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EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - AFTERMASTER, INC.exhibit_32-2.htm
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - AFTERMASTER, INC.exhibit_32-1.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - AFTERMASTER, INC.exhibit_31-2.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - AFTERMASTER, INC.exhibit_31-1.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
☐ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
For the fiscal year ended June 30, 2017
 
or
 
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
 
AFTERMASTER, INC.

(Name of Small Business Issuer as specific in its Charter)
 
DELAWARE
 
23-2517953
(State or other jurisdiction of
 
(IRS Employer
Incorporation or organization)
 
Identification No.)
 
6671 Sunset Blvd., Suite 1520
Hollywood, CA 90028

(Address of Principal Executive Offices) (Zip Code)
 
(310) 657-4886

(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, $.001 par value

(Title of Class)
 
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐    No 
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐    No 
 
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐
 
 
 
 
1
 
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging Growth company

 
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No 
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter: $28,225,339.  Shares of Common Stock held by each officer and director and each person, to Registrant’s knowledge, who owns more than 5% or more of the Registrant’s outstanding Common Stock have been excluded because these persons may be deemed to be affiliates. The determination of affiliate status for purpose of this calculation is not necessarily a conclusive determination for other purposes.
 
As of September 28, 2017, the number of shares of Registrant’s Common Stock outstanding was 120,687,228.
 
 
 
DOCUMENTS INCORPORATED BY REFERENCE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
 
 
AFTERMASTER, INC.
(FORMERLY STUDIO ONE MEDIA, INC.)
 
FORM 10-K
 
FOR THE FISCAL YEAR ENDED
       JUNE 30, 2017
 
INDEX
 
 
 
PART I
  Page
Item 1.
Business
5
Item 1A.
Risk Factors
10
Item 1B.
Unresolved Staff Comments
16
Item 2.
Properties
16
Item 3.
Legal Proceedings
16
Item 4.
Submission of Matters to a Vote of Security Holders
16
 
 
PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
17
Item 6.
Selected Financial Data
18
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
22
Item 8.
Financial Statements and Supplementary Data 
22
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
22
Item 9A(T).
Controls and Procedures
22
Item 9B.
Other Information
23
 
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
23
Item 11.
Executive Compensation
26
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
27
Item 13.
Certain Relationships and Related Transactions, and Director Independence
30
Item 14.
Principal Accounting Fees and Services
31
 
 
PART IV
 
Item 15.
Exhibits, Financial Statement Schedules
32
 
 
 
 
 
 
 
 
 
 
3
 
 
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
 
This Annual Report (the “Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended, and as contemplated under the Private Securities Litigation Reform Act of 1995.  These forward-looking statements may relate to such matters as  the Company’s (and its subsidiaries) business strategies, continued growth in the Company’s markets, projections, and anticipated trends in the Company’s business and the industry in which it operates anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products and services, anticipated market performance and similar matters.  All statements herein contained in this Report, other than statements of historical fact, are forward-looking statements.
 
When used in this Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “budget,” “budgeted,” “believe,” “will,” “intends,” “seeks,” “goals,” “forecast,” and similar words and expressions are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position. These forward-looking statements are based largely on the Company’s expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company’s control.  We caution our readers that a variety of factors could cause our actual results to differ materially from the anticipated results or other matters expressed in the forward looking statements, including those factors described under “Risk Factors” and elsewhere herein.  In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Report will in fact transpire or prove to be accurate.  These risks and uncertainties, many of which are beyond our control, include:
 
 
·
the sufficiency of existing capital resources and our ability to raise additional capital to fund cash requirements for future operations;
 
 
·
uncertainties involved in growth and growth rate of our operations, business, revenues, operating margins, costs, expenses and acceptance of any products or services;
 
 
·
uncertainties involved in growth and growth rate of our operations, business, revenues, operating margins, costs, expenses and acceptance of any products or services;
 
 
·
volatility of the stock market, particularly within the technology sector;
 
 
·
our dilution related to all equity grants to employees and non-employees;
 
 
·
that we will continue to make significant capital expenditure investments;
 
 
·
that we will continue to make investments and acquisitions;
 
 
·
the sufficiency of our existing cash and cash generated from operations;
 
 
·
the increase of sales and marketing and general and administrative expenses in the future;
 
 
·
the growth in advertising revenues from our websites and studios will be achievable and sustainable;
 
 
·
that seasonal fluctuations in Internet usage and traditional advertising seasonality are likely to affect our business; and
 
 
·
general economic conditions.
 
Although we believe the expectations reflected in these forward-looking statements are reasonable, such expectations cannot guarantee future results, levels of activity, performance or achievements.  We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report.
 
All references in this report to “we,” “our,” “us,” the “Company” or “AfterMaster” refer to AfterMaster, Inc., and its subsidiary and predecessors.
 
 
4
 
 
PART I
 
ITEM 1. DESCRIPTION OF BUSINESS.
 
General
 
Corporate Background
 
We are a Delaware corporation, incorporated on about May 12, 1988, and traded on an over the counter market (ticker symbol OTCQB:AFTM). As of June 30, 2017, there were 118,486,728 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 wholly-owned subsidiaries include Aftermaster HD Audio Labs, Inc. and MyStudio, Inc.
 
The Company and its subsidiaries are engaged in the development and commercialization of proprietary (patents issued and pending), leading-edge audio and video technologies and products for professional and consumer use, including Aftermaster® Audio, ProMaster™, Aftermaster Pro™, Aftermaster Studio Pro and MyStudio®. The Company also operates recording and mastering studios at its Hollywood facilities.
 
Aftermaster holds an unparalleled position in the audio technology industry and it is operated by a world-class team of experts with and extensive experience in music and audio technology. The Aftermaster team has produced, engineered and mastered more hit music than any other audio company in the world. We believe that our expertise and technical skills have led us to develop audio technologies unmatched in the audio industry. Aftermaster technologies are both patented and patent pending, and its technologies have won several awards. www.aftermaster.com
 
Mission Statement
 
Aftermaster's goal is to become one of the most innovative and important audio companies in the world through the development and licensing of proprietary audio technologies, the development and sales of leading-edge consumer and professional audio electronics products and through its contributions in the production, mixing and mastering of music, television and film audio.
 
Year End Summary
 
The Company is pleased to report that over the past year, its proprietary Aftermaster technology has begun to gain a marked foothold in the audio industry and that it’s products are receiving recognition and acceptance by consumers in over 65 countries. The revenues for fiscal year ending June 30, 2017 were generated from the sale of our proprietary Aftermaster Pro consumer electronics product, online and professional mastering services, and from studio rentals in Hollywood.
 
During the year, the Company realized its first “quarter over quarter” sales growth from its Aftermaster technologies. For the quarter ending March 31, 2017, the Company recorded its then highest quarterly sales revenues of $266,621, which was followed by a nearly doubling of revenues to $510,138 in the following quarter ending June 30, 2017. Based on current and forecasted sales, the Company believes that it will continue to see increased sales growth from the sale of its consumer and professional hardware products (subject to having adequate inventory levels to meet demand), studio revenues and its partnerships with third party companies.
 
Our sales growth has been dominated by the Company’s Aftermaster Pro product, which is its first consumer electronics product completely developed in-house. The Aftermaster Pro recently debuted to consumers on national television on the Home Shopping Network (“HSN”) television show on April 15, 2017. The Aftermaster Pro sales were deemed to be very successful and thousands of additional units were ordered. The product has since been featured on 5 additional HSN programs in June and September and additional programming with HSN has been scheduled for the fourth calendar quarter of 2017.
 
In June 2017, the Aftermaster Pro also went on sale at Crate and Barrel's "CB2" stores (see below) and is also now available at several other prominent online retail outlets including Amazon.com, Walmart.com, as well as through the Company’s own website, www.aftermasterpro.com. The Company has engaged a well regarded on-line product marketing firm and will begin an online advertising campaign in October 2017 designed to drive buyers to our various online retailers using the ad process that produced highly successful sales metrics during our crowdfunding campaigns.
 
Despite our recent record growth and proof of product interest by consumers, the Company is currently unable to keep up with the demand for its Aftemaster Pro product. The Company’s sales performance has been greatly impacted due to manufacturing and financing challenges, both of which have limited the timing and volume of the rollout of our products. The Company is currently working towards streamlining and stabilizing the manufacturing and financing challenges in order to substantially increase the manufacturing volume and sales of our products.
 
 
 
5
 
 
The Company has also recently expanded its relationship with Tunecore, Inc. TuneCore is considered to be the premier music distribution company for independent artists and has one of the largest music catalogs in the world. We originally partnered with Tunecore in May 2016 to provide the professional hands-on professional music mastering for their independent artist services. Our professional hands-on music mastering service is headed up by Peter Doelle, one of the world’s most talented and respected mastering engineers.
 
On August 28, 2017, the Company entered into an agreement to expand its services to TuneCore and provide its proprietary Promaster instant music-mastering service for Tunecore artists that was previously done by Landr. The service launched on September 25, 2017 and now allows TuneCore customers to have their music mastered on-line instantly, with a quality never before available. The combined agreements now make the Company the exclusive partner for all of the mastering services offered by TuneCore’s, providing both professional hands-on and instant mastering services. We expect this relationship will provide additional branding awareness opportunities for Aftermaster’s suite of products.
 
During the past year, the Company has also 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 and professional audio applications. The Aftermaster Studio Pro is a 1 U, 19” rack-mount Aftermaster audio processor that allows a user to enhance any audio playback with Aftermaster to make their sound fuller, clearer, louder and deeper. It will retail for $3,995 and can be seen at www.aftermastermaster.com/products. The Company believes that the worldwide market for this new product is significant, as it can be used in potentially hundreds of thousands of applications worldwide: radio stations, private and public recording studios, churchs, restaurants and bars, sports facilities, high-end residential audio systems, live concerts and concert facilities, hospitals – virtually anyplace where a business wants the audio to sound significantly better than anything they can do in house. The product will be available for pre-sale in October 2017 with expected delivery in December 2017.
 
The Company engaged Bruce Pivic as Director of Manufacturing. He has over 45 years of experience in manufacturing and broadcasting. Mr. Pivic has a degree in electrical engineering from the University of Wyoming specializing in electronics and product development. His experience with Honeywell/GE product development brings experience in development and manufacturing quality. Mr. Pivic for the past 20 years has been the CEO and manufacturing specialist for Infinity Power and Controls. He is also the owner and CEO of Big Thicket Broadcasting, which operates three FM Radio stations (KQSW, KMRZ, and KSIT) and one AM radio station KRKK. KQSW presently is the first terrestrial radio station using the Aftermaster Pro in their everyday radio broadcasting.
 
During the year, the Company completed an extensive renovation and subsequently opened a world-class music recording studio originally built by music legend Graham Nash and made famous by Crosby, Stills and Nash in 1977, which is located adjacent to its existing studios in Hollywood at Crossroads of the World. The studio is equipped with state-of-the-art recording and mixing equipment, and it is used for both audio research and development as well as to generate revenue from rental to musicians. The Company considers it to be among the finest recording studios in the US, and it began generating revenue in the first quarter of calendar 2017. It is the largest of the six recording studios that Aftermaster now operates at its studio facilities in Hollywood. www.aftermaster.com/studios
 
Investment Bankers
 
The recent successful introduction of our Aftermaster Pro has led the Company to engage a respected investment banking firm that specializes in small cap stocks, Maxim Group of New York, to assist the Company in concurrently raising the capital to both extinguish its current debt and to provide the additional growth capital required for the Company to complete an uplisting of its shares to a larger trading platform. Such financing is contingent on market conditions, share price and the performance of the company over the next two fiscal quarters. There is no guarantee that we will raise such capital or complete such an uplisting.
 
TuneCore Agreement
 
Aftermaster offers both world-class, professional hands-on mastering services and instant online mastering through its Promaster brand for music, TV and film customers in its facilities in Hollywood, California. Aftermaster’s Professional Mastering Division is headed up by Peter Doell, one of the world’s foremost mastering engineers. In May 2016, the Company entered into a partnership with TuneCore Digital Music Services to provide professional hands-on mastering services to TuneCore’s customers. In September 2017, the Company expanded its relationship with TuneCore and entered into a multi-year agreement to also provide TuneCore with the Company’s award-winning Promaster instant online mastering service to TuneCore’s artists. The agreement displaced TuneCore’s previous relationship with online mastering service, Landr.
 
Currently, TuneCore is one of the world's largest independent digital music distribution and publishing administration service. Under our agreement, Aftermaster has become the platform for both hands-on professional and online instant mastering services for TuneCore’s artists on an exclusive basis. TuneCore has one of the highest artist revenue-generating music catalogs in the world, earning TuneCore Artists approximately $987 million from billions of 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 expsoure, by granting access to unparalleled mastering that meets the industry's highest standards.
 
 
 
6
 
 
Home Shopping Network
 
On April 15, 2017, the Company introduced its Aftermaster Pro personal re-mastering device on national television on the Home Shopping Network during two 15-minute infomercials. Home Shopping Network is one of the world’s largest television retailers. HSN initially purchased 1,000 Aftermaster Pros, and its management team has expessed to the Company that it considered the launch to be a big success. HSN has subsequently issued the Company purchase orders for several thousand more units for sale on-air shows on June 9, 2017 and September 2, 2017. Additional dates are expected to be announced for the quarter ended December 31, 2017. HSN provides a unique format for the Company to showcase the quality of the product, while explaining the unique features and operation of its Aftermaster Pro on national television. The Company expects that Aftermaster Pro will continue to be featured on HSN and by other television shows, online and store based retailers.
 
Icon Health and Fitness Products
 
During the year, the Company entered into a consulting and license agreement with ICON Health & Fitness, Inc. (“ICON”), pursuant to which the Company will act as an audio technology development consultant to develop an AfterMaster-based sound module for integration with ICON’s exercise equipment. ICON will pay the Company a per module fee and receive a license from the Company to use or sell the modules and use the software relating to each module in its products. The Company will also provide audio tuning services to further enhance the sound quality for ICON’s other audio-enabled equipment. The Company has agreed with ICON on a product development schedule, and the companies currently expect to unveil an Aftermaster-equipped premium fitness product at the upcoming Consumer Electronics Show (“CES”) in Las Vegas in January 2018.
 
ICON Health & Fitness, Inc. is the world’s largest manufacturer and marketer of home fitness equipment, selling over 10 million audio-enable fitness-related devices annually. ICON manufactures treadmills, elliptical trainers, stationary bicycles, weight machines and benches, and yoga and Pilates equipment. ICON has a wide range of well-known and respected brands, products and technologies, and sells home fitness and health club equipment under the following brands: NordicTrack®, ProForm®, Weider®, Gold's Gym® Home Fitness and FreeMotion®. Its fitness technology brand, including Wi-Fi-enabled fitness equipment and fitness wearables, is iFit®.
 
CB2 Marketing Agreement
 
CB2 (a division of Crate and Barrel), a leading lifestyle furniture retailer, and the Company have entered into a multi-year partnership to bring music and lifestyle spaces together like never before. CB2 has unique positioning in the furnishings industry as a modern, affordable and socially responsible brand who regularly offers its sophisticated clientele new and exciting opportunities to better their lifestyle and living environments.
 
Under the partnership, CB2’s customers will receive the chance to purchase the unprecedented leading-edge audio through Aftermaster’s revolutionary technology to be showcased with the CB2 platforms in a myriad of ways. As part of its collaborative strategic venture, CB2 began offering the Company's Aftermaster Pro personal audio remastering devices at key store locations across the United States including West Hollywood, New York: Soho, South Beach, Chicago, and Austin. The units retail at $189.99 in stores and online at CB2's website.
 
In addition, Aftermaster will now be a part of powering CB2’s “After Hours” concert series. The “After Hours” events transform CB2 locales into intimate nocturnal music experiences. Just after closing time, the stores play host to a bevy of notable artists as they perform a one-of-a-kind show to an exclusive audience sipping on cocktails in a chic and sophisticated atmosphere. Aftermaster provides enhanced audio capability for these shows with its proprietary technology and offers unrivaled sound in real-time. Attendees may also try the Aftermaster Pro at demo stations throughout the stores during these events. We believe this is another important brand awareness and revenue avenue for the Aftermaster Pro.
 
Extending this partnership, CB2 also outfitted Aftermaster's famous music recording studios at Crossroads of the World in Hollywood, with a complete makeover of new furniture including "first-to-be-seen" pieces from their latest collection.
 
Aftermaster Consumer and Professional Electronics Products
 
The Company has assembled a world-class branding, technical and design team who have designed the the Companies first consumer and professional electronics product. The first consumer electronics product is 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 known direct competition.
 
The number of existing televisions worldwide is substantial, and a majority of TV owners complain about their TV audio quality, especially the challenge of having to continually adjust the volume because of difficulty hearing dialogue in certain programming. Feedback from thousands of TV owners have provided the Company with valuable data that confirms that no manufacturer is delivering an audio solution with the same sound quality of Aftermaster Pro.
 
 
7
 
 
Smaller than an iPhone, Aftermaster Pro transforms the audio of your TV, smartphone, headphones, laptop, tablet, gaming unit, or virtually any audio-enabled device to sound clearer, fuller, deeper, and more exciting. Aftermaster Pro connects easily via HDMI or 3.5mm audio cables with virtually any media source (i.e., cable, satellite box, cell phone, computer, tablet, etc.). When used with a television, Aftermaster Pro raises and clarifies dialogue in programming while significantly enhancing the quality of the overall audio content. This solves the longstanding issue with TV audio of having to continually adjust volume during a TV show to hear dialogue. When used portably with its built-in battery, Aftermaster transforms music and video to standards that we believe are superior to any portable audio enhancement device.
 
The Company issued an initial purchase order and paid a substantial deposit for the electronic components and manufacturing of the first 100,000 circuit boards, which will allow an assembly manufacturer a significant head start for larger scale unit deliveries. The Company continues to be undercapitalized, which has affects our ability to compete with the majors in the audio world on a head-to-head basis who have inferior products. Subject to the availability of additional capital, the Company expects to complete the assembly of the units related to the aforementioned components purchase orders.
 
Additional Aftermaster branded consumer electronics products products are under development, which we expect to introduce in the coming year.
 
The Company recently developed the “Aftermaster Studio Pro” its first product designed for use in commercial and professional audio environments. The new product is a 1 U, 19” rack mounted Aftermaster audio processor that allows a user to enhance any audio playback with Aftermaster technology to make their sound fuller, clearer, louder and deeper. The worldwide market is significant as it can be used in radio stations, private and public recording studios, church’s, restaurants and bars, sports facilities, high-end residential, concerts and concert facilities. For more information visit www.aftermaster.com/products.
 
ON Semiconductor/Aftermaster Audio Chip and Software
 
The Company entered into a joint development and marketing agreement with ON Semiconductor ("ON") of Phoenix, Arizona, to commercialize its technology through audio semiconductor chips. ON is a multi-billion dollar, multi-national semiconductor designer and manufacturer.
 
The agreement called for ON to implement and support our Aftermaster technology in a digital signal processor (“DSP”) semiconductor chip that is being marketed toits current OEM customers, distributors and others. We selected ON as our partner for its technical capabilities, sales support and deep customer pool.
 
In conjunction with ON, we have completed the development of an Aftermaster software algorithm that is designed to be used in semiconductor chips or as a standalone software product. We believe the sound quality from our algorithm provides a superior audio experience relative to other products on the market.
 
Now branded the BelaSigna 300 AM chip, it is one of the smallest, high power/low voltage DSP chips available. It is small enough to fit into a hearing aid but equally effective in any size device with audio capability.
 
Since entering into the agreement, both the Company and ON have identified a number of prospective customers that will be key targets for this new and unprecedented technology. The algorithm and chips allow consumer product manufacturers an opportunity to offer a significantly improved and differential audio experience in their products without having to significantly change hardware and form factor designs. Through the combined relationships of the Company and ON, we hope to generate significant revenues for both parties through the sale of the ON/AfterMaster chips and software licensing.
 
Promaster
 
Promaster is our 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 a minimal fee 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. Based on the enormous addressable market for this product, we believe that Promaster has the potential to generate significant revenues for the Company.
 
 
8
 
 
Our Promaster on-line music mastering service was recently completely redesigned and launched on September 25, 2017 in conjunction with our new partnership with TuneCore. www.promasterhd.com
 
Recording and Mastering Studios
 
Aftermaster operates six (6) recording and mastering studios at its Hollywood California facility. The Company’s engineers mix and master music for both independent and high profile artists, including the music for the hit TV show "Empire".
 
The Company recently took over the former recording studio built by music legends Crosby, Stills and Nash in 1977, which is located next to its existing studios. The Company recently completely renovated the studio and installed state-of-the-art equipment. The Company considers the new studio to be one of the finest recording studios in the US and it began generating revenues in the second quarter of 2017. www.aftermaster.com/studios
 
Adobe Audition
 
Aftermaster's Promaster on-line audio mastering service has been chosen to be included with Adobe® Audition® CC, a professional audio workstation for mixing, finishing and editing audio/video. The integration of Promaster will allow Adobe Audition CC users to instantly master their original work directly within Adobe Creative Cloud®. Promaster infuses the clearest, deepest sound quality into any recording, which elevates that audio to a studio remastered sound experience. Adobe's Audition CC with Promaster HD will enable its users to substantially cut editing time and enhance original audio work into fuller, deeper, louder and clearer tracks. When ready, users will install the Promaster extension from the Adobe Add-ons marketplace.
 
The integration of Promaster into Adobe Audition has been delayed due the Company undertaking a complete redesign of its ProMaster website including adding many new features to the platform. The Company expects to complete the integration in the coming months.
 
Aftermaster Audio Technology
 
Aftermaster audio technology was created and developed pursuant to a multi-year, multi-million dollar development effort to make digital audio sound substantially better by developing proprietary software, digital signal processing technology and consumer products. The Aftermaster Audio Labs team is comprised of a unique group of award-winning industry leaders in music, technology and audio engineering which includes Ari Blitz, Peter Doell, Rodney Jerkins, Larry Ryckman, Justin Timberlake, Paul Wolff, Andrew Wuepper and Shelly Yakus. See www.Aftermaster.com .
 
The Aftermaster audio technology is an internally-developed, proprietary (patented and patents pending) mastering, remastering and audio processing technology which makes virtually any audio source sound significantly louder, fuller, deeper and clearer. Aftermaster is a groundbreaking technology which eliminates the weaknesses found in other audio enhancement and processing technologies while offering a much superior audio experience for consumer and industrial applications. We believe that our Aftermaster audio technology is one of the most significant breakthroughs in digital audio processing technology and has the potential to create significant revenues for the Company. The broad commercialization of this technology is a top priority for the Company.
 
As the convergence of features on consumer electronics continues, it is becoming more difficult for leading consumer electronics companies to differentiate their products. We believe that Aftermaster provides a unique and significant competitive advantage for consumer electronics manufacturers by offering their customers a superior audio experience. Aftermaster technology can be incorporated into most audio capable devices through the addition of an Aftermaster DSP chip or Aftermaster software. Such uses are intended to include phones (i.e., mobile, home, business and VoIP); headphones; televisions; stereo speakers; stereos (i.e., home, portable, commercial and automobile); and computers (i.e., desktop, laptop and tablets).
 
Aftermaster audio is also the only commercial audio enhancement technology available that is used for professional music mastering because it enhances the entire frequency range without distortion or changing the underlying intent of the music. The technology has been used to master music created by some of the worlds most populat artists. Further information on Aftermaster and Aftermaster products can be found at www.Aftermaster.com.
 
Intellectual Property and Licensing
 
The Company has been awarded seven patents and seven trademarks with 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. During the year, the Company 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.
 
 
 
9
 
 
Employees
 
As of June 30, 2017, we employed eleven full-time employees. We expect to seek additional employees in the next year to support 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 expires on December 31, 2017. The total lease expense for the facility is approximately $17,220 per month, and the total remaining obligations under these leases at June 30, 2017, were approximately 108,350.
 
We lease a warehouse space located at 8260 E Gelding Drive, Suite 102, Scottsdale, Arizona, 85260. The lease expires on February 28, 2019. The total lease expense for the facility is approximately $1,888 per month, and the total remaining obligations under this leases at June 30, 2017, were approximately $37,135.
 
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 $7,224 per month, and the total remaining obligations under this leases at June 30, 2017, were approximately $348,558.
 
We lease corporate offices located at 7825 E Gelding Drive, Suite 103, Scottsdale, Arizona, 85260. The lease expires on April 30, 2021. The total lease expense for the facility is approximately $3,000 per month, and the total remaining obligations under this leases at June 30, 2017, were approximately $121,305.
 
ITEM 1A.   RISK FACTORS.
 
You should carefully consider the risk factors and other uncertainties set forth below and all other information contained in this Report, as well as the public disclosure documents incorporated by reference herein.  If any of the events contemplated by the following risks actually occurs, then our business, financial condition, or results of operations could be materially adversely affected. As a result, the trading price of our Common Stock could decline, and you may lose all or part of your investment. The risks and uncertainties below are not the only risks facing our company.  Additional risks and uncertainties, including those that are not yet identified or that we currently believe are immaterial, may also adversely affect our business, financial condition or operating results.   
 
History of Operations and Dependence on Future Developments.
 
We are dependent upon our management, certain shareholders and investors for fundraising.  We expect additional operating losses will occur until revenues are sufficient to offset our costs for marketing, sales, general and administrative and product and services development.  We are subject to all of the risks inherent in establishing an early stage business enterprise.  Since we have limited operations, there can be no assurance that our business plan will be successful.  The potential for our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered with an early stage business and the competitive environment in which we will operate.  A prospective investor should be aware that if we are not successful in achieving our goals and achieving profitability, any money invested in us will likely be lost.  Our management team believes that our potential near-term success depends on our success in, manufacturing, marketing and selling our products and services. As an early stage company, we are particularly susceptible to the risks and uncertainties described herein, and we will be more likely to incur the expenses associated with addressing them.  Our business and prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in early stages of development.  These risks are particularly severe among companies in new markets, such as those markets in which we expect we will operate.  Accordingly, shareholders will bear the risk of loss of their entire investment in our shares.  
 
New Business Model.
 
We have a relatively new business model in an emerging and rapidly evolving market.  Accordingly, this makes it difficult to evaluate our future prospects and may increase the risk that we will not continue or be successful.  We will encounter risks and difficulties as a company operating in a new and rapidly evolving market.  We may not be able to successfully address these risks and difficulties, which could materially harm our business and operating results. 
 
We Have Limited Capital and Will Need Additional Financing.
 
As of June 30, 2016, we had an accumulated deficit of $72,303,551 and negative working capital of $8,871,112.  In addition, for the year ended June 30, 2017, we had a loss of approximately $8,518,359 and negative cash flow from operating activities of approximately $4,103,326. The Company has not declared dividends on its common stock, but the Company does have cumulative dividends in arrears through June 30, 2017, of approximately $886,185 for its outstanding Series A Convertible Preferred Stock.
 
 
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Revenues generated from our current operations are not sufficient to pay our ongoing operating expenses.  Therefore, we will have to obtain additional funding from the sale of our securities or from strategic transactions in order to fund our current level of operations.  In order to fund our working capital needs and our operational costs during 2017, we entered into thirteen (13) separate promissory notes, and thirty-five (35) Share Purchase Agreements with individual accredited investors and twenty (20) conversions of warrants resulting in net proceeds of $4,387,372 to the Company.
 
The funds currently available to us are inadequate to fully implement our business plan.  Until we have achieved revenues sufficient for us to break-even, we will not be a self-sustaining entity, which could adversely impact our ability to be competitive in the areas in which we do and intend to operate.  We require additional funding for continued operations and will therefore be dependent upon our ability to raise additional funds through bank borrowing, equity or debt financing or asset sales. We expect to access the public and private equity and/or debt markets periodically to obtain the funds we need to support our operations and continued growth.  There is no assurance that we will be able to obtain additional funding when needed, or that such funding, if available, can be obtained on terms acceptable to us.  If we require, but are unable to obtain, additional financing in the future on acceptable terms, or at all, we will not be able to continue our business strategy, respond to changing business or economic conditions, withstand adverse operating results or compete effectively.  If we cannot obtain needed funds, we may be forced to curtail, in whole or in part, or cease its activities altogether.  When additional shares are issued to obtain financing, current shareholders will suffer a dilutive effect on their percentage of stock ownership.   
  
We require substantial capital to continue Aftermaster operations. Although we intend to engage in subsequent debt and equity offerings of our securities to raise additional working capital for Aftermaster operations, we have no firm commitments for any additional funding, either debt or equity, at the present time.  Insufficient financial resources may require us to delay or eliminate all or some of our sales and marketing efforts to generate revenues for AfterMaster, which could have a material adverse effect on our business, financial condition and results of operations.  There is no certainty that our expenditures will result in a profitable business as proposed.
 
Lack of Diversification.
 
Our current size and financial condition makes it unlikely that we will be able to commit our funds to diversify the business until we have a proven track record in our current markets. However, we do not have any plans nor have we identified any areas or markets in which we would seek diversification in our Company's business. We acknowledge that limiting our product offerings carries a risk of limiting revenues, which may impact our ability to continue operations.
 
Competition.
 
Aftermaster has developed an audio enhancement technology that it believes is unique and competitive in the audio enhancement industry. However, there are many more well established and financially successful brands in the audio enhancement industry, with more name recognition and financial resources such as, SRS, DTS, Landr and Dolby Labs. Although we believe that our technology differentiates us from competitor technologies, there is no assurance that we will be successful in gaining any consumer acceptance of our technology.
 
While we believe that the technologies behind AfterMaster and ProMaster are unique in the industry, other companies within the industry may develop or have developed audio enhancement technologies that are equal to or better than our technologies and could become our competitors. Potential competitors may have greater name recognition, access to financing, industry contacts and more extensive customer bases that could be leveraged to accelerate their competitive activity.  Further, potential competitors may establish future cooperative relationships among themselves and with third parties to enhance their products and services in this market space in which we propose to operate.  Consequently, competitors or alliances may emerge and rapidly acquire significant market share.  We cannot assure you that we will be able to compete effectively with any competitor should they arise or that the competitive pressures faced by us will not harm our business. Such intense competition will limit our opportunities and have a materially adverse effect on our profitability or viability.
 
To protect our Company against competitors, we have embarked on an aggressive intellectual property protection program which we believe will be a significant barrier to market entry to potential competitors for our current product offerings.  In addition, we strive to employ individuals who have long standing relationships and expertise in various segments of the entertainment, marketing, finance and communications industries, which we hope will help facilitate the negotiation of favorable partnerships, sponsorships and industry support for AfterMaster and ProMaster.
 
However, any investor must recognize that AfterMaster is unproven as a commercially viable audio technology and that many other companies dominate and are successful in licensing their audio products, which compete in the market within which AfterMaster is attempting to establish itself.
 
 
 
 
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Performance - Market Acceptance.
 
The quality of our products, services, its marketing and sales ability, and the quality and abilities of our personnel are among the operational keys to our success.  We are heavily dependent upon successfully completing our product development, gaining market acceptance and subsequently recruiting and training a successful sales and marketing force.  There can be no assurance that we will be successful in attracting, training or retaining the key personnel required to execute the business plan.  Also, there can be no assurance that we can complete development of new technologies so that other companies possessing greater resources will not surpass it.  There can be no assurance that we can achieve our planned levels of performance.  If we are unsuccessful in these areas, it could have a material adverse effect on our business, results of operations, financial condition and forecasted financial results.  The entertainment industry may resist our business plan and refuse to participate in contests and other sponsorship events.   In that case we would be forced to fund and sponsor its own contests which would affect operating capital, liquidity and revenues.   The music industry may also resist the adoption of our AfterMaster technology for new and catalogue releases.
 
Dependence on Intellectual Property - Design and Proprietary Rights.
 
Our success and ability to compete depends to a degree on our intellectual property.  We will rely on copyright, trademark and patent filings as well as confidentiality arrangements, to protect our intellectual property locally and internationally.  AfterMaster and its subsidiaries have filed numerous patent applications relating to MyStudio, AfterMaster, ProMaster and related technologies and processes, and while we believe the technologies, methods and processes merit patent protection, there is no assurance that any patent will be issued.  If circumstances make it impossible to try to adequately protect our intellectual property, that intellectual property could be used by others without our consent and there could be material adverse consequences to us. We have filed several trademark applications and have received Notices of Allowance on four of those applications. Effective protection may not be available for our service marks. Although we plan to continue to register our service marks in the United States and in countries in which we do business or expect to do business, we cannot assure you that we will be able to secure significant protection for these marks. Our competitors, if any exist, or others may adopt product or service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to client confusion. If circumstances make it impossible to adequately protect the name and brand, this could seriously harm our business. 
 
Some of Our Markets are Cyclical.
 
Some of our markets are cyclical, and a decline in any of these markets could have a material adverse effect on our operating performance.   Our business is cyclical and dependent on consumer and business spending and is therefore impacted by the strength of the economy generally, interest rates, and other factors, including national, regional and local slowdowns in economic activity and job markets, which can result in a general decrease in product demand from professional contractors and specialty distributors.  For example, a slowdown in economic activity that results in less discretionary income for entertainment and music can have an adverse effect on the demand for some or all of our products.  In addition, unforeseen events, such as terrorist attacks or armed hostilities, could negatively affect our industry or the industries in which our customers operate, resulting in a material adverse effect on our business, results of operations and financial condition.
 
Dependency on Foreign Components for our Products.
 
We do and expect to continue sourcing components for our products from both inside and outside of the United States, which may present additional risks to our business.  International sourcing of components subject to various risks, including political, religious and economic instability, local labor market conditions, the imposition of foreign tariffs and other trade restrictions, the impact of foreign government regulations, and the effects of income and withholding tax, governmental expropriation, and differences in business practices. 
 
We may incur increased costs and experience delays or disruptions in product deliveries and payments in connection with component manufacturers, thus causing a potential loss of revenues. Unfavorable changes in the political, regulatory, and business climate could have a material adverse effect on our financial condition, results of operations, and cash flows.
 
Exposure to Product Liability Lawsuits.
 
Our results of operations may be negatively impacted by product liability lawsuits.  While we expect to maintain what we believe to be suitable product liability insurance once we have commenced operations of services with the general public, we cannot assure you that we will be able to maintain this insurance on acceptable terms or that this insurance will provide adequate protection against potential liabilities.  A series of successful claims against us could materially and adversely affect our reputation and our financial condition, results of operations, and cash flows.
 
Dependency on Key Suppliers and Product Availability.
 
Loss of key suppliers, lack of product availability or loss of delivery sources could delay product development, manufacturing and decrease sales and earnings of our consumer electronics products.  While in many instances we have agreements, including supply agreements, with our suppliers, these agreements are generally terminable by either party on limited notice.  The loss of, or a substantial decrease in the availability of, products from certain of our suppliers, or the loss of key supplier agreements, could have a material adverse effect on our consumer products business, results of operations and financial condition.  In addition, supply interruptions could arise from shortages of raw materials, labor disputes or weather conditions affecting products or shipments, transportation disruptions or other factors beyond our control.
 
 
 
 
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Dependence on Intellectual Property - Design and Proprietary Rights.
 
Our success and ability to compete depends to a degree on our intellectual property.  We will rely on copyright, trademark and patent filings as well as confidentiality arrangements, to protect our intellectual property locally and internationally. The Company and its subsidiaries have filed numerous patent applications relating to AfterMaster and other audio and video technologies and processes, and while we believe the technologies, methods and processes merit patent protection, there is no assurance that any patent will be issued.  If circumstances make it impossible to try to adequately protect our intellectual property, that intellectual property could be used by others without our consent and there could be material adverse consequences to us. We have filed numerous patents and have received allowance for five of them. We have filed numerous trademark applications and have received Notices of Allowance on four of those applications. Effective protection may not be available for our service marks. Although we plan to continue to register our service marks in the United States and in countries in which we do business or expect to do business, we cannot assure you that we will be able to secure significant protection for these marks. Our competitors, if any exist, or others may adopt product or service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to client confusion. If circumstances make it impossible to adequately protect the name and brand, this could seriously harm our business.
 
Fluctuations in Cost of Raw Materials.
 
Our results of operations could be adversely affected by fluctuations in the cost of raw materials.  The manufacturing process is subject to world commodity pricing for some of the raw materials used in the manufacture of our consumer electronics products.  Such raw materials are often subject to price fluctuations, frequently due to factors beyond our control, including changes in supply and demand, general U.S. and international economic conditions, labor costs, competition, and government regulation.  Inflationary and other increases in the costs of raw materials have occurred in the past and may recur in the future.  Any significant increase in the cost of raw materials could reduce our profitability and have a material adverse effect on our business, results of operations and financial condition. 
 
Regulatory Factors.
 
Our business model includes a component involving the Internet.  As such, we are subject to a number of foreign and domestic laws and regulations that effect business on the Internet.  We must contend with laws and regulations relating to user privacy, freedom of expression, content, advertising, information security and intellectual property rights of others.  Possible future consumer legislation, regulations and actions could cause additional expense, capital expenditures, restrictions and delays in the activities undertaken in connection with our business, the extent of which cannot be predicted.  
 
The exact effect of such legislation cannot be predicted until it is proposed. Terms of subsequent financings may adversely impact your investment.  We will engage in common equity, debt, and/or preferred stock financings in the future.  Your rights and the value of your investment in Preferred or Common Stock could be reduced.  Interest on debt securities could increase costs and negatively impacts operating results.  
 
Shares of our Preferred Stock may be issued in series from time to time with such designations, rights, preferences, and limitations as needed to raise capital. The terms of Preferred stock could be more advantageous to those investors than to the holders of Common Stock.
 
In addition, if we need to raise more equity capital from the sale of common or preferred stock, institutional or other investors may negotiate terms at least as, and possibly more, favorable than the terms of your investment. Shares of Common Stock which we sell could be sold into the market, which could adversely affect the market price.
 
Rapid Technological Change.
 
The industries in which we operate are characterized by rapid technological change that requires us to implement new technologies on an ongoing basis.  Our future will depend upon our ability to successfully implement new technologies in a rapidly changing technological environment.  We will likely require additional capital to develop new technologies to meet changing customer demands.  Moreover, expenditures for technology and product development are generally made before the commercial viability for such developments can be assured.  As a result, we cannot assure that we will successfully implement new technologies, that any implementations will be well received by customers, or that we will realize a return on the capital expended to develop such technology.
 
Effect of Fluctuations in Operations on the Price of Common Stock.
 
Our future operating results may fluctuate and cause the price of our Common Stock to decline, which could result in substantial losses for investors.   Our limited operating history makes it difficult to predict accurately our future operations.  We expect that our operating results will fluctuate significantly from quarter to quarter, due to a variety of factors, many of which are beyond our control.  If our operating results fall below the expectations of investors or securities analysts, the price of our Common Stock could decline significantly.  The factors that could cause our operating results to fluctuate include, but are not limited to:
 
 
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Ability to broadly commercialize and expand AfterMaster and/or ProMaster
 
Changes in entertainment technology;
 
Availability and cost of technology and marketing personnel;
 
Our ability to establish and maintain key relationships with industry partners;
 
The amount and timing of operating costs and capital expenditures relating to maintaining our business, operations, and infrastructure; and
 
General economic conditions and economic conditions specific to the entertainment industry.
 
These and other external factors have caused and may continue to cause the market price and demand for our Common Stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of Common Stock and may otherwise negatively affect the liquidity of our Common Stock. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities.  If securities class action litigation were to be brought against us, it could result in substantial costs and a diversion of our management’s attention and resources, which could hurt our business.
 
Our Common Stock is Subject to Penny Stock Regulations.
 
Our Common Stock is subject to regulations of the SEC relating to the market for penny stocks.  These regulations generally require that a disclosure schedule explaining the penny stock market and the risks associated therewith be delivered to purchasers of penny stocks and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors.  The regulations applicable to penny stocks may severely affect the market liquidity for our Common Stock and could limit your ability to sell your securities in the secondary market.
  
Uncertainty as a Going Concern.
 
Our future existence remains uncertain and the report of our independent auditors on our financial statements for the year ended June 30, 2017 includes an explanatory paragraph relating to our ability to continue as a going concern.  We have suffered substantial losses from operations and require additional financing.  Ultimately we need to generate additional revenues and attain profitable operations.  These factors raise substantial doubt about our ability to continue as a going concern. There can be no assurance that we will be able to develop commercially viable products or an effective marketing system. Even if we are able to develop commercially viable products, there is no assurance that we will be able to attain profitable operations.
 
Dilution; Dilutive Effect of Future Transactions.
 
As of June 30, 2017, we had 118,486,728 shares of Common Stock, $0.001 par value, issued and outstanding.   We had options outstanding that would permit, if exercised, the issuance of 525,000 additional shares of common stock at an average exercise price of $0.18. We may also issue further shares to certain of our management, directors, officers, employees and consultants in the immediate future.  We also had 3,109,044 shares of various classes of Convertible Preferred Stock outstanding, which can be converted to 5,185,092 shares of Common Stock.  We had outstanding convertible debt with a face value of 6,778,000,   which can be converted into approximately 16,221,037 shares of Common Stock. In addition, we had warrants outstanding that would permit, if exercised, the issuance of 39,927,097 additional shares of Common Stock at an average exercise price of $0.48.  Issuing additional shares will result in further dilution to existing shareholders, which could be significant; meaning your percentage ownership of any such merged entity will be significantly less than your percentage ownership in us. If we issue additional shares either outright or through any future options or warrants programs or requires additional financing, further dilution in value and in the percentage ownership represented by the purchaser’s investment will occur.
 
Restrictions on Transfer - No Public Market for Preferred Shares or Restricted Common Shares.
 
Our shares of Common Stock are traded on the Over-The-Counter Bulletin Board System (OTCQB) under the ticker symbol AFTM.  However, for shares that have been issued and are restricted pursuant to SEC Rule 144 of the Securities Act of 1933 (the “Act”), there is presently no public or private market for such shares.  Such shares may only be offered or sold pursuant to registration under or an exemption from the Act and have not been registered under the Act, as amended, or any State securities laws and would be issued under Section 4(2) of the Act and Rule 506 of Regulation D promulgated under the Act.  
  
Expect to Incur Losses for the Foreseeable Future.
 
We expect to incur losses for the foreseeable future and we may never become profitable.   Our business model requires that we obtain revenues from our online music mastering service, ProMaster, or by licensing our AfterMaster HD audio and selling AfterMaster HD chip proprietary technology to consumer device manufacturers.  There are no assurances that significant revenues from ProMaster and/or AfterMaster necessary for the Company to become break-even will occur. We expect our expenses to increase significantly as we continue to develop the infrastructure necessary to fully implement our business strategy.  Our expenses will continue to increase as we: hire additional employees; implement our marketing plans; pursue further research and development; expand our information technology systems; and lease and purchase more space to accommodate our operations.
 
 
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Costs associated with designing, developing, manufacturing, marketing and developing the infrastructure we will need to support our customers will depend upon many factors, including the growth-rate of our online user base and the amount of engineering expertise needed to maintain and build our IP portfolio.  Therefore, we cannot now determine the amount by which our expenses will increase as we grow.
 
Possible Claims That the Company Has Violated Intellectual Property Rights of Others.
 
We are not subject to any dispute, claim or lawsuit or threatened lawsuit alleging the violation of intellectual property rights of a third party.  We believe AfterMaster and ProMaster are not in violation of any patents claimed by others.  To the extent that the Company is ever alleged to have violated a patent or other intellectual property right of a third party, it may be prevented from operating its business as planned, and it may be required to pay damages, to obtain a license, if available, to use the patent or other right or to use a non-infringing method, if possible, to accomplish its objectives. Any of these claims, with or without merit, could subject us to costly litigation and the diversion of our technical and management personnel. If we incur costly litigation and our personnel are not effectively deployed, the expenses and losses incurred will increase, and our profits, if any, will decrease.
 
Business Plans and Operational Structure May Change.
 
We continually analyze our business plans and operations in light of market conditions and developments.  As a result of our ongoing analyses, we may decide to make substantial changes in our business plan and organization.  In the future, as we continue our internal analyses and as market conditions and our available capital change, we may decide to make organizational changes and/or alter some or all of our overall business plans.
  
Reliance on Management.
 
We believe that our present management has the experience and ability to successfully implement our business plans for the foreseeable future.  However, it is likely that we will continue to add to our management and therefore will recruit additional persons to key management positions in the future.  Should we be unsuccessful in recruiting persons to fill the key positions or in the event any of these individuals should cease to be affiliated with us for any reason before qualified replacements can be hired, there could be material adverse effects on our business and prospects.  Each officer, director, and other key personnel has or will have an employment agreement with us which will contain provisions dealing with confidentiality of trade secrets, ownership of patents, copyrights and other work product, and non-competition. 
 
 Nonetheless, there can be no assurance that these personnel will remain employed for the entire duration of the respective terms of such agreements or that any employee will not breach covenants and obligations owed to us. In addition, all management decisions will be made exclusively by our officers and directors.  Investors will only have rights associated with minority ownership interest rights to make decisions that affect the Company.  Our success, to a large extent, will depend on the quality of our directors, officers and senior management.
 
Inability to Attract and Retain Qualified Personnel.
 
Our future success depends in significant part on its ability to attract and retain key management, technical and marketing personnel.  Competition for highly qualified professional, technical, business development, and management and marketing personnel is intense.  We may experience difficulty in attracting new personnel, may not be able to hire the necessary personnel to implement our business strategy, or we may need to pay higher compensation for employees than we currently expect.  A shortage in the availability of required personnel could limit our ability to grow.  We cannot assure you that we will succeed in attracting and retaining the personnel we need to grow.
 
Inability to Manage Rapid Growth.
 
We expect to grow rapidly.  Rapid growth often places considerable operational, managerial and financial strain on a business.  To successfully manage rapid growth, we must accurately project its rate of growth and:
 
 
Rapidly improve, upgrade and expand our business infrastructure;
 
Deliver our product and services on a timely basis;
 
Maintain levels of service expected by clients and customers;
 
Maintain appropriate levels of staffing;
 
Maintain adequate levels of liquidity; and
 
Expand and upgrade our technology, transaction processing systems and network hardware or software or find third parties to provide these services.
 
Our business will suffer if we are unable to successfully manage our growth.
 
 
 
 
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Dividend Policy.
 
There can be no assurance that our operations will result in future significant revenues or any level of profitability.  We have not, and do not, anticipate paying cash dividends on our Common Stock in the foreseeable future.  We plan to retain all future earnings and cash flows, if any, to finance our operations and for general corporate purposes.  Any future determination as to the payment of cash dividends will be at our Board of Directors’ discretion and will depend on our financial condition, operating results, current and anticipated cash needs, plans for expansion and other factors that our Board of Directors considers relevant.
 
Conflicts of Interest.
 
Existing and future officers and directors may have other interests to which they devote time, either individually or through partnerships and corporations in which they have an interest, hold an office, or serve on boards of directors, and each may continue to do so.  As a result, certain conflicts of interest may exist between the Company and its officers and/or directors that may not be susceptible to resolution.  All potential conflicts of interest will be resolved only through exercise by the directors of such judgment as is consistent with their fiduciary duties to the Company, and it is the intention of management to minimize any potential conflicts of interest.
 
Loss of Services of Key Members of Our Senior Management Team.
 
Our future success depends in a large part upon the continued services of key members of our senior management team.  
 
These persons are critical to the overall management of AfterMaster as well as the development of our technology, our culture and our strategic direction.  We do not maintain any key-person life insurance policies.  The loss of any of our management or key personnel could seriously harm our business.
 
ITEM 1B.  UNRESOLVED STAFF COMMENTS.
 
None.
 
ITEM 2. DESCRIPTION OF PROPERTIES.
 
We lease offices in Hollywood, California (located at 6671 Sunset Blvd., Suite 1520, 1518 and 1550, Hollywood, California, 90028) for corporate, research, engineering and mastering services. The lease expires on December 31, 2017. The total lease expense for the facility is approximately $17,220 per month, and the total remaining obligations under these leases at June 30, 2017, were approximately 108,350.
 
We lease a warehouse space located at 8260 E Gelding Drive, Suite 102, Scottsdale, Arizona, 85260. The lease expires on February 28, 2019. The total lease expense for the facility is approximately $1,888 per month, and the total remaining obligations under this leases at June 30, 2017, were approximately $37,135.
 
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 $7,224 per month, and the total remaining obligations under this leases at June 30, 2017, were approximately $348,558.
 
We lease corporate offices located at 7825 E Gelding Drive, Suite 103, Scottsdale, Arizona, 85260. The lease expires on April 30, 2021. The total lease expense for the facility is approximately $3,000 per month, and the total remaining obligations under this leases at June 30, 2017, were approximately $121,305.
 
ITEM 3. LEGAL PROCEEDINGS.
 
The Company may become involved in certain legal proceedings and claims which arise in the normal course of business. The Company is not a party to any litigation. To the best of the knowledge of our management, there are no material litigation matters pending or threatened against us.
  
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
No matters were submitted to a vote of the shareholders during the current fiscal year. 
 
 
 
 
 
 
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PART II
 
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
Market Information
 
AfterMaster’s Common Stock is traded on the Over-The-Counter Bulletin Board System (OTCBB) under the symbol “AFTM”.  The following table sets forth the range of high and low bid quotations for each fiscal quarter for the last two fiscal years.  These quotations reflect inter-dealer prices without retail mark-up, markdown, or commissions and may not necessarily represent actual transactions.
 
For the Fiscal Year Ending on June 30, 2017
High
Low
Quarter Ended June 30, 2017
0.34
0.16
Quarter Ended March 31, 2017
0.42
0.26
Quarter Ended December 31, 2016
0.45
0.32
Quarter Ended September 30, 2016
0.47
0.33
 
 
 
 
 
 
For the Fiscal Year Ending on June 30, 2016
High
Low
Quarter Ended June 30, 2016
0.51
0.34
Quarter Ended March 31, 2016
0.54
0.33
Quarter Ended December 31, 2015
0.87
0.40
Quarter Ended September 30, 2015
0.70
0.40
 
Stockholders
 
As of June 30, 2017, the number of stockholders of record according to our transfer agent was approximately 602.  Because many of our shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of stockholders represented by these record holders.  Consequently, the actual number of stockholders of record as of the date of this Report was not available. The Company believes, however, that it has approximately 1,500 stockholders in total.
 
Dividends
 
The Company has paid no dividends on its Common Stock since its inception and does not anticipate or contemplate paying cash dividends in the foreseeable future. 
 
Pursuant to the terms of our Series A Convertible Preferred Stock, a 5% annual dividend is due and owing. Pursuant to the terms of our Series B Convertible Preferred Stock, an 8% annual dividend is due and owing.  Pursuant to the terms of our Series A-1 Senior Convertible Redeemable Preferred Stock, a 6% annual dividend is due and owing.  As of June 30, 2017, we had not declared dividends on Series A, Series B or its Series A-1 Preferred Stock.  We have, however, for those shares of Series A-1 Preferred Stock that were converted, calculated the dividends through the date of conversion and issued shares of common stock in payment of those dividends.  The unpaid cumulative dividends totaled approximant $886,185.  See Note 8 of Notes to Consolidated Financial Statements.  
 
Supplemental Disclosure of Non-Cash Investing and Financing Activities for Fiscal Years 2017 and 2016
 
Fiscal Year 2017
 
During fiscal year ended June 30, 2017, the Company issued 3,471,666 shares of Common Stock for cash valued at $991,500.
 
The Company issued 2,150,364 shares of Common Stock for the conversion of notes and accrued interest valued at $438,781.
 
The Company also issued 650,000 shares of Common Stock as incentive to notes valued at $127,500. The Beneficial Conversion was valued at $30,519.
 
The Company also issued 300,000 shares of Common Stock, and issued 15,682 shares of Common Stock of payment of $7,841 in accrued dividends.
 
 
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The Company issued 2,953,057 shares of Common Stock as payment for services and rent valued at $917,152.
 
The Company issued 3,020,750 shares of Common Stock for the conversion warrants valued at $906,224.
 
The Company issued 22,000 shares of Common Stock for the extension of two convertible notes valued at $5,910.
  
As share-based compensation to employees and non-employees, the Company issued 1,237,210 shares of common stock valued at $403,945, based on the market price of the stock on the date of issuance. As interest expense on outstanding notes payable, the Company issued 2,532,655, shares of common stock valued at $783,786 based on the market price on the date of issuance.
 
Fiscal Year 2016
 
During fiscal year ended June 30, 2016, the Company issued 2,667,919 shares of Common Stock for the conversion of notes and accrued interest valued at $446,757.
 
The Company also issued 200,000 shares of Common Stock for the conversion of 100,000 shares of Series A-1 Preferred Stock and issued 59,326 shares of Common Stock of payment of $26,769 in accrued dividends.
 
The Company also issued 26,000 shares of Common Stock as incentive to notes valued at $10,284 and recorded $22,375 in beneficial conversion features related to new issuances of debt.
 
The Company issued 496,137 shares of Common Stock as payment for services and rent valued at $225,413.
 
As share-based compensation to employees and non-employees, the Company issued 812,804 shares of common stock valued at $364,851, based on the market price of the stock on the date of issuance. As interest expense on outstanding notes payable, the Company issued 1,704,803 shares of common stock valued at $762,076 based on the market price on the date of issuance.
 
ITEM 6 - SELECTED FINANCIAL DATA.
 
Not required by Form 10-K for smaller reporting companies.
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
For the Years Ended
 
 
 
June 30,
 
 
 
2017
 
 
2016
 
AfterMaster Revenues
 $338,725 
 $118,226 
Product Revenues
  541,259 
  - 
Licensing Revenues
  - 
  1,800,000 
Total Revenues
 $879,984 
 $1,918,226 
 
We currently generate revenue from our operations through three activities: AfterMaster revenues, product revenue and licensing revenues.
 
AfterMaster revenues are generated primarily from AfterMaster audio services provided to producers and artists on a contract basis. We hope this source of revenue grows in coming years, and the Company is expecting to generate additional revenues in this category from on-line mastering downloads and the development of the AfterMaster software algorithm and chip, although such growth and additional revenues are not assured and may not occur. AfterMaster revenues for the fiscal year ended June 30, 2017, increased to $338,725, as compared to $118,226 for the comparable fiscal year ended June 30, 2016, the increases were due primarily to an increase in the mastering and remastering of music and licensing by our customers and recognition of deferred revenues from sales.
 
Product revenues are generated through the sale of the AfterMaster TV Pro.  Our product revenues were $541,259 and $0 during the fiscal year ended June 30, 2017 and June 30, 2016.
 
Licensing revenues are generated by licensing certain technologies, intellectual property, and patents to third parties.  Our licensing revenues were $0 and $1,800,000 during the fiscal year ended June 30, 2017 and June 30, 2016.
 
 
18
 
 
In the aggregate, total Company revenues decreased to $879,984 for the year ended June 30, 2017, as compared to total revenues of $1,918,226 for the year ended June 30, 2016, due to the licensing contract revenue with bBooth in the prior year.
 
Cost of Revenues
 
 
 
 
 
 
 
 
For the Years Ended
 
 
 
June 30,
 
 
 
2017
 
 
2016
 
Cost of Revenues (excluding depreciation and amortization)
 $1,250,365 
 $484,507 
 
Cost of sales consists primarily of manufacturing cost of the AfterMaster Pro TV consumer electronic product, AfterMaster Studio Rent, Consultants, senior engineers, and Internet connectivity and excludes depreciation and amortization on the studios. The increase in cost of sales for the years ended June 30, 2017, over the comparable fiscal year, is attributable, primarily, to the Company hiring a new senior engineer and increase in studio rent for new state-of-the-art recording studio. The company had manufacturing cost in the amount of $941,067 for the AfterMaster Pro TV for the year ending June 30, 2017.
  
Other Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended
 
 
 
June 30,
 
 
 
2017
 
 
2016
 
Depreciation and Amortization Expense
 $178,071 
 $83,620 
Research and Development
  221,437 
  386,949 
Advertising and Promotion Expense
  45,183 
  366,740 
Legal and Professional Expense
  119,520 
  377,047 
Non-Cash Consulting Expense
  2,209,950 
  4,119,978 
General and Administrative Expenses
  2,956,464 
  3,590,584 
Total
 $5,730,625 
 $8,924,918 
 
General and administrative expenses consist primarily of compensation and related costs for our finance, legal, human resources, investor relation, Public relations and information technology personnel; advertising and promotion expenses; rent and facilities; and expenses related to the issuance of stock compensation. During the fiscal year ended June 30, 2017, General and administrative expenses decreased by $634.120 as compared to the fiscal year ending June 30, 2016. The decreases in General and administrative expenses is due to decreases in consulting services, public relations and marketing, and traveling expense partially set of by increases in tradeshows and investor relations.
 
During the fiscal year ended June 30, 2017, Research and Development costs decreased by $165,512, Advertising and Promotion decreased by $321,557, Legal and Professional fees decreased by $257,527 and consulting services decreased by $1,910,028, as compared to the fiscal year ending June 30, 2016. The decreases in Research and Development, and decreases in Advertising and Promotion, and consulting services are primarily due to the design, development and marketing of its Aftermaster Pro consumer hardware product. Legal and Professional fees decrease are primarily to the company only using one attorney on a monthly retainer to handle all the company’s legal needs. 
 
Other Income (Expense)
 
 
 
 
 
 
 
 
For the Years Ended
 
 
 
June 30,
 
 
 
2017
 
 
2016
 
Interest Expense
 $(1,876,031)
 $(967,721)
Derivative Expense
  (376,427)
  - 
Change in Fair Value of Derivative
  (138,693)
  4,376,281 
Loss on Available for Sale Securities
  - 
  (1,770,000)
Gain (Loss) on Extinguishment of Debt
  1,724 
  232,894 
Imairment of assets
  (27,926)
  - 
Total
 $(2,417,353)
 $1,871,454 
 
The other income (expense) during the fiscal year ended June 30, 2017, totaled $(2,417,353) of net expenses, which consists of change in fair value of derivative, derivative expense, impairment of assets, and interest. During the comparable fiscal year in 2016, other income and expenses totaled $1,871,454. Interest expense has increased primarily due to an increase in non-cash interest expense relating to warrants attached to recent debt discount.  These additional borrowings have been used in the development of the AfterMaster HD. Derivative expense has increased and change in fair value of derivatives has decreased due to the issuance of derivative instruments in the current year and the company revaluing the instruments at the end of the current year. Gain on extinguishment of debt decreased in the current year due to having less notes extinguished in the current year.
 
 
19
 
 
Net Loss
 
 
 
 
 
 
 
 
For the Years Ended
 
 
 
June 30,
 
 
 
2017
 
 
2016
 
Net Loss
 $(8,518,359)
 $(5,619,745)
 
Due to the Company’s cash position, we use our Common Stock and warrants to pay many employees, vendors and consultants as well as to raise capital through incentives attached to our debt offerings.  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 505-50 “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 $1,747,414 and $1,377,442, derivative expense of $376,427 and $0, and gain(loss) on the change in the derivative liability of $(138,693) and $4,376,281 for the fiscal years ended June 30, 2017 and 2016, our net (loss) income would have been $(6,255,825) and $133,978 for fiscal years ended June 30, 2017 and 2016, respectively.
 
LIQUIDITY AND CAPITAL RESOURCES
 
The Company had revenues of $879,984 the fiscal year ended June 30, 2017 as compared to $1,918,226 in the comparable period in 2016.  The Company has incurred losses since inception of $72,303,551.  At June 30, 2017, the Company had negative working capital of $8,871,112, which was a decrease in working capital of $3,776,958 from June 30, 2016.  
  
The Company had cash of $250,728 as of June 30, 2017, as compared to $394,325 as of June 30, 2016.  The company entered into thirty-five (35) Share Purchase Agreements with individual accredited investors resulting in net proceeds of $1,344,648 to the Company compared to twenty-five (25) Share Purchase Agreements with individual accredited investors resulting in net proceeds of $1,382,390 to the Company from the prior year. This amount was partially offset by operational costs, purchases of assets, and payments of obligations from convertible notes, notes, and lease payables.
 
The Company had prepaid expense of $516,358 as of June 30, 2017, as compared to $1,097,036 as of June 30, 2016.  The decrease is due to the Company amortizing the prepaid expenses totaling $2,207,450 over the year ended June 30, 2017, partially offset by the issuance of nine consulting agreements entered into in the current year.
 
The future of the Company as an operating business will depend on its ability to obtain sufficient capital contributions and/or financing as may be required to sustain its operations.  Management’s plan to address these issues includes a continued exercise of tight cost controls to conserve cash and obtaining additional debt and/or equity financing.
  
As we continue our activities, we will continue to experience net negative cash flows from operations, pending receipt of significant revenues that generate a positive sales margin.  
 
The Company expects that additional operating losses will occur until net margins gained from sales revenue is sufficient to offset the costs incurred for marketing, sales and product development. Until the Company has achieved a sales level sufficient to break even, it will not be self-sustaining or be competitive in the areas in which it intends to operate. 
 
In addition, the Company will require substantial additional funds to continue production and installation of the additional studios and to fully implement its marketing plans.  
 
As of June 30, 2017, 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.  
 
 
 
 
20
 
 
CRITICAL ACCOUNTING POLICIES
 
Revenue Recognition
 
The Company applies the provisions of FASB ASC 605, “Revenue Recognition in Financial Statements,” which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. ASC 605 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue related to goods and services provided when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.
 
The Company's revenues are generated from AfterMaster products and services, and licensing fees.  Revenues related to licensing fees generated per a term sheet with bBooth are recorded when payment is received as there is no current executed agreement in place and the term of use is indefinite, pursuant to which bBooth agreed to acquire exclusive rights to license certain technologies, intellectual property, and patents from AfterMaster.
 
Long-lived Assets – Long-lived tangible assets and definite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company uses an estimate of undiscounted future net cash flows of the assets over the remaining useful lives in determining whether the carrying value of the assets is recoverable. If the carrying values of the assets exceed the expected future cash flows of the assets, the Company recognizes an impairment loss equal to the difference between the carrying values of the assets and their estimated fair values. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent from other groups of assets. The evaluation of long-lived assets requires the Company to use estimates.
 
Share-based Compensation – The Company follows the provisions of FASB ASC 718, “Share-Based Payment,” which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Equity instruments issued to non-employees for goods or services are accounted for at fair value and are marked to market until service is complete or a performance commitment date is reached, whichever is earlier. The Company uses the Black-Scholes pricing model for determining the fair value of stock-based compensation. The Company also follows the provisions of FASB ASC 505-50, “Equity-Based Payments to Non-Employees,” which addresses the accounting and reporting for both the issuer (that is, the purchaser or grantor) and recipient (that is, the goods or service provider or grantee) for a subset of share-based payment transactions.
 
Convertible Securities and Derivatives – The Company estimates the fair values of the debt and warrants, and allocates the proceeds pro rata based on these values.  The allocation of proceeds to the warrants results in the debt instrument being recorded at a discount from the face amount of the debt and the value allocated to the warrant is recorded to additional paid-in capital.
 
When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds from the convertible host instruments are first allocated to the bifurcated derivative instruments.  The remaining proceeds, if any, are then allocated to the convertible instruments themselves, resulting in those instruments being recorded at a discount from their face value.
 
Derivative Liabilities - The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Company’s balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. The Company has a sequencing policy regarding share settlement wherein instruments with the earliest issuance date would be settled first. The sequencing policy also considers contingently issuable additional shares, such as those issuable upon a stock split, to have an issuance date to coincide with the event giving rise to the additional shares.
 
Using this sequencing policy, all instruments convertible into common stock, including warrants and the conversion feature of notes payable, issued subsequent to August 14, 2014 are derivative liabilities. On August 28, 2015, the Company increased the number of authorized common shares from 100,000,000 to 250,000,000, which removed the derivative using the sequencing policy. The Company again used this sequencing policy, all instruments convertible into common stock, including warrants and the conversion feature of notes payable, issued subsequent to May 10, 2016 until the note was converted on May 20, 2016 were derivative liabilities.
 
The Company entered into multiple amendments to a note payable to extend the maturity date (the Amendments). The Company agreed to additional $30,000 extension fees which were converted 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. This creates a situation where the Company no longer has shares enough available to “cover” all potential equity issuance obligations during the period of issuance until conversion.
 
 
 
 
21
 
 
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. Additionally, the note contains a ratchet provision. The Company determined under ASC 815, that the embedded conversion feature (if offering of common stock is at no consideration or at a price that is lower than the effective conversion price on the date shares are offered for sale, then a ratchet down of effective exercise price to price per share offered for common stock would be used to determine additional shares to be issued). The Company has determined that this ratchet provision indicates that these shares, if issued, are not indexed to the Company’s own stock and, therefore, is an embedded derivative financial liability. Accordingly, all convertible instruments issued after February 3, 2017 are considered derivatives according to the Company’s sequencing policy.
 
The Company values these convertible notes payable using the multinomial lattice method that values the derivative liability within the notes based on a probability weighted discounted cash flow model. The resulting liability is valued at each reporting date and the change in the liability is reflected as change in derivative liability in the statement of operations.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not required for smaller reporting companies.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
Our financial statements as of and for the fiscal year ended June 30, 2017 and June 30, 2016 have been audited to the extent indicated in the report by Sadler, Gibb & Associates, independent certified public accountants, and have been prepared in accordance with generally accepted accounting principles and pursuant to Regulation S-X as promulgated by the SEC.  
 
The aforementioned financial statements are presented in a separate section of this Report following Part IV.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None.
  
ITEM 9A. CONTROLS AND PROCEDURES.
 
Evaluation of Disclosure Controls and Procedures
 
Our Chief Executive Officer, President, and Chief Financial Officer (the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures for the Company.  The Certifying Officers have designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this Report was prepared.
 
The Certifying Officers responsible for establishing and maintaining adequate internal control over financial reporting for the Company used the “Internal Control over Financial Reporting Integrated Framework” issued by Committee of Sponsoring Organizations (“COSO”) to conduct an extensive review of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act, Rules 13a-15(e) and 15-d-15(e)) as of the end of each of the periods covered by this Report (the “Evaluation Date”).  Based upon that evaluation, the Certifying Officers concluded that, as of June 30, 2017 and June 30, 2016, our disclosure controls and procedures were not effective in ensuring that the information we were required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms.
 
The Certifying Officers based their conclusion on the fact that the Company has identified material weaknesses in controls over financial reporting, detailed below.  In order to reduce the impact of these weaknesses to an acceptable level, the company has contracted with consultants with expertise in U.S. GAAP and SEC financial reporting standards to review and compile all financial information prior to filing that information with the SEC.  However, even with the added expertise of these consultants, we still expect to be deficient in our internal controls over disclosure and procedures until sufficient capital is available to hire the appropriate internal accounting staff and individuals with requisite GAAP and SEC financial reporting knowledge.  There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Management Annual Report on Internal Control over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  Management used the “Internal Control over Financial Reporting Integrated Framework” issued by COSO to conduct an extensive review of the Company’s internal controls over financial reporting to make that evaluation.  As of June 30, 2017 and June 30, 2016, the Company had identified deficiencies in internal controls that constituted material weaknesses in internal controls. Due to these material weaknesses, management concluded that internal controls over financial reporting as of June 30, 2017 and June 30, 2016 were, based on COSO’s framework.  
 
 
 
 
22
 
 
The deficiencies are attributed to the fact that the Company does not have adequate resources to address complex accounting issues, as well as an inadequate number of persons to whom it can segregate accounting tasks within the Company so as to ensure the segregation of duties between those persons who approve and issue payment from those persons who are responsible to record and reconcile such transactions within the Company’s accounting system.  These control deficiencies will be monitored and attention will be given to the matter as we continue to accelerate through our current growth stage.
 
Management has concluded that these control deficiencies constitute a material weakness that continued throughout fiscal year 2017.  In order to reduce the impact of these weaknesses to an acceptable level, we have contracted with consultants with expertise in U.S. GAAP and SEC financial reporting standards to review and compile all financial information prior to filing that information with the SEC.  However, even with the added expertise of these consultants, we still expect to be deficient in our internal controls over disclosure and procedures until sufficient capital is available to hire the appropriate internal accounting staff and individuals with requisite GAAP and SEC financial reporting knowledge.  There were no significant changes in our internal control over financial reporting or in other factors that occurred during our most recent fiscal year that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
 
This Annual Report does not include attestation reports of the Company’s registered public accounting firms regarding internal controls over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B.  OTHER INFORMATION.
 
None.
 
PART III
 
ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The directors and executive officers of the Company as of June 30, 2017 were as follows:
 
 Name
Age
Position
 
 
 
Lawrence G. Ryckman
58
Director, President, CEO, Chairman
Mirella Chavez
32
CFO, Director, Secretary, Treasurer
Mark Depew
55
Director, Senior Vice President Finance
Arnie Weintraub
74
Director
Sheldon Yakus
72
Vice President
Aaron Ryckman
30
SVP Business Development
Matthew R. Long
51
Vice President
 
The directors and officers of our wholly-owned operating subsidiary, MyStudio, Inc., at June 30, 2016 were:
 
Name
Age
Position
 
 
 
Lawrence G. Ryckman
58
Director, President, CEO, Secretary
 
The directors and officers of our wholly-owned operating subsidiary, AfterMaster HD Audio Labs, Inc., at June 30, 2016 were:
 
Name
Age
Position
 
 
 
Lawrence G. Ryckman
58
Director, President, CEO, Secretary
 
 
23
 
 
The significant Employees of the Company as of June 30, 2016 were as follows:
 
 Name
Position
 
 
Aaron Ryckman
SVP Business Development
Sheldon Yakus
Senior Vice President, Engineering
Matthew R. Long
Vice President, Video Production and Engineering
Ron Gillyard
Senior Vice President of Music and Marketing
Paul Wolff
Senior Vice President of Product Development
Pete Doell
Senior Mastering Engineer
Ari Blitz
Senior Engineer
 
Directors serve until the next annual meeting or until their successors are qualified and elected. Officers serve at the discretion of the Board of Directors.
 
Lawrence (Larry) Ryckman is a Director and President and CEO of the Company. Mr. Ryckman was the Founder, President & CEO of AfterMaster HD Audio, Inc. and MyStudio, Inc., both wholly-owned subsidiaries of AfterMaster, Inc. He is an award-winning businessman with extensive experience in the music, audio and entertainment industries. He served as President & CEO of American Artists, Inc., a film, video and music production and distribution company; as Owner and President of the Calgary Stampeder Football Club of the Canadian Football League; and was Co-Founder, President & CEO of QSound, Inc., which develops proprietary audio technologies for the entertainment industry. QSound grew from a start-up to a NASDAQ-listed, internationally recognized participant in the entertainment audio technology industry with numerous patents. His personal mastering and corporate mixing credits include some of the most popular artists including Lady Gaga, Madonna, Michael Jackson, Sting and many others. Mr. Ryckman has negotiated partnerships with many national and international companies including ON Semiconductor, Simon Cowell’s “The X-Factor, Mark Burnett Productions, Guitar Center, JVC, Nintendo, Coca-Cola, Hard Rock International and the GRAMMY Foundation.
 
Sheldon “Shelly” Yakus is Senior Vice President, Audio Engineering.  He is a renowned music producer, audio engineer/mixer and recording studio designer. He has engineered and mixed recordings for some of the world’s best known artists including John Lennon, Stevie Nicks, Alice Cooper, Van Morrison, Tom Petty, Dire Straits, Blue Oyster Cult, Bob Seger, Amy Grant, Don Henley, U2 and Madonna. Known as “Golden Ears,” he is also widely respected for his expertise in recording studio design and acoustics. Mr. Yakus co-designed, equipped and supervised construction of the industry leading A&M Music recording studios in Los Angeles and served as vice-president of A&M studios. He was previously vice president of the Record Plant recording studios in New York and a partner at Tongue and Groove Studios in Philadelphia. The music that Mr. Yakus has engineered, produced or mixed has grossed over a billion dollars in sales and in 1999 he was nominated for induction into the Rock and Roll Hall of Fame. Mr. Yakus’ career and accomplishments are widely covered in publications such as Rolling Stone, Mix Magazine, Audio Engineer and Spin .
 
Mirella Chavez is Chief Financial Officer, Secretary and Treasurer of the Company. Ms. Chavez has a Bachelor of Science in Accounting and Marketing from DeVry University.  She has been with AfterMaster, Inc. since October 2006.
 
Paul Wolff is Senior Vice President of Product Development. Paul has been intimately involved in the professional music and audio industries as an audio engineer and product designer and manufacturer of professional audio products for more than 35 years. He is known within the industry as an expert in engineering, electronic design, DSP processing, mechanical design and packaging for the audio industry. Paul owned and operated two highly coveted and successful audio product companies, API Audio and Tonelux. At API Audio, Paul designed, manufactured and marketed API’s legendary recording/mixing consoles to recording studios and production facilities worldwide. At Tonelux, Paul was responsible for the conceptual design, physical design, marketing and manufacturing of some of the world’s best sounding and most coveted audio recording and processing hardware components used in high end recording studios (equalizers, compressors, mixers, consoles, etc.). His equipment and technologies have been used in many of the world’s top recording and engineering studios for the production of hundreds of hit records.
 
Ron Gillyard is the Senior Vice President of Music and Marketing. A GRAMMY award winner, Ron Gillyard is a highly respected music industry veteran who has experience in all aspects of the music industry. Ron was formerly President of Urban Music at Interscope Records, Head of Urban Music at Clive Davis’, J Records and General Manager of Bad Boy Entertainment and Motown. Over the course of his career, Ron has worked with such artists as Stevie Wonder, Alicia Keys, Mary J. Blige, Sean “Diddy” Combs, 50 Cent and Eminem.
 
Peter Doell is one of the most talented and best known mastering engineers in the world.   Pete has more than 35 years of experience and has mastered and engineered hundreds of chart-topping records, film scores and TV spots. Doell has served as a first-call engineer with some of the most prestigious and acclaimed studios including Universal Mastering, Sunset Sound, Capitol Studios, and Sony Pictures.   Some of Doell’s credits include: Josh Groban, Frank Sinatra, Kurupt, John Waite, Glenn Frye, Celine Dion, Dave Coz, Miss Saigon, Miles Davis, Brian McKnight, Toto, Dwight Yoakam, Marilyn Manson, Los Lobos, Harry Connick Jr., The Beach Boys, Dashboard Confessional, Willie Nelson and Sheryl Crow.   He has also worked on feature film scores including Road To Perdition and Black Hawk Down, and mastered the music for prominent TV productions such as American Idol and The Voice.
 
 
 
 
24
 
 
Andrew Wuepper is a Los Angeles based mix engineer, who is credited on albums and singles grossing over 50 million copies worldwide. He has worked with some of the biggest superstars in the Pop and Urban music garnering three Grammy Nomination and honors. Andrew was deeply rooted in the burgeoning local music scene of Seattle, where giants like Nirvanna, Soundgarden and Jimi Hendrix inspired his love for music. He became involved in the underground music scene. Where he wrote and produced music that led to his love for sound design. His natural gift for mixing was as big as his determination and motivation to take his dreams to the next level. In 2006, he secured an internship at one of the most renowned mixing studios in the country, Larrabee Recording Studios, which housed some of the nation’s most sought after Mix Engineers under one roof. It was at Larrabee where he quickly climbed the studio ranks garnering the attention of Dave Pensado, who noticed his stealth-like determination, which united talent and hard-work, separating him form among his peers. Andrew would later go on to make a name for himself mixing for superstars such as Jon Legend, Usher, TI, Mary J. Blige, Iggy Azalea, Future and many more. His most prominent accomplishment is currently being fueled by the record breaking success of Purpose by megastar, Justin Bieber, which he co-mixed numerous songs including the growing momentum of leading singles like “Sorry” and “Company”.
 
Matthew R. Long is Vice President, Video Production and Engineering.  Matt is an Emmy Award winner and has enjoyed an extensive career as a producer, director, editor, director of photography and writer for television, feature film and video productions.  Mr. Long is responsible for developing, producing and managing AfterMaster technology with film and video content.
 
Indemnification of Directors and Officers
 
The Certificate of Incorporation and Bylaws of the Company provide that the Company will indemnify and advance expenses, to the fullest extent permitted by the Delaware General Corporation Law, to each person who is or was a director, officer or agent of the Company, or who serves or served any other enterprise or organization at the request of the Company (an “Indemnitee”).  Under Delaware law, to the extent that an Indemnitee is successful on the merits of a suit or proceeding brought against him or her by reason of the fact that he or she was a director, officer or agent of the Company, or serves or served any other enterprise or organization at the request of the Company, the Company will indemnify him or her against expenses (including attorneys’ fees) actually and reasonably incurred in connection with such action.  If unsuccessful in defense of a third-party civil suit or a criminal suit, or if such a suit is settled, an Indemnitee may be indemnified under Delaware law against both (i) expenses, including attorneys’ fees, and (ii) judgments, fines and amounts paid in settlement if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action, had no reasonable cause to believe his other conduct was unlawful.  If unsuccessful in defense of a suit brought by or in the right of the Company, where the suit is settled, an Indemnitee may be indemnified under Delaware law only against expenses (including attorneys’ fees) actually and reasonably incurred in the defense or settlement of the suit if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Company except that if the Indemnitee is adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Company, he or she cannot be made whole even for expenses unless a court determines that he or she is fully and reasonably entitled to indemnification for such expenses.  Also under Delaware law, expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of the suit, action or proceeding upon receipt of an undertaking by or on behalf of the officer or director to repay such amount if it is ultimately determined that he or she is not entitled to be indemnified by the Company.  The Company may also advance expenses incurred by other employees and agents of the Company upon such terms and conditions, if any, that the Board of Directors of the Company deems appropriate.  Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, in the opinion of the Commission, such indemnification is against public policy as expressed in Delaware law and is therefore unenforceable.
 
Compliance with Section 16(a) of the Exchange Act
 
Section 16(a) of the Exchange Act, requires the Company’s directors and named executive officers, and persons who beneficially own more than ten percent of our common stock, to file initial reports of ownership and reports of changes in ownership of our common stock and our other equity securities with the SEC. Based on a review of the public record, we believe that during the year ended June 30, 2016 all current Officers and Directors have file the required reports on a timely basis under Section 16(a) of the Exchange Act.
 
Code of Ethics
 
The Company maintains a Code of Ethics (the “Code”) that was filed as Exhibit 14 with its Annual Report on Form 10-KSB for 2004 filed on November 15, 2004.  The Code applies to the Chief Executive, financial and accounting officers, controller and persons performing similar functions.  If the Company amends the Code or grants a waiver from the Code with respect to the foregoing persons, it will post that amendment or waiver on its website.
 
Audit Committee
 
The Company’s Audit Committee consists of Arnie Weintraub. Neither of those members has been designated by the Board or the Audit Committee as an “audit committee financial expert.”  The Board is seeking to fill a board seat with an independent Board member that would fulfill that qualification.
 
 
25
 
 
ITEM 11. EXECUTIVE COMPENSATION
 
Summary Compensation Table
 
The following table sets forth the total compensation earned by or paid to the Company’s officers for the last two fiscal years.
 
 
Long Term Compensation                
 
Annual Compensation
 
  
Awards  
 
 
 
 
  
Payouts
 
 
 
 
 
 
 
 
 
 
Name and Principal Position
Fiscal Year
 
Salary ($)
 
 
Bonus ($)
 
 
Other Annual Compensation ($)
 
 
Restricted Stock Awards ($)
 
 
Underlying Options/Shares ($)
 
 
LTIP Payout ($)
 
 
All Other Compensation ($)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lawrence G. Ryckman,
2017
 $272,503 
 
 
 
 
 
 
 $70,129
 $- 
 $- 
 $- 
Director, President, CEO, Chairman
2016
 $256,109 
 $200,000 
 $- 
 $64,659 
 $- 
 $- 
 $- 
 
    
    
    
    
    
    
    
Mirella Chavez
2017
 $80,000 
 $- 
 $- 
 $173,376 
 $- 
 $- 
 $- 
CFO, Director, Secretary, Treasurer
2016
 $80,000 
 $- 
 $- 
 $137,834 
 $- 
 $- 
 $- 
 
    
    
    
    
    
    
    
Mark Depew
2017
 $70,000 
 $- 
 $- 
 $70,129
  - 
 $- 
 $- 
Director, Senior Vice President Finance
2016
 $70,000 
 $- 
 $- 
 $44,589 
 $- 
 $- 
 $- 
 
    
    
    
    
    
    
    
Sheldon Yakus,
 
 $135,000 
 $- 
 $- 
 $- 
 $- 
 $- 
 $752.00 
Vice President
2016
 $120,000 
 $- 
 $- 
 $- 
 $- 
    
 $766.00 
 
 
Outstanding Equity Awards at Fiscal Year-End                
 
Name
 
Option Awards      
 
 
Stock Awards      
 
 
 
Number of Securities Underlying Unexercised Options (#) Exercisable
 
 
Number of Securities Underlying Unexercised Options (#) Unexercisable
 
 
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)
 
 
Option Exercise Price ($)
 
Option Expiration Date
 
Number of Shares or Units of Stock that have not Vested (#)
 
 
Market Value of Shares or Units of Stock that have not Vested ($)
 
 
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested (#)
 
 
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that have not Vested ($)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lawrence G. Ryckman
  500,000 
 
 
 
  - 
  0.2 
09/11/24
  - 
  - 
  - 
  - 
 
  200,000 
  - 
  - 
  0.2 
04/05/26
  - 
  - 
  - 
  - 
 
  2,000,000 
    
    
  0.2 
10/01/19
    
    
    
    
 
    
    
    
    
 
    
    
    
    
Justin Timberlake
  10,579,665 
  - 
  - 
  0.18 
11/01/24
  - 
  - 
  - 
  - 
 
    
    
    
    
 
    
    
    
    
Sheldon Yakus
  1,000,000 
    
    
  0.45 
12/18/20
    
    
    
    
 
    
    
    
    
 
    
    
    
    
Mark Depew
  2,000,000 
    
    
  0.2 
06/30/18
    
    
    
    
 
Compensation of Directors
 
Our non-employee Directors receive reimbursement for expenses of attendance for each scheduled meeting that requires physical attendance.  Effective July 1, 2010, each Director receives restricted common shares valued at the greater of (i) fifteen thousand (15,000) shares of Common Stock, or (ii) such number of shares as shall be determined by dividing the sum of fifteen thousand dollars ($15,000) by the per share price calculated at seventy five percent (75%) of the average of the closing prices of the Company’s Common Stock for the ten (10) trading days prior to the date such payment is due, for each quarter year service to the Company.  Compensation for our directors for our last completed fiscal year is set forth below, with the exception of Directors who are also Officers whose compensation is disclosed above.
 
 
26
 
 
 
Director Compensation              
 
Name
 
Fees Earned or Paid in Cash ($)
 
 
Stock Awards ($)
 
 
Option Awards ($)
 
 
Non-Equity Incentive Plan Compensation ($)
 
 
Non-Qualified Deferred Compensation Earnings ($)
 
 
All Other Compensation ($)
 
 
Total ($)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Arnie Weintraub
 $- 
 $70,129
 $- 
 $- 
 $- 
 $- 
 $66,847 
   
Employment and Related Agreements
 
The Company has no employment agreements with any of its current management.
 
Change in Control
 
The Company is not aware of any arrangements which may result in a change in control of the Company.
 
Equity Compensation Plans
 
As of June 30, 2017 our equity compensation plans were as follows:
 
2009 Long-Term Stock Incentive Plan
 
On June 10, 2009, the Board of Directors approved the 2009 Long-Term Stock Incentive Plan (the “2009 Plan”).  The purpose of the 2009 Plan was 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 Plan was 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 was reserved for issuance under stock options to be issued under the 2009 Plan.  The Plan permits the grant of Incentive Stock Options, Non-Statutory Stock Options and Restricted Stock Awards.  The 2009 Plan is administered by the Board of Directors or, at its direction, the Compensation Committee comprised of officers of the Company.   As of June 30, 2011, the Company had granted options to fifteen employees to purchase, in the aggregate, 727,000 shares of the Company’s Common Stock.  The exercise period for each of the grants was two to five years from the date of grant and the average exercise price was $0.88.  During the year ended June 30, 2010, one employee exercised the option to purchase 28,571 shares for $10,000.  During the year ended June 30, 2011, one employee exercised the option to purchase 20,000 shares for $10,400, or $0.52 per share. During the year ended June 30, 2013, 85,000 shares expired. No Grants were made under the Plan during the fiscal year ended June 30, 2013. During the year ended June 30, 2014, 257,000 shares expired and 25,000 Grants were made under the Plan. The number of unexercised, outstanding options at June 30, 2014 was 381,429 at an average exercise price of $0.87 per share. During the year ended June 30, 2015, 301,429 shares expired and 0 Grants were made under the Plan. The number of unexercised, outstanding options at June 30, 2015 was 80,000 at an average exercise price of $0.66 per share. During the year ended June 30, 2016, 812,804 shares expired and 0 Grants were made under the Plan. The number of unexercised, outstanding options at June 30, 2016 was 25,000 at an average exercise price of $0.15 per share. During the year ended June 30, 2017, 0 shares expired and 500,000 Grants were made under the Plan. The number of unexercised, outstanding options at June 30, 2017 was 525,000 at an average exercise price of $0.17 per share. 
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
The following table sets forth certain information, as of June 30, 2017, concerning shares of the Company’s Common Stock held by (1) each stockholder known to own beneficially more than five percent of any class of the Company’s voting securities as of June 30, 2017, with the number of outstanding common shares at 118,486,728 at such time, (A) each of the Company’s directors, (B) each of the executive officers, and (C) all of the directors and executive officers as a group:
 
 
 
 
 
 
 
 
 
 
 
 
 
27
 
 
Title of Class
Beneficial Owner
Title of Class
Number of Shares
Percent of Class (1)
Common
Mirella Chavez
 Direct ( C)
                 1,924,660
2%
 
6323 W Desert Hills Dr.
 
 
 
Glendale, AZ 85304
 
 
 
 
 
 
 
 
Common
Frank Perrotti, Jr.
 Direct (3)
               14,726,909
12.43%
 
305 Spruce Bank Road
 
 
 
 
Hamden, CT 06518
 
 
 
 
 
 
 
 
Common
Lawrence G. Ryckman
Indirect (C) (4)
                 7,592,640
6.41%
 
20202 Pacific Coast Highway, #5
 
 
Malibu, California 90265
 
 
 
 
 
 
 
Common
Sheldon Yakus
 Direct (B) (5)
                    245,797
0.21%
 
1778 Lantana Drive
 
 
 
 
Miden, NV 89423
 
 
 
 
 
 
 
 
Common
Justin Timberlake
 Direct (6)
               10,579,655
8.93%
 
1801 Century Park West
 
 
 
Los Angeles, CA  90067
 
 
 
 
 
 
 
Common
Arnold S. Weintraub
 Direct (A)
                    356,464
0.30%
 
24901 Northwestern Hwy, #311
 
 
 
Southfield, MI 48075
 
 
 
 
 
 
 
 
Common
Mark Depew
 Direct (C) (7)
                 2,348,290
1.98%
 
1325 Deerbrooke Trail
 
 
 
 
Cheyenne, WY 82009
 
 
 
 
 
 
 
 
Series A Convertible Preference Stock
Murray B. Day
Direct
                        5,000
32.26%
 
549 W. Cresent
 
 
 
 
Palo Alto, CA 94301
 
 
 
 
 
 
 
 
Series A Convertible Preference Stock
Elliot Leferts
Direct
                        3,000
19.35%
 
60 McNear Drive
 
 
 
 
San Rafael, CA 9490
 
 
 
 
 
 
 
 
Series A Convertible Preference Stock
Harriet Lloyd
Direct
                        2,500
16.13%
 
1200 California St.
 
 
 
 
San Francisco, CA 94109
 
 
 
 
 
 
 
Series A Convertible Preference Stock
Richard Matza
Direct
                        2,500
16.13%
 
454 Burr Rd.
 
 
 
 
Southbury, CT 06488
 
 
 
 
 
 
 
 
Series A Convertible Preference Stock
Richard Oliver
Direct
                        2,500
16.13%
 
25466 Adobe Lane
 
 
 
 
Los Altos, CA 94022
 
 
 
 
 
 
 
 
Series B Senior Redeemable Convertible Preference Stock
J. Patrick Carter
Direct
                        1,500
42.86%
 
2448 E. 81st Street, #4550
 
 
 
Tulsa, OK 74137
 
 
 
 
 
 
 
 
Series B Senior Redeemable Convertible Preference Stock
Robert Stillman
Direct
                        2,000
57.14%
 
2440 Virginia Ave NW, Apt. D 1206
 
 
Washington, DC 20037
 
 
 
 
 
 
 
 
 
28
 
 
Series C Convertible Preferred Stock
John Arrilaga, TTEE
Direct
                        2,068
15.43%
 
2560 Mission College Blvd., #101
 
 
Santa Clara, CA 95054
 
 
 
 
 
 
 
 
Series C Convertible Preferred Stock
Paul Essi
Direct
                        1,171
8.74%
 
2450 One Cleveland Center
 
 
 
Cleveland, OH 44114
 
 
 
 
 
 
 
 
Series C Convertible Preferred Stock
Thomas Fersti
Direct
                        3,592
26.80%
 
P.O. Box 284
 
 
 
 
761 State St. Millington, MI 48746
 
 
 
 
 
 
 
Marton & Kjellaaug Klepp
Direct
                        1,825
13.62%
 
12 Day Road
 
 
 
 
Armonk, NY 10504
 
 
 
 
 
 
 
 
Series C Convertible Preferred Stock
Gustavo Nicolich
Direct
                        1,097
8.18%
 
P.O. Box 60040
 
 
 
 
Palo Alton, CA 94306
 
 
 
 
 
 
 
 
Series C Convertible Preferred Stock
Richard Perry, TTEE
Direct
                        2,068
15.43%
 
2200 Cowper Street
 
 
 
 
Palo Alto, CA 94301
 
 
 
 
 
 
 
 
Series P Convertible Participating Preferred Stock
Robert Huskins
Direct
                      67,741
78.19%
 
42 Shady Vista Rd.
 
 
 
 
Rolling Hills Estates, CA 90274
 
 
 
 
 
 
 
Series P Convertible Participating Preferred Stock
Roderick Thompson
Direct
                      18,899
21.81%
 
Address unknown
 
 
 
 
 
 
 
 
 
Officers and Directors as a Group
            37,891,876
37.22%
 
1.   
The number and percentage of shares beneficially owned is determined under rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares, which the individual has the right to acquire within 60 days through the exercise of any stock option or other right. The persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table.
2.   
The above table is based on 118,486,728 shares of Common Stock outstanding as of June 30, 2017, and based on the following shares of other voting stock outstanding as of such date: (i) 15,500 shares of Series A Convertible Preference Stock; (ii) 3,500 shares of Series B Senior Redeemable Convertible Preference Stock; (iii) 13,404 shares of Series C Convertible Preferred Stock; and (iv) 86,640 shares of Series P Convertible Participating Preferred Stock.  Shares of Common Stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person.
3.
Mr. Perrotti owns these shares personally and through an entity, FPJ Investments, in which he serves as the manager and has voting control.
4.   
Mr. Ryckman owns these shares personally and through two entities, Maverick Investments and Sundance. The amount listed here includes an option to purchase 500,000 shares of Common Stock at $.20 per share, option to purchase 200,000 shares of Common Stock at $.20 per share, and option to purchase 2,000,000 shares of Common Stock at $.20 per share
5.   
Includes an option to purchase 1,000,000 shares of Common Stock at $.45 per share.
6.   
Tennman Brands, LLC owns 10,579,665 warrants to purchase shares of Common Stock at an exercise price of $0.18 per share. Justin Timberlake is the beneficial owner of Tennman Brands, LLC and, upon exercise of the warrants, would exercise voting control of the common stock underlying the warrants.
7.
Includes an option to purchase 2,000,000 shares of Common Stock at $.20 per share.
 
 
29
 
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
From December 2011 to April 2013, the Company issued convertible notes to Frank Perrotti, Jr., a director of the Company, in the aggregate amount of $2,675,000. The notes bear an average interest rate of 11.25% per annum and are convertible, along with all accrued interest, into shares of the Company’s Common Stock at $0.50 per share.
 
From February 2010 to December 2010, the Company issued convertible notes to Frank Perrotti, Jr., a director of the Company, in the aggregate amount of $1,000,000. The notes bear an average interest rate of 12.00% per annum and are convertible, along with all accrued interest, into shares of the Company’s Common Stock at $0.50 per share.
 
On November 3, 2011, the Company issued a convertible note to Frank Perrotti, Jr., a director of the Company, in the amount of $250,000. The note bears an interest rate of 15% per annum and is convertible, along with all accrued interest, into shares of the Company’s Common Stock at $0.40 per share.
 
From April 2011 to October 2011, the Company issued notes to Frank Perrotti, Jr., a director of the Company, for $575,000. The note bears an average interest rate of 9% per annum.
 
On August 8, 2016, the Company issued notes to the Kayla Depew, a wife of a director of the Company, for $30,000. 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.
 
On August 11, 2016, the Company issued notes to the Rosa Chavez, a mom of the CFO of the Company, for $30,000. 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.
 
On November 15, 2016, the Company issued notes to Larry Ryckman, CEO of the Company, for $5,000. The note bears an average interest rate of 0% per annum.
 
From November 2016 to February 2017, the Company issued notes to Mark Depew, a director of the Company, for $37,500. The note bears an average interest rate of 0% per annum.
 
On June 5, 2017, the Company issued notes to Mirella Chavez, CFO of the Company, for $10,000. The note bears an average interest rate of 0% per annum.
 
Future Transactions
 
All future affiliated transactions are expected to be made or entered into on terms that are no less favorable to the Company than those that can be obtained from any unaffiliated third party. A majority of the independent, disinterested members of the Company’s Board of Directors are asked to approve future affiliated transactions. The Company believes that of the transactions described above have been on terms at least as favorable to it as could have been obtained from unaffiliated third parties as a result of arm’s length negotiations.
 
Conflicts of Interest
 
In accordance with the laws applicable to the Company, its Directors are required to act honestly and in good faith with a view to the Company’s best interests. In the event that a conflict of interest arises at a meeting of the Board of Directors, a Director who has such a conflict is expected to disclose the nature and extent of his interest to those present at the meeting and to abstain from voting for or against the approval of the matter in which he has a conflict.
 
Director Independence
 
Our Common Stock trades on the OTC Bulletin Board.  As such, we are not currently subject to corporate governance standards of listed companies, which require, among other things, that the majority of the board of directors be independent.
 
Since we are not currently subject to corporate governance standards relating to the independence of our directors, we choose to define an “independent” director in accordance with the NASDAQ Global Market’s requirements for independent directors (NASDAQ Marketplace Rule 4200).  The NASDAQ independence definition includes a series of objective tests, such as that a director is not an employee of the company and has not engaged in various types of business dealings with the company. We presently do not have a compensation committee, nominating committee, executive committee of our Board of Directors, stock plan committee or any other committees, except for an Audit Committee.
 
 
30
 
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
 
The following is a summary of the aggregate fees billed to Registrant by its principal accountant(s) for professional services rendered for the fiscal years ended June 30, 2017 and 2016:
 
 
 
2017
 
 
2016
 

Audit Fees (1)
 $115,000 
 $110,000 
Audit-Related Fees (2)  
 $- 
 $1,500
Tax Fees (3)    
 $-
 
 $- 
All Other Fees (4)  
 $-
 
 $- 
Total Fees
 $115,000 
 $111,500 
 
1. Audit Fees.  Consists of fees billed for professional services rendered for the audits of Registrant’s financial statements for the fiscal years ended June 30, 2017 and 2016 and for review of the financial statements included in Registrant’s Quarterly Reports on Form 10-Q for those fiscal years.  
 
2. Audit-Related Fees.  Consists of fees billed for services rendered to Registrant for audit-related services, which generally include fees for audit and review services in connection with proposed spin-off transactions, separate audits of employee benefit and pension plans, and ad hoc fees for consultation on financial accounting and reporting standards.
 
3. Tax Fees.  Consists of fees billed for services rendered to Registrant for tax services, which generally include fees for corporate tax planning, consultation and compliance.
 
4. All Other Fees.  Consists of fees billed for all other services rendered to Registrant, which generally include fees for consultation regarding computer system controls and human capital consultations.  No services were performed related to financial information systems design and implementation for the fiscal years ended June 30, 2017 and 2016.
 
No “audit-related,” “tax” and “all other” services in 2017 or 2016, as defined above, were approved by the Audit Committee in reliance on the de minimums exception to the preapproval requirements under federal securities laws and regulations.
 
Pre-Approval of Services of Principal Accounting Firm
 
The Audit Committee’s written policy is to pre-approve all audit and permissible non-audit services provided by Registrant’s principal accounting firm (independent auditor).  These services may include audit services, audit-related services, tax services and other permissible non-audit services.  Any service incorporated within the independent auditor’s engagement letter, which is approved by the Audit Committee, is deemed pre-approved.  Any service identified as to type and estimated fee in the independent auditor’s written annual service plan, which is approved by the Audit Committee, is deemed pre-approved up to the dollar amount provided in such annual service plan.
 
During the year, the principal accounting firm may also provide additional accounting research and consultation services required by, and incident to, the audit of Registrant’s financial statements and related reporting compliance. These additional audit-related services are pre-approved up to the amount approved in the annual service plan approved by the Audit Committee.  The Audit Committee may also pre-approve services on a case-by-case basis during the year.
 
The Audit Committee’s approval of proposed services and fees are noted in the meeting minutes of the Audit Committee and/or by signature of the Audit Committee on the engagement letter.  The principal accounting firm of Registrant and management are periodically requested to summarize the principal accounting firm services and fees paid to date, and management is required to report whether the principal accounting firm’s services and fees have been pre-approved in accordance with the required pre-approval process of the Audit Committee.
 
Non-Audit Services
 
The Audit Committee of the Board of Directors has considered whether the provision of non-audit services by the Registrant’s principal accountants is compatible with maintaining auditor independence.
 
 
31
 
 
ITEM 15. EXHIBITS
 
The following Exhibits are incorporated by reference:
 
Exhibit No.
Description
3.1
Articles of Incorporation, dated May 12, 1988. (a)
3.1
Certificate of Amendment of Articles of Incorporation of Dimensional Visions Incorporated, dated January 16, 2006. (f)
3.2
Certificate of Amendment of Articles of Incorporation of Elevation Media, Inc., dated March 24, 2006. (f)
3.2
Bylaws. (a)
3.3
Certificate of Amendment of Certificate of Incorporation of Dimensional Visions Incorporated dated January 22, 2004. (f)
4.1
Certificate of Designation of Series A Convertible Preferred Stock, dated December 12, 1992. (a)
4.1
Form of Warrant issued to Participants in 2007 Private Placements. (g)
4.2
Certificate of Designation of Series B Convertible Preferred Stock, dated December 22, 1993. (a)
4.3
Certificate of Designation of Series P Convertible Preferred Stock, dated September 11, 1995. (a)
4.4
Certificate of Designation of Series S Convertible Preferred Stock, dated August 28, 1995. (a)
4.5
Certificate of Designation of Series C Convertible Preferred Stock, dated November 2, 1995. (a)
4.6
Certificate of Designation of Series D and Series E Convertible Preferred Stock, dated August 25, 1999. (a)
4.7
Form of Warrant Agreement to Debt Holders, dated January 15, 1998. (a)
4.8
Form of Warrant Agreement to Debt Holders, dated April 8, 1998. (a)
4.9
Form of Warrant Agreement to Participants in Private Placement, dated April 8, 1998. (a)
4.10
Pledge Agreement with Dale Riker and Russ Ritchie, dated January 11, 2001. (b)
4.11
Investment Agreement with Swartz Private Equity, LLC, dated December 13, 2000. (b)
4.12
Merrill Lynch Portfolio Reserve Loan and Collateral Account Agreement, dated January 12, 2002. (b)
10.1
1996 Equity Incentive Plan. (a)
10.1
Stock Purchase Agreement between Studio One Entertainment, Inc. and Dimensional Visions Incorporated, dated March 29, 2006 (g)
10.2
1999 Stock Option Plan. (a)
10.2
Exchange Agreement between AfterMaster, Inc., and Studio One Entertainment, Inc., dated April 16, 2007. (g)
10.3
Employment Agreement with John D. McPhilimy, dated January 1, 2001. (c)
10.3
Accord and Satisfaction between Dimensional Visions, Inc. and Russell H. Ritchie, Dale E. Riker, Suntine Enterprises, LLC, and Cornerstone Wireless Communications, LLC, dated October 11, 2006. (g)
10.4
Employment Agreement with Bruce D. Sandig, dated July 1, 2001. (c)
10.5
Settlement Agreement and Release between the Company and Russell H. Ritchie, Dale E. Riker, Suntine Enterprises, LLC, and Cornerstone Wireless Communications, LLC, dated April 30, 2003. (d)
10.6
2009 Long-Term Incentive Plan.
10.7
Form of Directors and Officers Indemnity Agreement.
14
Dimensional Visions, Inc. Code of Ethics. (e)
21.1
Subsidiaries of the Registrant (h)
 
 
(a) 
Incorporated by reference from the Company’s Registration Statement on Form SB-2, dated June 19, 2000 (Registration No. 333-30368).
 
(b) 
Incorporated by reference from the Company’s Registration Statement on Form SB-2, dated July 10, 2001 (Registration No. 333-56804).
 
(c) 
Incorporated by reference from the Company’s Amendment No. 1 to Annual Report on Form 10-KSB, dated February 22, 2002.
 
(d) 
Incorporated by reference from the Company’s Annual Report, Form 10-KSB for fiscal year ended June 30, 2003, filed October 15, 2003.
 
(e) 
Incorporated by reference from the Company’s Annual Report, Form 10-KSB for fiscal year ended June 30, 2004, filed November 15, 2004.
 
(f) 
Incorporated by reference from the Company’s Annual Report, Form 10-KSB for fiscal year ended June 30, 2006, filed September 29, 2006.
 
(g) 
Incorporated by reference from the Company’s Annual Report, Form 10-KSB for fiscal year ended June 30, 2007, filed September 28, 2007, and Form 10-K/A for the fiscal year ended June 30, 2007, filed May 27, 2008.
 
(h) 
Incorporated by reference from the Company’s Annual Report, Form 10-KSB for fiscal year ended June 30, 2008, filed September 29, 2008.
 
(i)
Incorporated by reference from the Company’s Annual Report, Form 10-KSB for fiscal year ended June 30, 2009, filed October 15, 2009.
 
(j)
Incorporated by reference from the Company’s Annual Report, Form 10-KSB for fiscal year ended June 30, 2010, filed October 12, 2010
  
 
32
 
 
The following Exhibits are filed herewith:
 
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
XBRL Taxonomy Extension Label Linkbase
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase
 
* Previously filed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
33
 
 
SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
AFTERMASTER, INC.
 
 
 
Date: September 28, 2017
By:  
/s/ Larry Ryckman
 
Larry Ryckman
 
President & Chief Executive Officer
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
Signature
Title
Date
 
 
 
/s/ Larry Ryckman
 
President and Director
September 28, 2017
Larry Ryckman
 
(Principal Executive Officer)
 
 
 
 
 
/s/ Mirella Chavez
 
Chief Financial Officer
September 28, 2017
Mirella Chavez
 
 
 
 
 
 
 
/s/ Mark Depew
 
Director
September 28, 2017
Mark Depew
 
 
 
 
 
 
 
/s/ Arnold S. Weintraub
 
Director
September 28, 2017
Arnold S. Weintraub
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
34
 
 
 
 
AFTERMASTER, INC.
 
FINANCIAL STATEMENTS
 
 INDEX TO THE FINANCIAL STATEMENTS
PAGE
NUMBER
 
 
 Report of Independent Registered Public Accounting Firm
F-2
 
 
 Financial Statements
F-3
 
 
 Consolidated Balance Sheets
F-3
 
 
 Consolidated Statements of Operations and Comprehensive Loss
F-4
 
 
 Consolidated Statements of Stockholders' Deficit
F-5 - F-6
 
 
 Consolidated Statements of Cash Flows
F-7 - F-8
 
 
 Notes to Financial Statements
F-9 - F-29
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
F-1
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors and Shareholders of
AfterMaster, Inc.
 
We have audited the accompanying consolidated balance sheets of AfterMaster, Inc. (“the Company”) as of June 30, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for each of the years in the two year period ended June 30, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AfterMaster, Inc. as of June 30, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two year period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the footnotes to the consolidated financial statements, the Company has incurred losses since inception, has a negative working capital, and has accumulated a significant deficit. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in the footnotes to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ Sadler, Gibb & Associates, LLC
 
Salt Lake City, UT
September 28, 2017
 
 
 
 
F-2
 
 
 
AFTERMASTER, INC.
 
 
Consolidated Balance Sheets
 
 
 
June 30,
 
 
June 30,
 
 
 
2017  
 
 
2016  
 
 
ASSETS
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
Cash
 $250,728 
 $394,325 
Accounts receivable
  97,103 
  11,389 
Inventory, net
  104,891 
  - 
Available for sale securities
  123,600 
  63,600 
Prepaid expenses
  507,254 
  1,078,819 
 
    
    
Total Current Assets
  1,083,576 
  1,548,133 
 
    
    
Property and equipment, net
  266,040 
  294,557 
 
    
    
Intangible assets, net
  102,243 
  99,186 
 
    
    
Deposits
  33,363 
  33,363 
Prepaid expenses, net of current
  9,104 
  18,217 
 
    
    
Total Assets
 $1,494,326 
 $1,993,456 
 
    
    
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
    
    
Current Liabilities
    
    
Accounts payable and other accrued expenses
 $459,975 
 $225,001 
Accrued interest
  185,509 
  77,335 
Deferred revenue
  270,623 
  740,200 
Accrued consulting services - related party
  22,064 
  28,561 
Lease payable
  1,937 
  984 
Derivative Liability
  2,145,065 
  - 
Notes payable - related party
  610,000 
  575,000 
Notes payable
  40,488 
  40,488 
Convertible notes payable - related party, net of discount of $3,818 and $0
  3,951,182
  3,925,000 
Convertible notes payable, net of discount of $549,737 and $22,282, respectively
  2,267,845
  1,029,718 
 
    
    
Total Current Liabilities
  9,954,688 
  6,642,287 
 
    
    
 
    
    
Total Liabilities
  9,954,688 
  6,642,287 
 
    
    
Stockholders' Deficit
    
    
Convertible preferred stock, Series A; $0.001 par value; 100,000 shares authorized, 15,500 shares issued and outstanding
  16 
  16 
Convertible preferred stock, Series A-1; $0.001 par value; 3,000,000 shares authorized 2,585,000 and 2,185,000 shares issued and outstanding, respectively
  2,585 
  2,185 
Convertible preferred stock, Series B; $0.001 par value; 200,000 shares authorized, 3,500 shares issued and outstanding
  3 
  3 
Convertible preferred stock, Series C; $0.001 par value; 1,000,000 shares authorized, 13,404 shares issued and outstanding
  13 
  13 
Convertible preferred stock, Series D; $0.001 par value; 375,000 shares authorized, 130,000 shares issued and outstanding
  130 
  130 
Convertible preferred stock, Series E; $0.001 par value; 1,000,000 shares authorized, 275,000 shares issued and outstanding
  275 
  275 
Convertible preferred stock, Series P; $0.001 par value; 600,000 shares authorized, 86,640 shares issued and outstanding
  87 
  87 
Convertible preferred stock, Series S; $0.001 par value; 50,000 shares authorized, -0- shares issued and outstanding
  - 
  - 
Common stock, authorized 250,000,000 shares,
    
    
par value $0.001, 118,486,728 and 102,133,344 shares issued
    
    
and outstanding, respectively
  118,493 
  102,140 
Additional paid In capital
  63,627,987 
  58,997,912 
Accumulated other comprehensive income
  93,600 
  33,600 
Accumulated Deficit
  (72,303,551)
  (63,785,192)
 
    
    
Total Stockholders' Deficit
  (8,460,362)
  (4,648,831)
 
    
    
Total Liabilities and Stockholders' Deficit
 $1,494,326 
 $1,993,456 
 
    
    
The accompanying notes are an integral part of these consolidated financial statements.
 
F-3
 
 
 
AFTERMASTER, INC.
 
 
Consolidated Statements of Operations and Comprehensive Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended
 
 
 
June 30,      
 
 
 
2017  
 
 
2016  
 
 
 
 
 
 
 
 
REVENUES
 
 
 
 
 
 
AfterMaster Revenues
 $338,725 
 $118,226 
Product Revenues
  541,259 
  - 
Licensing Revenues
  - 
  1,800,000 
Total Revenues
  879,984 
  1,918,226 
 
    
    
COSTS AND EXPENSES
    
    
Cost of Revenues (Exclusive of Depreciation and Amortization)
  1,250,365 
  484,507 
Depreciation and Amortization Expense
  178,071 
  83,620 
Research and Development
  221,437 
  386,949 
Advertising and Promotion Expense
  45,183 
  366,740 
Legal and Professional Expense
  119,520 
  377,047 
Non-Cash Consulting Expense
  2,209,950 
  4,119,978 
General and Administrative Expenses
  2,956,464 
  3,590,584 
 
    
    
Total Costs and Expenses
  6,980,990 
  9,409,425 
 
    
    
Loss from Operations
  (6,101,006)
  (7,491,199)
 
    
    
Other Income (Expense)
    
    
Interest Expense
  (1,876,031)
  (967,721)
Derivative Expense
  (376,427)
  - 
Change in Fair Value of Derivative
  (138,693)
  4,376,281 
Loss on Available for Sale Securities
  - 
  (1,770,000)
Gain Loss on Extinguishment of Debt
  1,724 
  232,894 
Impairment of assets
  (27,926)
  - 
 
    
    
Total Other Income (Expense)
  (2,417,353)
  1,871,454 
 
    
    
Loss Before Income Taxes
  (8,518,359)
  (5,619,745)
Income Tax Expense
  - 
  - 
NET LOSS
 $(8,518,359)
 $(5,619,745)
 
    
    
Preferred Stock Accretion and Dividends
  (169,850)
  (105,603)
 
    
    
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
 $(8,688,209)
 $(5,725,348)
 
    
    
Basic and diluted Loss Per Share of Common Stock
 $(0.08)
 $(0.06)
 
    
    
Weighted Average Number of Shares Outstanding
  108,520,687 
  98,802,908 
 
    
    
Other Comprehensive Income, net of tax
    
    
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
  (8,688,209)
  (5,725,348)
Unrealized gain on AFS Securities
  60,000 
  33,600 
COMPREHENSIVE LOSS
 $(8,628,209)
 $(5,691,748)
 
    
    
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
 
F-4
 
 
 
AFTERMASTER, INC.
 
 
Consolidated Statements of Stockholders' Equity (Deficit)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 

 
 
 
Preferred Stock
 
 
Common Stock
 
 
Additional Paid In
 
 
Subscription
 
 
Accumulated
 
 
Accumulated Other Comprehensive
 
Total Stockholders'
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Payable
 
 
Deficit
 
 
  Income
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2015
  1,140,044 
 $1,140 
  95,280,257 
 $95,287 
 $46,314,765 
 $35,000 
 $(58,165,447)
 $- 
 $(11,719,255)
 
    
    
    
    
    
    
    
    
    
Preferred Stock Sold for Cash, net of offering costs of $251,610
  1,669,000 
  1,669 
  - 
  - 
  1,415,721 
  (35,000)
  - 
  - 
  1,382,390 
 
    
    
    
    
    
    
    
    
    
Share-Based Compensation to Directors and Employees- Common shares
  - 
  - 
  812,804 
  812 
  364,039 
  - 
  - 
  - 
  364,851 
 
    
    
    
    
    
    
    
    
    
Total Stock Issued for Consulting Services and Rent
  -