their estimated fair
value in results of operations during the period of change. The
Company has estimated the fair value of these embedded derivatives
for convertible debentures and associated warrants using a
multinomial lattice model as of December 31, 2019 and June 30,
2019. For amounts over proceeds in the initial derivative
measurement, the Company recorded a derivative expense of $547,121
and $1,355,346 during the six months ended December 31, 2019 and
2018, respectively. The fair values of the derivative instruments
are measured each quarter, which resulted in a gain of $35,204 and
$594,737 during the six months ended December 31, 2019 and 2018,
respectively. As of December 31, 2019, and June 30, 2019, the fair
market value of the derivatives aggregated $7,033,544 and
$5,009,094, respectively, using the following assumptions:
estimated 5-0 year term, estimated volatility of 341.18 –
153.09%, and a discount rate of 1.74 – 1.48%.
Financial
instruments measured at fair value on a recurring basis at December
31, 2019, are summarized as follows:
|
|
|
|
|
|
|
Fair value of
derivatives
|
$-
|
$-
|
$7,033,544
|
$7,033,544
|
|
|
|
|
|
|
Liabilities
measured at fair value on a recurring basis at June 30, 2019, are
summarized as follows:
|
|
|
|
|
|
|
Fair value of
derivatives
|
$-
|
$-
|
$5,009,094
|
$5,009,094
|
|
Series H Preferred
Stock
|
$-
|
$198,116
|
$-
|
$198,116
|
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The
Company may become involved in certain legal proceedings and claims
which arise in the normal course of business.
1. The
Company is a defendant in an employment related lawsuit filed by a
former employee, who was terminated for cause in October 2018. The
Company believes it is without merit and filed a defense and a
Motion to move the matter to Arbitration which was subsequently
granted. The complaint revolves around alleged unpaid
commissions.
2. The
Company is both a plaintiff and defendant in litigation with its
prior manufacturer, Infinity Power and Controls, LLC, (Infinity) of
Rock Springs, Wyoming. Infinity was the Company’s
manufacturer until they were dismissed in December 2018, due to
quality and reliability issues, which resulted in unacceptable
product returns and substantial damage to the Company. The Company
commenced an action against Infinity in the United States District
Court Central District of California for Breach of Contract,
Negligence and Fraud. The claim of Fraud was later dismissed. The
lawsuit seeks direct and punitive damages of $30 million from
Infinity. Infinity sued the Company in the Superior Court of
Arizona County of Maricopa for the alleged non-payment of invoices
totaling $414,000 and an undetermined amount of parts inventory.
Infinity’s Arizona action was stayed pending the outcome of
the action in California commenced by the Company. Infinity
subsequently counter-sued Aftermaster in California for the relief
it sought in Arizona. In a related action, both the Company and
Infinity were sued in Arizona on December 2, 2019 by PCB
manufacturer, Quik Tek Assembly, for alleged unpaid products and
parts that were procured by both the Company and Infinity. No
amounts were specified in the complaint nor has Quik Tek ever
contacted the Company regarding any of the alleged outstanding
amounts. The Company believes that the complaint is without merit
and it will continue to seek to recover the cash deposit of
$375,000.00 that it lodged with Quik Tek Assembly.
3. On
December 27, 2019, the Company was sued by JSJ Investments, Inc.
(JSJ), a Texas corporation, in Texas State Court. Shortly
thereafter, the Company successfully had the case moved to Federal
Court. In April and June of 2019, JSJ issued the Company two, one
year loans with a combined value of $154,000.00, backed by
ratcheting promissory notes. Although neither loan was due, JSJ
issued a notice of default, alleging the Company prevented them
from converting their debt on one of the notes, into common shares
of the Company. The Company offered to pay the notes with interest
at the maximum rate allowed under Texas law, when they came due. In
response, JSJ demanded in writing that the Company immediately pay
them $718,000.00 to redeem the two notes, which totaled
$154,000.00. The Company refused and JSJ sued for $718,000.00,
which JSJ alleges represents principal, penalties, interest and
fees on the loans. The Company is vigorously defending its
interests and believes that their demands and conduct is usurious
and illegal under Texas law.
|
AFTERMASTER,
INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
Lease Agreements
The
Company has operating type leases for real estate. As of December
31, 2019, the Company had no finance type leases. The
Company’s leases have remaining lease terms of up to 1.33
years, some of which may include options to extend the leases for
up to 5 years. Operating lease expense was $21,252 and $42,273 for
the three and six months ended December 31, 2019, inclusive of
period cost for short-term, cancellable and variable leases, not
included in lease liabilities, of $61,376 and $124,430 for the
three and six months ended December 31, 2019.
|
Supplemental cash flow information related to operating
leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
cash paid to settle lease liabilities
|
$38,378
|
|
Right
of use asset additions in exchange for lease
liabilities
|
154,541
|
|
Supplemental
balance sheet information related to operating leases:
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
|
Right
of use assets
|
Other
noncurrent assets
|
$112,268
|
|
|
|
|
Lease
payable
|
Current
liabilities
|
$83,657
|
|
Lease
payable
|
Long-term
liabilities
|
32,506
|
|
Total
lease payable
|
|
$116,163
|
|
|
December 31,
|
|
|
2019
|
|
Weighted average remaining lease term (in years)
|
1.33
|
|
|
Weighted average discount rate
|
12.15
|
%
|
We
lease offices in Hollywood, California (located at 6671 Sunset
Blvd., Suite 1520, 1518 and 1550, Hollywood, California, 90028) for
corporate, research, engineering and mastering services. The lease
expired on December 31, 2017 and now is on a month to month basis.
The total lease expense for the facility is approximately $20,574
per month, and the total remaining obligations under these leases
at December 31, 2019, were approximately $0.
We
lease warehouse space located at 8260 E Gelding Drive, Suite 102,
Scottsdale, Arizona, 85260. The lease expired on January 31, 2019
and now is on a month to month basis. The total lease expense for
the facility is approximately $1,993 per month, and the total
remaining obligations under this lease at December 31, 2019, were
approximately $0.
We
lease corporate offices located at 7825 E Gelding Drive, Suite 101,
Scottsdale, Arizona, 85260. The lease expires on April 30, 2021.
The total lease expense for the facility is approximately $7,799
per month, and the total remaining obligations under this lease at
December 31, 2019, were approximately $125,518. The lease resulted
in the balance sheet recognition of $154,541.
Below
is a table summarizing the annual operating lease obligations over
the next 5 years:
|
Year
|
|
|
2020
|
$46,505
|
|
2021
|
79,012
|
|
2022
|
-
|
|
2023
|
-
|
|
2024
|
-
|
|
Total
|
$125,518
|
|
AFTERMASTER, INC.
|
|
Notes
to Consolidated Financial Statements
|
|
December
31, 2019 (Unaudited)
|
Other
The
Company has not declared dividends on Series A or B Convertible
Preferred Stock or its Series A-1 Convertible Preferred Stock. The
cumulative dividends in arrears through December 31, 2019 were
approximately $1,473,835.
NOTE 10 –
COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
The
Company may become involved in certain legal proceedings and claims
which arise in the normal course of business.
1. The
Company is a defendant in an employment related lawsuit filed by a
former employee, who was terminated for cause in October 2018. The
Company believes it is without merit and filed a defense and a
Motion to move the matter to Arbitration which was subsequently
granted. The complaint revolves around alleged unpaid
commissions.
2. The
Company is both a plaintiff and defendant in litigation with its
prior manufacturer, Infinity Power and Controls, LLC, (Infinity) of
Rock Springs, Wyoming. Infinity was the Company’s
manufacturer until they were dismissed in December 2018, due to
quality and reliability issues, which resulted in unacceptable
product returns and substantial damage to the Company. The Company
commenced an action against Infinity in the United States District
Court Central District of California for Breach of Contract,
Negligence and Fraud. The claim of Fraud was later dismissed. The
lawsuit seeks direct and punitive damages of $30 million from
Infinity. Infinity sued the Company in the Superior Court of
Arizona County of Maricopa for the alleged non-payment of invoices
totaling $414,000 and an undetermined amount of parts inventory.
Infinity’s Arizona action was stayed pending the outcome of
the action in California commenced by the Company. Infinity
subsequently counter-sued Aftermaster in California for the relief
it sought in Arizona. In a related action, both the Company and
Infinity were sued in Arizona on December 2, 2019 by PCB
manufacturer, Quik Tek Assembly, for alleged unpaid products and
parts that were procured by both the Company and Infinity. No
amounts were specified in the complaint nor has Quik Tek ever
contacted the Company regarding any of the alleged outstanding
amounts. The Company believes that the complaint is without merit
and it will continue to seek to recover the cash deposit of
$375,000.00 that it lodged with Quik Tek Assembly.
3. On
December 27, 2019, the Company was sued by JSJ Investments, Inc.
(JSJ), a Texas corporation, in Texas State Court. Shortly
thereafter, the Company successfully had the case moved to Federal
Court. In April and June of 2019, JSJ issued the Company two, one
year loans with a combined value of $154,000.00, backed by
ratcheting promissory notes. Although neither loan was due, JSJ
issued a notice of default, alleging the Company prevented them
from converting their debt on one of the notes, into common shares
of the Company. The Company offered to pay the notes with interest
at the maximum rate allowed under Texas law, when they came due. In
response, JSJ demanded in writing that the Company immediately pay
them $718,000.00 to redeem the two notes, which totaled
$154,000.00. The Company refused and JSJ sued for $718,000.00,
which JSJ alleges represents principal, penalties, interest and
fees on the loans. The Company is vigorously defending its
interests and believes that their demands and conduct is usurious
and illegal under Texas law.
NOTE 11 – RELATED PARTY TRANSACTIONS
On
August 8, 2016, the Company issued a convertible note to a daughter
of a director of the Company, for $30,000 as of December 31, 2019
and June 30, 2019. The note bears an interest rate of 0% per annum
and is convertible into shares of the Company’s Common Stock
at $0.40 per share.
From
September 2017 to June 2019, the Company issued convertible notes
to a director and officer of the Company for $89,500 as of December
31, 2019 and June 30, 2019. The notes bear an average interest rate
of 0% per annum and is convertible into shares of the
Company’s Common Stock at $0.10 per share.
On
November 15, 2016, the Company issued notes to a director and
officer of the Company, for $5,000. The note bears an average
interest rate of 0% per annum.
From
February 2017 to December 2019, the Company issued notes to a
director and officer of the Company for $274,000 and $255,000 as of
December 31, 2019 and June 30, 2019, respectively. The notes bear
an average interest rate of 0% per annum.
As share-based compensation to employees and non-employees, the
Company issued 9,724,215 and 3,031,473 and 18,052,258 and 5,199,699
shares of common stock valued at $20,421 and $60,629 and $112,029
and $125,676 for three and six months ended December 31, 2019 and
2018, respectively, based on the market price of the stock on the
date of issuance.
The
company has accrued consulting services in the amount of $171,887
and $161,124 payable to directors for services rendered as of
December 31, 2019 and June 30, 2019, respectively.
NOTE 12 - SUBSEQUENT EVENTS
In
accordance with ASC 855, Company’s management reviewed all
material events through the date of this filing and determined that
there were the following material subsequent events to
report:
In January 2020, a holder of an unrelated convertible note
converted $9,000 of principal and $705 of accrued interest into
16,733,120 shares of common stock.
In January 2020, the Company issued 80,000,000 shares of
Common Stock for $40,000 in cash as part of a private
placement.
On
January 16, 2020, the Company issued a note to an unrelated party
for $13,200, which includes proceeds of $12,000 and $1,200 in OID
that matures in January 2020. The notes bear 0% interest per
annum
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report (the “Report”) includes
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934, as amended, and as contemplated
under the Private Securities Litigation Reform Act of
1995. These forward-looking statements may relate to
such matters as the Company’s (and its
subsidiaries) business strategies, continued growth in the
Company’s markets, projections, and anticipated trends in the
Company’s business and the industry in which it operates
anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services,
anticipated market performance and similar matters. All
statements herein contained in this Report, other than statements
of historical fact, are forward-looking statements.
When used in this Report, the words “may,”
“will,” “expect,” “anticipate,”
“continue,” “estimate,”
“project,” “intend,” “budget,”
“budgeted,” “believe,” “will,”
“intends,” “seeks,” “goals,”
“forecast,” and similar words and expressions are
intended to identify forward-looking statements regarding events,
conditions, and financial trends that may affect our future plans
of operations, business strategy, operating results, and financial
position. These forward-looking statements are based largely on the
Company’s expectations and are subject to a number of risks
and uncertainties, certain of which are beyond the Company’s
control. We caution our readers that a variety of
factors could cause our actual results to differ materially from
the anticipated results or other matters expressed in the forward
looking statements, including those factors described under
“Risk Factors” and elsewhere herein. In
light of these risks and uncertainties, there can be no assurance
that the forward-looking information contained in this Report will
in fact transpire or prove to be accurate. These risks
and uncertainties, many of which are beyond our control,
include:
|
|
●
|
the sufficiency of existing capital resources and our ability to
raise additional capital to fund cash
requirements for future
operations;
|
|
|
●
|
uncertainties involved in growth and growth rate of our operations,
business, revenues, operating margins,
costs, expenses and acceptance of
any products or services;
|
|
|
●
|
uncertainties involved in growth and growth rate of our operations,
business, revenues, operating margins,
costs, expenses and acceptance of
any products or services;
|
|
|
●
|
volatility of the stock market, particularly within the technology
sector;
|
|
|
●
|
our dilution related to all equity grants to employees and
non-employees;
|
|
|
●
|
that we will continue to make significant capital expenditure
investments;
|
|
|
●
|
that we will continue to make investments and
acquisitions;
|
|
|
●
|
the sufficiency of our existing cash and cash generated from
operations;
|
|
|
●
|
the increase of sales and marketing and general and administrative
expenses in the future;
|
|
|
●
|
the growth in advertising revenues from our websites and studios
will be achievable and sustainable;
|
|
|
●
|
that seasonal fluctuations in Internet usage and traditional
advertising seasonality are likely to affect our
business; and
|
|
|
●
|
general economic conditions.
|
Although we believe the expectations reflected in these
forward-looking statements are reasonable, such expectations cannot
guarantee future results, levels of activity, performance or
achievements. We urge you not to place undue reliance on
these forward-looking statements, which speak only as of the date
of this Annual Report.
All references in this report to “we,”
“our,” “us,” the “Company” or
“AfterMaster” refer to AfterMaster, Inc., and
its subsidiary and
predecessors.
Corporate Background
We are a Delaware corporation, incorporated on about May 12, 1988,
and traded on an over the counter market (ticker symbol OTCQB:
AFTM). As of December 31, 2019, there were 306,736,038 shares of
Common Stock issued and outstanding. The Company’s office and
principal place of business, research, recording and mastering
studios are located at 6671 Sunset Blvd., Suite 1520, Hollywood, CA
90028 USA, and its telephone number is (310) 657-4886. The Company
also has an office at 7825 E. Gelding Drive, Suite 101, Scottsdale,
Arizona 85260 USA, and its telephone number is (480)
556-9303.
Aftermaster,
Inc. (“the Company” or “Aftermaster”) is an
audio technology company located in Hollywood, California and
Scottsdale, Arizona. The Company’s subsidiaries include
Aftermaster HD Audio Labs, Inc. and MyStudio, Inc.
The
Company and its subsidiaries are engaged in the development and
commercialization of proprietary (patents issued and pending),
leading-edge audio and video technologies and products for
professional and consumer use, including Aftermaster® Audio,
ProMaster™, Aftermaster Pro™, HearClearTV, the
Superbar™, Aftermaster Studio Pro and MyStudio®. The
Company also operates recording and mastering studios at its
Hollywood facilities.
The
name Aftermaster was derived from our technology being primarily
utilized to remaster and improve audio that has already been
mastered. The Aftermaster audio process remasters an audio event to
our standards, that has previously been finished or mastered, hence
“Aftermaster”. Aftermaster is unique among audio
processes as it greatly enhances the entire frequency range without
distortion or changing the underlying intent of the audio. The
Aftermaster process is also popular for mastering previously
un-mastered audio such as new recordings or live
events.
Aftermaster,
Inc. is an award-winning audio laboratory whose unique expertise
and approach to its audio technologies and products, is rooted in
its world class expertise in music related audio engineering,
processing and mastering. The music industry has been responsible
for the biggest breakthroughs in audio techniques, inventions and
technologies for over a century. Aftermaster’s team of audio
engineers and music industry veterans have produced, engineered and
mastered more hit records than any other audio company in the
world, providing it with its leading edge expertise. For more
information visit. www.Aftermaster.com/team
Mission Statement
Aftermaster’s
goal is to become one of the most innovative and important audio
companies in the world through the development and licensing of
proprietary audio technologies, the development and sales of
leading-edge consumer and professional audio electronics products
and through its contributions in the production, mixing and
mastering of music, television and film audio.
Summary
The
Company continued to underperform during the quarter ended December
31, 2019, due to the ongoing delay in having its products available
to sell. High return rates and quality and reliability issues with
the Company’s Aftermaster Pro product, led the Company to
suspend sales and dismiss its manufacturer in December 2018. The
suspension of manufacturing has put substantial financial strain on
the company as it has had no meaningful revenues from product sales
since that time. The Company commenced an action against the
manufacturer, Infinity Power and Controls, LLC of Rock Springs,
Wyoming for $30 million to recover direct and punitive damages in
the United States District Court for the Central District of
California. The Company expects to resume sales sometime in the
next two calendar quarters.
Since
suspending production, the Company undertook a complete redesign of
its Aftermaster Pro unit and developed two new products, HearClear
TV and the “Superbar” soundbar. The Aftermaster Pro has
new features including Bluetooth, optical in/out and a handheld
remote. It’s sister unit “HearClearTV” is
designed to significantly improve television audio for those that
are hard of hearing. They all join the Aftermaster Studio Pro which
is the Company’s first product aimed primarily at commercial
applications. www.aftermaster.com/products
During
the quarter, in order to address its ongoing financing and
manufacturing challenges, the Company entered into a
groundbreaking, multi-year, Financing, Licensing, Manufacturing and
Distribution agreement with Ritika Research Labs Pvt. Ltd. of
Mumbai India. Ritika is a private company which has interests in
manufacturing, electronics and product distribution and marketing.
The agreement calls for Ritika to finance engineering, product
development, manufacturing, inventory and the marketing and
distribution of all Aftermaster’s products worldwide
(excluding the US and Canada). The Company will receive tiered
royalty payments on worldwide sales excluding the US and Canadian
markets, which are retained by the Company. The agreement is
expected to save the Company significant resources both financially
and operationally while raising the quality and reliability of all
its products in markets worldwide. The financing and manufacturing
agreement that the Company entered into with Ritika is expected to
significantly reduce the requirement for the financing of product
inventory and manufacturing going forward.
Business and Products
Aftermaster
Consumer and Professional Electronics Products
The
Company has assembled a talented branding, technical and design
team who design and develop the Company’s consumer and
professional electronics products. The first consumer electronic
product to be introduced was the Aftermaster Pro, designed to
dramatically improve the quality of TV audio. Aftermaster Pro is
the world’s first personal audio re-mastering device and
defines a new category in consumer electronics products by offering
a product never before offered. Aftermaster Pro is a proprietary,
first-to-market product which has no direct
competition.
The
number of existing televisions worldwide is substantial, and a
majority of TV owners complain about their TV audio quality,
especially the need to continually adjust the volume because of the
difficulty in hearing dialogue in programming.
Smaller
than an iPhone, the Aftermaster Pro transforms the audio of a TV to
sound clearer, fuller, deeper, and more exciting. Aftermaster Pro
connects easily via HDMI cables with virtually any A/V media source
(i.e., cable, satellite box, etc.). Aftermaster Pro raises and
clarifies TV dialogue in programming while significantly enhancing
the quality of the overall audio content. This solves the
longstanding need to continually adjust volume during a TV show to
hear the dialogue.
Once
the Company receives inventory of its products, Aftermaster Pro is
for sale on HSN TV and HSN.com and other online retail outlets as
well as through the Company’s own website,
Aftermasterpro.com.
The
Company has also developed a new portable TV audio remastering
product called HearClear TV™, which is based on its
Aftermaster Pro product. HearClear is aimed at people with hearing
loss and will initially be available through audiological clinics
www.hearclear.tv. In addition, the Company also completed the
development of a product called the Superbar™ which is the
Company’s first soundbar product. The new Superbar™
will include Aftermaster’s award winning and patented
Aftermaster audio technology. The Company expects to begin
manufacturing the Superbar™ late this year.
The
Company has also recently designed and developed its first
professional hardware product dubbed the “Aftermaster Studio
Pro” which is the Company’s first product designed for
use in commercial audio applications. The new product is a 1 U,
19” rack-mount Aftermaster audio processor that allows a user
to enhance any audio playback with Aftermaster to make any sound
fuller, clearer, louder and deeper. It is expected to retail for
$3,995 and can be seen at www.aftermastermaster.com/products. The
Company believes that the worldwide market for its new product is
significant, as it can be used in potentially hundreds of thousands
of facilities worldwide: radio stations, private and public
recording studios, places of worship, restaurants and bars, sports
facilities, high-end residential, live concerts and concert
facilities, hospitals – virtually any place where a business
wants the audio to sound significantly better than anything that
they can currently do. The product is expected to be available for
pre-sale in the near future.
Additional
Aftermaster branded consumer electronics products are under
development, which we expect to introduce in the coming
year.
ON Semiconductor/Aftermaster Audio Chip and Software
The
Company jointly developed a unique semi-conductor chip with ON
Semiconductor (“ON”) of Phoenix, Arizona, to
commercialize its Aftermaster technology through audio
semiconductor chips. ON is a multi-billion-dollar, multi-national
semiconductor designer and manufacturer.
Branded
the BelaSigna 300 AM chip, it is one of the smallest, high
power/low voltage DSP chips available. It is small enough to fit
into a hearing aid but equally effective in any size device with
audio capability.
In
conjunction with ON, we also completed the development of an
Aftermaster software algorithm that is designed to be a standalone
software product. We believe the sound quality from our algorithm
provides a superior audio experience relative to other products on
the market.
The
algorithm and chips allow consumer product manufacturers an
opportunity to offer a significantly improved and differential
audio experience in their products without having to significantly
change hardware and form factor designs. We hope to generate
significant revenues through the sale of the ON/Aftermaster chips
and software licensing.
Promaster On-line Music Mastering
Promaster
is an online music mastering, streaming, and storage service
designed for independent artists which utilizes proprietary audio
technologies developed by Aftermaster.
Tens of
millions of songs are produced, distributed and played on the
Internet each month around the world by independent artists.
However, many of these artists lack the financial and technical
means to master, or “finish” their composition, as a
professional mastering session can cost up to $500 per song. Now,
with the Promaster online platform, musicians can transmit their
music directly to the Promaster HD website, where it can be
mastered with Aftermaster technology for $9.99 per song. Each user
receives four different mastered versions of their song done in
different styles, and they can preview 90 seconds of each version
to make a decision about whether or not they want to buy
it.
Promaster
creates a compelling offering for those seeking to significantly
enhance the quality of their music for personal use, or with intent
to showcase their music in hopes of advancing their career
aspirations. The service also offers additional features such as
file storage. Based on the enormous addressable market for this
product, we believe that with effective marketing Promaster has the
potential to generate significant revenues for the Company.
www.promasterhd.com
TuneCore
Aftermaster
offers both world-class, professional hands-on mastering services
and instant online mastering through its Promaster brand for music,
TV and film in its facilities in Hollywood, California. The
Professional Mastering division is headed up by Peter Doell, one of
the world’s foremost mastering engineers. The Company has a
partnership with TuneCore Digital Music Services to provide both
professional hands-on mastering services and on-line instant
mastering services through its Promaster on-line to
TuneCore’s customers.
Currently,
TuneCore is one of the world’s largest independent digital
music distribution and publishing administration service. Under our
agreement, Aftermaster has become the platform for both hands-on
professional and online instant mastering services for
TuneCore’s artists on an exclusive basis. TuneCore has one of
the highest artist revenue-generating music catalogs in the world,
earning TuneCore Artists over a billion dollar from downloads and
streams. TuneCore’s music distribution services help artists,
labels and managers sell their music through iTunes, Amazon Music,
Spotify and other major download and streaming sites while
retaining 100% of their sales revenue and rights for a low annual
flat fee. TuneCore’s artists have direct access to
Aftermaster’s world-class senior mastering engineers and
unmatched technologies and can get their tracks hand mastered for a
premium price or instantly electronically mastered through
Aftermaster’s Promaster, returned and ready for distribution.
The partnership builds upon TuneCore’s mission to provide
independent artists with key tools to build their careers and gain
broad fan exposure, by granting access to unparalleled mastering
that meets the industry’s highest standards.
Muzik Headphones
The
Company is party to an agreement with headphone manufacturer Muzik,
Inc., to license its Aftermaster technology (through both its
Company’s proprietary DSP chip and software application).
Known as the “smartphone” of headphones, award-winning
Muzik has created one of the worlds most advanced wireless
headphones. Muzik’s proprietary voice command and multiple
“hot keys” allow a user to access Spotify, Siri and
connect their headphones to over 300 apps from fitness, news, and
productivity to the connected home, commerce, automotive, and
social media. Muzik is considered one of the most important new
headphone designer and manufacturer. The Company expects its
technology to be implemented in Muzik products in the
future.
Recording Studios
The
Company operates a world-class music recording studio originally
built by music legend Graham Nash and made famous by Crosby, Stills
and Nash in 1977, which is located adjacent to the Company’s
existing studios in Hollywood at the Crossroads of the World
complex. The studio is equipped with state-of-the-art recording and
mixing equipment, and it is used for both audio research and
development as well as to generate revenue from rental to prominent
musicians. It is the largest of the six recording studios that
Aftermaster operates at its studio facilities in Hollywood.
www.aftermaster.com/studios
Aftermaster Audio Technology
Aftermaster
audio technology was created and developed pursuant to a
multi-year, multi-million-dollar development effort to make digital
audio sound substantially better by developing proprietary
software, digital signal processing technology and consumer
products. The Aftermaster Audio Labs team is comprised of a unique
group of award-winning industry leaders in music, technology and
audio engineering which includes Ari Blitz, Peter Doell, Rodney
Jerkins, Larry Ryckman, Justin Timberlake, Andrew Wuepper and
Shelly Yakus. See www.Aftermaster.com.
The
name Aftermaster was derived by our technology being primarily
utilized to remaster and improve audio that has already been
mastered. The Aftermaster audio process pulls an audio event apart
that has previously been finished or mastered and then remasters it
to our standards, hence “Aftermaster”. Aftermaster is
unique among audio processes as it enhances the entire frequency
range without distortion or changing the underlying intent of the
audio. The Aftermaster process is also popular for mastering
previously un-mastered audio such as new recordings or live
events.
Our
Aftermaster audio technology is an internally-developed,
proprietary (patented and patents pending) mastering, remastering
and audio processing technology which makes virtually any audio
source sound significantly louder, fuller, deeper and clearer.
Aftermaster is a groundbreaking technology which eliminates the
weaknesses found in other audio enhancement and processing
technologies while offering a much superior audio experience for
consumer and industrial applications. We believe that our
Aftermaster audio technology is one of the most significant
breakthroughs in digital audio processing technology and has the
potential to create significant revenues for the Company. The broad
commercialization of this technology is a top priority for the
Company.
As the
convergence of features on consumer electronics continues, it is
becoming more difficult for leading consumer electronics companies
to differentiate their products. We believe that Aftermaster
provides a unique and significant competitive advantage for
consumer electronics manufacturers by offering their customers a
superior audio experience. Aftermaster technology can be
incorporated into most audio capable devices through the addition
of an Aftermaster DSP chip or Aftermaster software. Such uses are
intended to include phones (i.e., mobile, home, business and VoIP);
headphones; televisions; stereo speakers; stereos (i.e., home,
portable, commercial and automobile); and computers (i.e., desktop,
laptop and tablets).
Aftermaster
audio is also the only commercial audio enhancement technology
available that is also used for professional music mastering
because it enhances the entire frequency range without distortion
or changing the underlying intent of the music. The technology has
been used to master music created by some of the world’s most
popular artists. Further information on Aftermaster and Aftermaster
products can be found at www.Aftermaster.com.
Intellectual Property and Licensing
The
Company has been awarded eight patents and multiple trademarks with
numerous others pending. The Company has an aggressive intellectual
property strategy to protect the Aftermaster and the related
technologies it has developed. We also enter into confidentiality
and invention assignment agreements with our employees and
consultants and confidentiality agreements with third parties. We
rigorously control access to our proprietary technologies. The
Company has engaged Morgan Chu of Irell and Manella, to represent
its intellectual property interests along with its existing IP
attorneys Farjami & Farjami LLP and Arnold Weintraub of the
Weintraub Group. Mr. Weintraub serves on the Board of Directors of
the Company.
Employees
As of
December 31, 2019, we employed nine full-time employees. We
expect to seek additional employees in the next year to handle
anticipated potential growth.
We
believe that our relationship with our employees are
good. None of our employees are members of any union,
nor have they entered into any collective bargaining
agreements.
Facilities
We
lease offices in Hollywood, California (located at 6671 Sunset
Blvd., Suite 1520, 1518 and 1550, Hollywood, California, 90028) for
corporate, research, engineering and mastering services. The lease
expired on December 31, 2017 and now is on a month to month basis.
The total lease expense for the facility is approximately $20,574
per month, and the total remaining obligations under these leases
at December 31, 2019, were approximately $0.
We
lease warehouse space located at 8260 E Gelding Drive, Suite 102,
Scottsdale, Arizona, 85260. The lease expired on January 31, 2019
and now is on a month to month basis. The total lease expense for
the facility is approximately $1,993 per month, and the total
remaining obligations under this lease at December 31, 2019, were
approximately $0.
We
lease corporate offices located at 7825 E Gelding Drive, Suite 101,
Scottsdale, Arizona, 85260. The lease expires on April 30, 2021.
The total lease expense for the facility is approximately $7,799
per month, and the total remaining obligations under this lease at
December 31, 2019, were approximately $125,518.
|
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
AfterMaster
Revenues
|
$143,587
|
$126,959
|
|
Product
Revenues
|
6,875
|
281,105
|
|
Total
Revenues
|
$150,462
|
$408,064
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AfterMaster
Revenues
|
$275,467
|
$272,372
|
|
Product
Revenues
|
15,264
|
670,214
|
|
Total
Revenues
|
$290,731
|
$942,586
|
We currently generate revenue from our operations through two
activities: AfterMaster revenues and AfterMaster product
revenues.
AfterMaster revenues are generated primarily from AfterMaster audio
services provided to producers and artists on a contract basis. We
hope this source of revenue grows in coming years, and the Company
is expecting to generate additional revenues in this category from
on-line mastering downloads and the development of the AfterMaster
software algorithm and chip, although such growth and additional
revenues are not assured and may not occur. Product revenues
for the three and six months ended December 31, 2019, increased to
$143,587 and $275,467, as compared to $126,959 and $282,372 for the
comparable the three and six months ended December 31, 2018,
respectively. The increase in product revenues are due to the
company selling more Aftermaster Pro through our website
(www.Aftermasterpro.com) and through consumer retail distribution
channels.
In the aggregate, total Company revenues decreased to $150,462 and
$290,731for the three and six months ended December 31, 2019, as
compared to total revenues of $408,064 and $942,586 for the three
and six months ended December 31, 2018, the decrease is due to the
company acquiring new overseas manufacturer and the redesign of the
Aftermaster Pro in order to lower the cost of goods
sold.
|
Cost of Revenues
|
|
|
|
|
For the Three
Months Ended
|
|
|
|
|
|
|
|
|
Cost of Revenues (excluding depreciation and
amortization)
|
$108,742
|
$461,196
|
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues (excluding depreciation and
amortization)
|
$222,808
|
$878,953
|
Cost of
sales consists primarily of manufacturing cost of the Aftermaster
Pro TV consumer electronic product, Aftermaster Studio Rent,
Consultants, senior engineers, and excludes depreciation and
amortization on fixed assets. The decrease in cost of sales for the
three and six months ending December 31, 2019, over the comparable
quarter, is attributable, primarily, to the decrease in product
revenue therefore the company had lower manufacturing cost of the
Aftermaster Pro. The company had cost of revenues in the amount of
$108,742 and $222,808 for the three and six months ending December
31, 2019, as
compared to $461,196 and $878,953 for the three and six
months ending December 31, 2018.
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization Expense
|
$6,237
|
$23,428
|
|
Research
and Development
|
-
|
3,023
|
|
Advertising
and Promotion Expense
|
1,780
|
12,199
|
|
Legal
and Professional Expense
|
43,365
|
3,780
|
|
Non-Cash
Consulting Expense
|
270,543
|
238,731
|
|
General
and Administrative Expenses
|
517,013
|
786,347
|
|
Total
|
$838,938
|
$1,067,508
|
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization Expense
|
$14,653
|
$46,895
|
|
Research
and Development
|
-
|
5,623
|
|
Advertising
and Promotion Expense
|
3,777
|
66,568
|
|
Legal
and Professional Expense
|
86,519
|
14,810
|
|
Non-Cash
Consulting Expense
|
295,930
|
303,847
|
|
General
and Administrative Expenses
|
1,242,899
|
1,635,534
|
|
Total
|
$1,643,778
|
$2,073,277
|
General
and administrative expenses consist primarily of compensation and
related costs for our finance, legal, human resources, investor
relation, public relations and information technology personnel;
rent and facilities; and expenses related to the issuance of stock
compensation. During the three and six months ended December
31, 2019, General and administrative expenses decrease by
$269,334 and $392,635 as compared to the three and six months ended December
31, 2018. The decrease is primarily due to the company using
a third-party consultant to help with the business operations in
the prior period, which did not occur in the current
period.
During the three
and six months ended December 31, 2019, Research and
Development costs decreased to $0 and $0 from $3,023 and $5,623,
Advertising and Promotion decreased to $1,780 and $3,777 from
$12,199 and $66,568, Legal and Professional fees increased to
$43,365 and $86,519 from $3,780 and $14,810 and consulting services
increased and decreased to $270,543 and $295,930 from $238,731 and
$303,847, as compared to the three and six months ended December
31, 2018. The decrease is primarily due to the company using social
media advertising to help generate sales. The decrease in Research
and Development was not material compared to the three and six
months ended December 31, 2018. The decreases in Advertising and
Promotion for the three and six months ended December 31, 2019, are
primarily due to the design, development and marketing of its
Aftermaster Pro consumer hardware product in the three and six
months ended December 31, 2018. Legal and Professional fees
increases are primarily to the company only using one attorney on a
monthly retainer to handle all the company’s legal needs in
the prior period compared to five in the three and six months ended
December 31, 2019. The increase in consulting expenses are
primarily due to the issuance of warrants as part of an advisory
agreement and the decrease in consulting expenses are primarily due
to issuing fewer stock for services compared to the three and six
months ended December 31, 2018, respectively.
|
Other Expense
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
Interest
Expense
|
$(652,185)
|
$(731,916)
|
|
Derivative
Expense
|
(475,762)
|
(312,256)
|
|
Change
in Fair Value of Derivative
|
359,896
|
(17,475)
|
|
Gain
on Extinguishment of Debt
|
88,542
|
-
|
|
Total
|
$(679,509)
|
$(1,061,647)
|
|
Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
$(1,342,559)
|
$(1,538,566)
|
|
Derivative
Expense
|
(547,121)
|
(1,355,346)
|
|
Change
in Fair Value of Derivative
|
35,204
|
594,737
|
|
Gain
on Extinguishment of Debt
|
88,542
|
-
|
|
Total
|
$(1,765,934)
|
$(2,299,175)
|
The
other expenses during the three and six months ended December 31,
2019, totaling $679,509 and $1,765,934 of expenses, which consists
of interest expense, derivative expense, change in fair value of
derivative, and gain on extinguishment of debt. During the
comparable three and six months in 2018, other expenses totaled
$1,061,647 and $2,299,175. Interest expense has decreased primarily
due to a decrease in non-cash interest expense relating to
amortization of recent debt discount. These additional borrowings
have been used in the development of the Aftermaster HD. Derivative
expense and change in fair value of derivatives has decreased due
to the company revaluing the instruments at the end of the current
period offset by the issuance of derivative instruments in the
current period . Gain on extinguishment of debt is due to two
settlement agreements in the current period.
|
Net Loss
|
|
|
|
|
For the Three
Months Ended
|
|
|
|
|
|
|
|
|
Net Loss
|
$(1,476,727)
|
$(2,182,287)
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
$(3,341,789)
|
$(4,308,819)
|
Due to
the Company’s cash position, we use our Common Stock as
currency to pay many employees, vendors and consultants. Once we
have raised additional capital from outside sources, as well as
generated cash flows from operations, we expect to reduce the use
of Common Stock as a significant means of compensation. Under FASB
ASC 718, “Accounting for
Stock-Based Compensation” and ASC
505, Equity Based
Payments to Non-Employees”, these non-cash
issuances are expensed at the equity instruments fair market
value. Absent these
large stock-based compensation of $270,543 and $295,930 and
$238,731 and $303,847, derivative expense of $475,762 and $547,121
and $312,256 and $1,355,346, gain (loss) on the change in the
derivative liability of $359,896 and $35,204 and $(17,475) and
$594,737 for the three and six months ended December 31, 2019 and
2018, our net loss would have been $1,090,318 and $1,613,825 and
$2,533,942 and $3,244,363 for three and six months ended December
31, 2019 and 2018, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The
Company had revenues of $150,462 and $290,467 during the
three and six months ended December 31, 2019 as compared to
$408,064 and
$942,586 in the comparable three and six months of
2018. The Company has incurred losses since inception of
$89,201,278. At December 31, 2019, the Company has negative working
capital of $16,554,457, which was a decrease in working capital of
$3,663,053 from June 30, 2019.
The
Company had cash of $62,140 as of December 31, 2019, as compared to
$366,129 as of
June 30, 2019. The decrease is a result of the Company making
payments on convertible notes payable totaling $120,204 and
payments on notes payable totaling $97,147, which was partially
offset by the Company entered into twenty four (24) Share Purchase
Agreements with individual accredited investors resulting in net
proceeds of $273,000, seven (7) notes payable resulting in net
proceeds of $219,000, four (4) related notes payable resulting in
net proceeds of $44,000, and three (3) convertible notes payable
resulting in net proceeds of $463,750 during the six months ended
December 31, 2019. The cash provided by financing activities
decreased by $481,792 during the six months ended December 31, 2019
as compared to
the six months ended December 31, 2018. This amount was also
decreased by operational costs, payments of obligations from
convertible notes, notes, and lease payables. The company had
more expenses during the quarter than the funding which resulted in
a decrease in cash. The decrease is related to the company having
less funding during the six months ending December 31, 2019 as
compared to June 30, 2019.
The
Company had prepaid expense of $270,786 as of December 31, 2019, as
compared to $311,296 as of June 30, 2019. The decrease is due to
the Company amortizing the prepaid expenses totaling $53,106 over
the six months ended December 31, 2019.
The
future of the Company as an operating business will depend on its
ability to obtain sufficient capital contributions and/or financing
as may be required to sustain its
operations. Management’s plan to address these
issues includes a continued exercise of tight cost controls to
conserve cash and obtaining additional debt and/or equity
financing.
As we
continue our activities, we will continue to experience net
negative cash flows from operations, pending receipt of significant
revenues that generate a positive sales
margin.
The
Company expects that additional operating losses will occur until
net margins gained from sales revenue is sufficient to offset the
costs incurred for marketing, sales and product development. Until
the Company has achieved a sales level sufficient to break even, it
will not be self-sustaining or be competitive in the areas in which
it intends to operate.
In
addition, the Company will require substantial additional funds to
continue production and installation of the additional studios and
to fully implement its marketing plans.
As of
December 31, 2019, the existing capital and anticipated funds from
operations were not sufficient to sustain Company operations or the
business plan over the next twelve months. We anticipate
substantial increases in our cash requirements which will require
additional capital to be generated from the sale of Common Stock,
the sale of Preferred Stock, equipment financing, debt financing
and bank borrowings, to the extent available, or other forms of
financing to the extent necessary to augment our working
capital. In the event we cannot obtain the necessary
capital to pursue our strategic business plan, we may have to
significantly curtail our operations. This would
materially impact our ability to continue operations. There is no
assurance that the Company will be able to obtain additional
funding when needed, or that such funding, if available, can be
obtained on terms acceptable to the
Company.
Recent
global events, as well as domestic economic factors, have recently
limited the access of many companies to both debt and equity
financings. As such, no assurance can be made that financing will
be available or available on terms acceptable to the Company, and,
if available, it may take either the form of debt or equity. In
either case, any financing will have a negative impact on our
financial condition and will likely result in an immediate and
substantial dilution to our existing
stockholders.
Although
the Company intends to engage in a subsequent equity offering of
its securities to raise additional working capital for operations,
the Company has no firm commitments for any additional funding,
either debt or equity, at the present time. Insufficient
financial resources may require the Company to delay or eliminate
all or some of its development, marketing and sales plans, which
could have a material adverse effect on the Company’s
business, financial condition and results of operations.
There is no certainty that the expenditures to be made by the
Company will result in a profitable business proposed by the
Company.