UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2014

 

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 For the transition period from ______to______. 

 

Commission file number  000-51886

 

MAX SOUND CORPORATION
(Exact name of registrant as specified in its charter)
Delaware		26-3534190
State or other jurisdiction of incorporation or organization		(I.R.S.  Employer Identification No.)
2902A Colorado Avenue Santa Monica, CA 90404		90404
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code: 888-777-1987

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $.00001 per share

(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 x

 

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 x

 

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

Yes No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if

any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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. 

 

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

 

Large accelerated filer			Accelerated filer	
Non-accelerated filer (Do not check if a smaller reporting company)			Smaller reporting company	

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No  

 

The Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2014 as approximately $14,241,146.

 

As of March 24, 2015, the registrant had 285,044,350 shares issued and outstanding.

 

Documents Incorporated by Reference:

None.

  

 

TABLE OF CONTENTS

 

PART I
ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	9
ITEM 1B.	UNRESOLVED STAFF COMMENTS	9
ITEM 2.	PROPERTIES	9
ITEM 3.	LEGAL PROCEEDINGS	9
ITEM 4.	MINE SAFETY DISCLOSURES	11

 

PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	12
ITEM 6.	SELECTED FINANCIAL DATA	22
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	36
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	18
ITEM 9A.	CONTROLS AND PROCEDURES	18
PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	63
ITEM 11.	EXECUTIVE COMPENSATION	65
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	67
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	67
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	68
PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	68
SIGNATURES		69

 

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Annual Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

CERTAIN TERMS USED IN THIS REPORT

 

When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Max Sound Corporation, and “SEC” refers to the Securities and Exchange Commission.

 

 

PART I

 

ITEM 1.          BUSINESS

 

Overview

 

Max Sound Corporation (“we,” “us,” “our,” or the “Company”) was incorporated in the State of Delaware on December 9, 2005 as 43010, Inc. to engage in any lawful corporate undertaking, including, but not limited to, locating and negotiating with a business entity for combination in the form of a merger, stock-for-stock exchange or stock-for-assets exchange. On October 7, 2008, pursuant to the terms of a stock purchase agreement, Mr. Greg Halpern purchased a total of 100,000 shares of our common stock from Michael Raleigh for an aggregate of $30,000 in cash. The total of 100,000 shares represents 100% of our issued and outstanding common stock at the time of the transfer. As a result, Mr. Halpern became our sole shareholder. As part of the acquisition, and pursuant to the Stock Purchase Agreement, Michael Raleigh, our then President, CEO, CFO, and Chairman resigned from all the positions he held in the company, and Mr. Halpern was appointed as our President, CEO CFO and Chairman. The original business model was developed by Mr. Halpern in September of 2008 and began when he joined the Company on October 7, 2008. In October 2008, we became a development stage company focused on creating an Internet search engine and networking web site. 

 

From October 2008 until January 17, 2011, Mr. Halpern was our CEO, and during that time the Company was focused on developing their Internet search engine and networking web site. In January of 2010, the Company launched their Internet search engine and networking website.  In 2011, the Company decided to abandon its social networking website.  On May 11, 2010, the Company acquired the worldwide rights, title, and interest to all fields of use for MAX-D.

 

On January 17, 2011, Mr. Halpern resigned as the Company’s CEO and John Blaisure was appointed as CEO.  In February of 2011, the Company elected to change its business operations and focus primarily on developing and launching the MAX-D technology.  Our current website (www.maxsound.com) is used to showcase the MAX-D technology.  On March 8, 2011, the Company changed its name to Max Sound Corporation, and its trading symbol on the OTC Bulletin Board to MAXD.

  

MAX Sound Corporation owns the worldwide rights to all fields of use to MAX-D HD Audio, which was invented by Lloyd Trammell, a top sound designer and audio engineer who helped develop and sell the first working Surround Sound System to Hughes Aircraft.  Mr. Trammell, who is now the CTO of MAX-D, also developed MIDI for Korg and owns five patents in dimensional sound processing.  We believe that MAX-D is to Audio what High Definition is to Video.  MAX-D works by converting all audio files to their highest possible acoustically perfect equivalent without increasing files size or bandwidth usage.

 

The Company shall act as the exclusive agent to facilitate and negotiate any opportunities on behalf of EA Technology to Companies, Organizations and other qualified entities. Upon any closing, EA shall receive 50% of gross dollars and the Company shall receive the other 50% at the time of a completion of any transaction opportunity, including legal settlements after subtracting applicable contingent legal fees. In the event the Company sublicenses EA to other entities, profits shall be split 50/50.

 

On May 22, 2014, MaxD entered into a representation agreement with architect Eli Attia giving MAXD the exclusive rights to sue violators of Eli Attia’s intellectual property rights. MAXD has since filed suit against Google, Inc., Flux Factory, and various executives of these companies for misappropriation of trade secrets.

 

On May 28, 2014, the Company entered into a license agreement with Akyumen Technologies Corp. (“Akyumen”), an original equipment manufacturer of mobile devices, for the non-exclusive, non-transferable, indivisible worldwide license rights to the use of Company’s API technology in Akyumen’s mobile devices.  The license is for five years and is renewable, with the Company’s approval, at Akyumen’s request.

 

As consideration for the above-referenced license rights, Akyumen agreed to pay the Company royalties of $2.50 per Akyumen device that utilizes the API technology, to be payable on a monthly basis within 15 days after the close of the calendar month.  Akyumen also agreed to pay, within three months of first sale, 50% of non-recurring engineering costs to port the Technology onto the operating systems of the Akyumen devices, inclusive of any local fees, taxes, or other charges.

 

In December 2014, the CEO of Akyumen notified the Company that Akyumen entered into a contract in Asia representing five million mobile device units, and further that the company is engaged in high level discussions with major cellular carriers in Europe and the Middle East, estimating that another ten million mobile device units should come from those regions in the year 2015. Moreover, Akyumen announced in November 2014 the building of a five million state of the art manufacturing and assembly facility in Bahrain allowing the company the ability to produce over ten million units for that region.

 

The Company continues to work with Akyumen executives and developers to assist in getting the MAX-D-HD Audio ported onto their mobile devices and into the consumer marketplace. While the Akyumen product continues to improve the company still needs to increase positive consumer reviews and excitement.

 

On June 16, 2014, MAXD entered into a license and revenue share agreement with LOOKHU, an online subscription service that delivers movies, music, television shows, apps and games. The agreement grants LOOKHU non-exclusive, non-transferable, indivisible worldwide license rights to the distribution and use of the Company’s Application Programming Interface (“API”) audio processor technology. The license is for five years and is renewable, with the Company’s approval, at LOOKHU’s request. The Company is continuing to work closely with the LOOKHU program developers, and is building the LOOKHU/MAX-D HD powered version, which product the Company expects with no assurances to be available in late first quarter 2015.

 

As consideration for the above-referenced license rights, LOOKHU agreed to pay the Company royalties of $0.25 per month per paid subscription to the technology, to be payable on a monthly basis.  Additionally, LOOKHU agreed to pay the Company 4% of the net advertising revenue derived from advertising that utilizes the technology, to be payable on a quarterly basis.

 

Additionally, for the term of the agreement, the parties agreed to split, on a 50/50 basis, net revenue derived from sales of digital music or songs played from a LOOKHU software player, to be payable on a monthly basis.

 

No later than June 20, 2014, MAXD entered into a representation agreement with VSL Communications, Inc., making MAXD the exclusive agent to VSL to enforce all rights with respect to patented technology owned by VSL subsidiary Vedanti Systems Limited. In particular, last summer, the Company announced that it had acquired a worldwide license and representation rights to a patented video and data technology “Optimized Data Transmission System and Method” which enables end-user licensees to transport 100% of data bandwidth content in only 3% of the bandwidth with the identical lossless quality. Significantly, this represents thirty three times reduction associated with transport cost and the time it takes for the video or digital content to be viewed by an end-user. As described more fully in the Legal Proceedings Section, The Company has since filed suit against Google, Inc., YouTube, LLC, and On2 Technologies, Inc., alleging willful infringement of the patent.

 

 

Description of Our Business                                                                           

 

Max Sound (MAX-D) is engaged in activities to sell and license products and services based on its patent-pending MAX-D HD Audio Technology for sound recording and playback that dramatically improves the listener’s experience. The MAXD-D HD Audio Technology delivers high definition audio without increasing file size.   

 

The Company is marketing MAX-D on the basis that it is to audio what HD is to video.  MAX-D technology improves all types of audio; moreover, it is intended to be particularly valuable in improving the ever-growing use of compressed audio and video as used in mp3 files, iPods, internet, and satellite/terrestrial broadcasting.  For example, a listener using a portable mp3 player with MAX-D will experience sound quality that is comparable to the original CD before it was converted into an mp3 file.  In another example, cell phone users using a cell phone equipped with MAX-D will hear the other person's voice as if they are speaking directly in front of them. The Company believes that the MAX-D HD is better for a consumers hearing than today’s highly compressed audio and anticipate that continued research and development will support the Company’s position. In numerous consumer audio tests, MAXD-D HD sounded better to consumers than high resolution WAV files. Importantly, MAX-D HD remains one tenth the size of a WAV file, and in the Company’s opinion offers more clarity, dimension, articulation and impact in every range of the audio spectrum to the listener  The Company’s current business model is to license the technology to content creators, manufacturers, and network broadcasters.  The Company’s patent-pending technology stands customer ready today.  The Company’s market pursuits include motion picture, music recording, video game, broadcasting, internet video and audio, automobile infotainment systems and consumer electronics. 

 

The Company has grown this year to a staff of 18, including employees and sub-contractors. We now have an infrastructure that is allowing us to expand and execute quickly. In addition we have established business relationships with the leading companies in the Smartphone, Tablet, Chip, Music and Consumer Retail business. The Company is now executing its “Go To Market” strategy and sales programs as a first market mover solving the degraded compressed audio issues plaguing the audio currently being consumed. These companies dominate the multi-media and electronics technology arena providing audio delivery across all channels of the exploding smartphone tablet device phenomenon.

 

Qualcomm

 

We have entered into a license agreement with Qualcomm that enables our MAX-D technology to be on Qualcomm’s Snapdragon DSP.  The license agreement is automatically renewable for one-year periods unless terminated by either party with 30 days prior written notice.  By residing on the Qualcomm Snapdragon DSP, the MAX-D HD Audio Technology will have the ability to control and convert to HD Audio up to 8 audio processes simultaneously. This will include Cellular Voice transmission and termination, streaming video, streaming audio and all content stored on the device in memory. Qualcomm currently has a significant portion of the entire global chip market for all smartphones and tablets and they believe their growth rate mirrors the industry. We anticipate a strong adoption from the OEMs licensing the MAX-D technology. Now that MAX-D is part of the Snapdragon Chip, we believe MAX-D can be successfully deployed on the chip, and will have the ability to be offered to up to 86 of Qualcomm’s OEM’s on potentially hundreds of millions of devices every quarter.

 

Since the Company’s debut at the Qualcomm Upling conference in San Diego over a year ago, we remain engaged with some of the largest OEM’s in the smart phone device market. Our sales and marketing team are continuing in advanced high-level strategic meetings with industry leaders in the chip manufacturing and device hardware sectors. The Company is operating under several NDA’s and R&D Test Agreements with today’s most well-known industry to implement and license the MAX-D HD onto their platforms.

 

About MAX-D:

 

The MAX-D software improves the sound heard from any device. Consumers have unknowingly sacrificed better audio quality for portable convenience and MAX-D rectifies this problem by:

 

		analyzing what content is missing from the compressed audio signal;
		dynamically resynthesizing lost harmonics and natural sound fields in real time;
		maximizing the output potential of any device without increasing original file size; and
		without requiring consumers or OEM’s to change equipment or infrastructure.

 

MAX-D Benefits:

 

		Increases dynamic range, eliminates destructive effects of audio compression with no increase in file size or transmission bandwidth;
		High-resolution audio reproduction with an omni-directional sound field using only two speakers;
		“Real” three-dimensional sound field, versus artificial sound field created by competing technologies; and
		More realistic “live performance” quality of all recordings with optimal dynamic range, bass response and overall clarity

 

 

 

 

MAX-D Markets:

 

MAX-D can be used in a variety of venues and applications that provide audio capability, as categorized below:

 

		MOBILE - Communication | Voice – Data | Entertainment
		ENTERTAINMENT - Music | Movies | Audiobooks | Streaming Content | Live Events
		MULTI-MEDIA - Computing | Gaming
		CONSUMER - Home Theater | Portable Audio Players | Live Concert Sound | Automotive

 

We intend to license the MAX-D technology to creators of film, music, broadcast, and gaming content and selling them the service of applying the MAX-D technology to their end product. MAX-D is fully compatible with existing playback technology. We believe that no current competitor can provide the level of sound quality and end user experience that MAX-D delivers. MAX-D technology is ready for these markets now.  We also intend to license the technology to manufacturers of consumer electronics products such as portable mp3 players, TV’s, Set Top Boxes, Car Stereo, Home Theatre, Smartphones and Tablets.

 

The Company is making positive inroads in the motion picture industry. Many of the post-production facilities are now requesting a MAX-D HD Box. The Max-D HD box is a small Windows-based computer that allows audio engineers to apply our patent pending MAX-D HD Audio technology to protect the original audio quality as it is compressed and distributed downstream throughout the internet in all compressed formats. We now have internal testing boxes completed, and anticipate delivering the first boxes to several markets in Q2 2015, and one of the

top post film production houses is now engaged with us negotiating their first feature film deal to employ MAX-D HD Audio.

 

MAX-D Revenue Model:

 

The Company expects to derive its revenue through the licensing of its MAX-D technology.  The Company is negotiating the licensing of its HD Audio Technology onto hardware and software across the primary vertical markets in Entertainment, Multi-media and Mobile Communications technology.  It is also negotiating the “White Labeling,” or the adding of a customizable feature to the Liquid Spins Music Store, into all of these sectors and national retailers as well.

 

In 2014, the Company nearly tripled its Mobile App user base (with no dedicated marketing budget being employed –until we expect later in 2015). We currently have over 80,000 subscribers on the free version of our HD Audio App for MP3’s on Android. We also are in the final weeks of Beta testing our latest MAX-D HD Apple iOs App that will support current iPhones and iPads. We anticipate a Q2 2015 launch onto the Apple store.

 

In addition, the Company is now exploring a subscription based revenue model, which would offer millions of consumers a Max-D HD Audio experience on a 30 day free trial basis, and following the free trial the opportunity to upgrade to a paid annual subscription.

 

MAX-D Embedded Chip Solution: The MAX-D Embedded Chip technology is being designed to restore the natural sound field, causing compressed audio to sound like the original audio at playback time in any device. The audio does not have to be pre-processed or encoded. The Chip is being designed to be imbedded into TV Receivers, Digital Projection TVs, LCD TVs, Plasma TVs, Component DVD Players/Recorders, DVD Recorders, Set-Top Boxes, Personal Video Recorders (PVRs), Direct Broadcast Satellite (DBS) Receivers, Personal Computers, Satellite Radio Receivers, Mobile Video Devices, Domestic Factory Installed Auto Sound, Camcorders, MP3 Players, Electronic Gaming Hardware, Wireless Telephones, Cell Phones, and Personal Digital Assistants (PDAs).

 

MAX-D Dynamic Software Module: Max Sound has delivered and is working to implement an application programming interface (“API”) for all Internet applications to process all audio/video content streamed or downloaded by consumers. Viable target candidates within the next 24 months include streaming movie and music services such as Netflix and Spotify. Companies selling downloaded MP3’s are also expected to find immense value in our technology due to their dominance in web-based audio and video. This Module is a lossless dynamic process requiring no destructive encoding or decoding and needs no additional hardware or critical monitoring stage after processing.  In addition, no specialized decoder is necessary on any audio system.

 

Technology

 

MAX-D is a unique approach to processing sound, based on the physics of acoustics rather than electronics. Remarkably simple to deploy, MAX-D is a new technology that dramatically raises the standard for sound quality, with no corresponding increase in file size or transmission channel bandwidth.   This is accomplished by processing audio with our proprietary, patent-pending process. This embedded and duplicating format either remains the same, or can be converted to whatever format the user desires, while retaining unparalleled fidelity and dynamic range.

 

MAX-D restores the original recorded acoustical space in any listening environment. MAX-D is the only technology that both aligns phase and corrects phase distortion in a completed recording. MAX-D supplies missing audio content by adding acoustics and frequency response lost in the original recording or in the compression and transmission processes. MAX-D corrects and optimizes harmonic content and low frequency responses, greatly enhancing acoustic accuracy and we believe reduces ear fatigue.

 

 

MAX-D integrates time, phase, harmonics, dynamics, and sub-harmonic region optimizations in a fully dynamic fashion. MAX-D is a lossless dynamic process, requiring no destructive encoding/decoding process, or any specialized decoder at all. MAX-D needs no additional hardware or critical monitoring stage after processing.   The end result is that every aspect of audio processed with MAX-D  - voice, instrument, or special effects - sounds refreshingly clear, realistic, and natural. The MAX-D HD Audio Technology creates an optimum sound field throughout every listening environment – from the corners of a theater; on your living room couch; to the back seat of your car.

 

MAXD-D HD Audio Technology requires no equipment changeover and can be embedded into any product (e.g. speakers, headphones, mobile devices), or online content delivery systems (e.g. streaming, cable, video games) to provide better sounding audio.

 

Market

 

MAX-D products and services are designed and intended to solve problems and add value to audio components of several separate industries, including consumer electronics, motion picture, broadcasting, video game, recording, cell phone, internet, and VOIP applications.

 

2014 was a year of creating relationships with companies across all vertical markets understanding the value of those industries and what it would mean to Max-D. It became clear that the device market was the largest for potential revenue and profits for the Company. Our license agreement with Qualcomm has established the foundation for entry into this market. The MAX-D HD Audio player App provided the consumer the ability to experience MAX-D. The acquisition of Liquid Spins provided a music gateway directly to the retail consumer and the record labels and the ability to provide MAX-D HD Audio.

 

List of 2014 contracted companies:

 

Qualcomm

(Leader in Chips for Smartphones & Tablets)

The Company is now positioned to pursue the following expansion strategies:

 

		Launch MAX-D audio on the Qualcomm Snapdragon DSP, which stands to make MAX-D audio available on potentially hundreds of millions of devices that can be licensed by up to 86 OEMs around the world.
		Grow the MAX-D HD Audio Apps user base and begin selling a paid version of the App.
		Deploy MAX-D APIs for use in streaming online Video/Audio and stand alone Audio services.

 

Competition

 

The Company’s management believes there are no current competitors capable of delivering the high quality of audio products and services produced by the company. Although other companies, like DTS or Dolby, have technologies that enhance sound; we do not believe these technologies negatively affect the Company because the MAX-D process can enhance the other audio company’s technology.

 

We believe we will be considered friendly competition in the future for three reasons; (1) we believe that MAX-D technology delivers the best sound quality available today, (2) MAX-D does not require any additional equipment; and (3) MAX-D makes any competition’s audio processes sound better.

 

Intellectual Property

 

Max-D and HD Audio technologies and designs are Patent Pending and Trademarked. On February 8, 2011, the words “Max Sound” was issued to the Company by the U.S. Patent and Trademark office under Serial Number 85050705, and the words “HD Audio” are pending under Serial Number 85232456 for the following applications: Computer application software for mobile phones, namely, software for HD audio; Computer

hardware and software systems for delivery of improved HD audio; Computer hardware for communicating audio, video and data between computers via a global computer network, wide-area computer networks, and peer-to-peer computer networks; Computer software for manipulating digital audio information for use in audio media applications; Computer software to control and improve computer and audio equipment sound quality; Digital materials, namely, CD's, DVD's, MP3's, streaming media, movies, videos, music, concerts, news, pre-recorded video, downloadable audio and video and high definition audio and video featuring improved HD audio; Digital media, namely, pre-recorded DVDs, downloadable audio and video recordings, and CDs featuring and promoting improved HD audio; Digital media, namely, pre-recorded video cassettes, digital video discs, digital versatile discs, downloadable audio and video recordings, DVDs, and high definition digital discs featuring improved HD audio; Digital media, namely, CD's, DVD's, MP3's, movies, videos, music, concerts, news, pre-recorded video, downloadable and streaming audio and video and high definition audio and video featuring improved HD audio; Downloadable MP3 files, MP3 recordings, on-line discussion boards, webcasts, webinars and podcasts featuring music, audio books in the field of entertainment and general subjects, and news broadcasts; Software to control and improve audio equipment sound quality; Sound recordings featuring improved HD audio.

 

The Company is in the process of filing 70 additional patents for its technology.

 

Research and Development

 

The Company throughout 2014 has continued to focus on research and development initiatives concerning the MAX-D HD Audio Technologies now that the Company is entering into the licensing phase. The Company is working with strategic partners who are now integrating or assisting with the development of the Company’s application on their respective platforms. The Company’s development team is concentrating on enhancing the existing MAX-D HD, and is also developing additional API interfaces. The MAX-D API can be deployed across all streaming platforms along with most audio/video web-based services including audio hardware such as speakers and audio receivers including car smart head units. In 2014, the Company completed testing for industry the MAX-D HD Audio boxes and the MAXD –D Accurate Voice. Significantly, in 2014 the Company achieved breakthroughs in the software development of MAX-D HD for Android OS, Windows OS, Apple OS and a universal MAX-D API. In the fiscal years ended December 31, 2014 and 2013, the Company spent $304,300 and $370,225 respectively, on research and development activities relating to the build-out for the Company’s App for Windows Linix and IOS, as well as the MAX-D’s 300 KB API.

 

Employees

 

As of December 31, 2014, we had 14 employees, of which all were full-time.

 

Anticipated Milestones for the Next Twelve Months

 

For the next twelve months, our most important goal is to become cash flow positive by growing Max Sound HD Audio sales through licensing and recurring revenue streams. Our goal is to have this growth improve our stock value and investor liquidity. We expect our financial requirements to increase with the additional expenses needed to promote the MAX-D HD Audio Technology. We plan to fund these additional expenses by equity loans from our existing lines of credit and we are also considering various private funding opportunities until such time that our revenue stream is adequate enough to provide the necessary funds.

 

Over the next twelve months, our focus will be in the achieving and implementing the following:

 

1.

The marketing of the MAX-D Android and Windows APP for tablets and smartphones in addition to an APP that will run on the Apple OS into the direct consumer market.

 

2.

The include the ability to stream content through the MAX-D Apps.

 

 

3.

MAX-D is in the Qualcomm Snapdragon DSP through the Hexagon program. We will seek adoption of the MAX-D HD Audio Technology by Qualcomm’s OEMs.

 

4.

Deployment of Max Sound HD Audio appliances for key industry engineers and internet streaming companies allowing them to broadcast in MAX-D.

 

5.

Early adoption from the movie industry producing “Mastered in MAX-D” content.

 

Long-Term Goals

 

	1.	Increase Max Sound’s customer base substantially producing large consumer adoption and branding.
	2.	Make a financial return on the investments of the last year, with increased sales and reduction of indirect costs, to become cash flow positive and then profitable in 2015.
	3.	Increased adoption by industry leaders and differentiated as a deliverer of game-changing audio technology.
	4.	Explore the applicability of Liquid Spins in future agreements with MAX-D.

 

Where You Can Find More Information

  

We are a publicly reporting company under the Exchange Act and are required to file periodic reports with the Securities and Exchange Commission.  The public may read and copy any materials we file with the Commission at the SEC's Public Reference Room at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m.  The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.  The Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission and state the address of that site (http://www.sec.gov).  In addition, you can obtain all of the current filings at our Internet website at www.maxsound.com.

 

ITEM 1A.      RISK  FACTORS

 

Not applicable for smaller reporting companies.

 

ITEM 1B.      UNRESOLVED STAFF COMMENTS

 

Not applicable for smaller reporting companies.

 

ITEM 2.         PROPERTIES.

 

Office Arrangements and Operational Activities

 

In November 2010, we leased our MAX-D post production facility at 2902A Colorado Ave., Santa Monica, CA, 90404. The lease is for two years with one-year renewable options.

  

ITEM 3.         LEGAL PROCEEDINGS.

 

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business.

 

 

On February 21, 2012, the Company filed a suit for breach of contract, intentional misrepresentation, negligent

misrepresentation, fraud, false advertising, and unfair competition with a former consultant.   It seeks damages due to their alleged failure to meet the contractual requirements regarding promotions.   The defendant has been served.   In September of 2014, the Company received a Default Judgment against the Defendant.    The Company is vigorously pursuing collection on this judgment.

 

On August 14, 2012, the Company, along with two shareholders of the Company, were named as a defendant in an action filed in the Superior Court for the State of California and the County of San Diego. The plaintiff alleges he was terminated by his former employer “Acoustics Control Sciences, LLC” (which is a company that is not affiliated with Max Sound Corporation) in August 2008 without receiving wages and other compensation allegedly due him. The plaintiff further claims that two of the members or “shareholders” of Acoustics Control Sciences, LLC, wrongfully transferred a patent owned by his former employer and this transfer prevented his former employer from paying the wages alleged due. According to the plaintiff, when the assets of his former employer were sold to the Company, Max Sound Corporation became a successor-in-interest to the plaintiff’s former employer. Plaintiff thus seeks unpaid wages and other compensation from each alleged successor-in-interest named in his complaint. This case will be vigorously prosecuted and has a good likelihood of success.

  

On August 11, 2014, the Company and VSL simultaneously filed trade secret and patent infringement actions against Google, Inc., and its subsidiaries YouTube, LLC, and On2 Technologies, Inc., relating to proprietary and patented technology owned by Vedanti Systems Limited (“Vedanti”), a subsidiary of VSL.  The patent infringement complaint was originally filed in the U.S. District Court for the District of Delaware; the trade secret suit was filed in Superior Court of California, County of Santa Clara.  On September 30, 2014, the Company filed notices of voluntary dismissal without prejudice as to both lawsuits. On October 1, 2014, the Company amended the patent complaint and filed it in the U.S. District Court for the Northern District of California. In this patent lawsuit, which remains pending, the Company contends that, in 2010, while Google was in discussions with Vedanti about the possibility of acquiring Vedanti's patented digital video streaming techniques and other proprietary methods, Google gained access to and received technical guidance regarding Vedanti’s proprietary codec, a computer program capable of encoding and decoding a digital data stream or signal.  The lawsuit further alleges that soon after Google and Vedanti initiated negotiations, Google willfully infringed Vedanti's patent by incorporating Vedanti's patented technology into Google's own VP8, VP9, WebM, YouTube, Google Adsense, Google Play, Google TV, Chromebook, Google Drive, Google Chromecast, Google Play-per-view, Google Glasses, Google+, Google’s Simplify, Google Maps, and Google Earth, without compensating Vedanti for such use.  Plaintiffs are seeking a permanent injunction against Google, compensatory damages, as well as treble damages. As exclusive agent to VSL to enforce all rights with respect to the subject technology, the Company has hired Grant & Eisenhofer PA and Buether Joe & Carpenter LLC to represent the Company in the suit on a contingency fee basis. The case will be vigorously prosecuted, and the Company believes it has a good likelihood of success. 

 

Additionally, on December 5, 2014, the Company, along with renowned architect Eli Attia, filed a lawsuit in the Superior Court of California, County of Santa Clara, against Google, its co-founders Sergey Brin and Larry Page, Google’s spinoff company Flux Factory, and senior executives of Flux. Plaintiffs’ allege misappropriation of trade secrets, breach of contract and other contract-related claims, breach of confidence, slander of title, violation of California’s Unfair Competition Law (California Business and Professionals Code §§ 17200 et seq.), and fraud, and also bring a claim for declaratory relief. The lawsuit contends that Google and the other Defendants stole Mr. Attia’s trade secrets, proprietary information, and know-how regarding a revolutionary architecture design and building process that he alone had invented, known as Engineered Architecture. Defendants are alleged to have engaged Mr. Attia in 2010 and 2011 to translate his architectural technology into software for a proof of concept, with the goal of determining at that point whether to continue with full-scale development with Mr. Attia. Instead, the lawsuit claims that once Mr. Attia had disclosed the trade secrets and proprietary information Defendants needed to bring the technology to market, they severed ties with Mr. Attia, and continued to use his technology without a license and without compensation, in order to bring the technology to market themselves. Plaintiffs seek a permanent injunction against Google, damages (including punitive damages), and restitution. As exclusive agent to Eli Attia to enforce all rights with respect to the subject technology, the Company has retained

Buether Joe & Carpenter LLC to represent the Company in the suit, on a contingency fee basis. The case will be vigorously prosecuted, and the Company believes it has a good likelihood of success. 

 

On September 8 and 9, 2014, respectively, the Company and VSL were granted preliminary injunctions by the District Court of Berlin, Germany, against the Chinese company Shenzhen KTC Technology Co. Ltd. and the French company Pact Informatique S.A. Both companies have been offering products at the International Consumer Electronics Trade Show 2014 in Berlin, which, according to the company’s claim and the Preliminary Injunctions issued by the Court, infringed the rights to a patent. This patent is the German is the German part of the patent on optimized data transmission, owned by Vedanti, which is already asserted the United States infringement proceedings. The products in question are tablet computers and smart phones with Android OS and with the ability to encode videos in the format H.264. The injunctions were issued ex-parte and can be appealed by the Defendants. However, currently there are no indications that any prospective appeals will be interposed. The Company can still enforce claims for cost reimbursement with regard to these legal proceedings.

 

On December 2, 2014, the Company filed a patent infringement action against Google, Inc., Germany GmBH, Google Commerce Ltd. and YouTube LLC with the District Court of Mannheim, Germany. The asserted patent infringement concerns the same patent infringement asserted in the in the prior Germany Preliminary Injunctions described herein. The Complaint alleges that Google Inc. and it above-named subsidiaries are offering and selling products which can also decode and show videos, which have been encoded in a patent protected and proprietary way. The complaint also avers that YouTube LLC offers to German customers, which are encoded and transmitted in a manner claimed and protected by the patent. The Company mainly seeks a permanent injunction against the Defendants, damages and information regarding past infringements.

 

On January 21, 2015, the Company filed a patent infringement action against Netflix Inc., Netflix Luxembourg S.a.r.l. and Netflix International B.V. with the District Court of Mannheim, Germany. The asserted patent is the same patent as in the German proceedings against Google Inc. and its subsidiaries. The Complaint alleges that Netflix Inc. and its subsidiaries are offering and transmitting video streams to German customers as part of their video-on-demand business model; the videos being encoded and transmitted in a manner claimed and protected by the patent. The Company primarily seeks a permanent injunction against the Defendants, plus damages and information regarding past infringements.

 

The Company intends to vigorously prosecute these various patent infringement litigations. The Company believes it has a good likelihood of success associated with these patent infringement lawsuits. However, no assurance can be given by the Company as to the ultimate outcome of these actions or its effect on the Company. The law firm is prosecuting these action on a pure contingency fee basis.

 

On January 26, 2015, the Company was named as a defendant in an action filed in the Superior Court for the State of California and the County of Los Angeles captioned Bibicoff Family Trust v. Max Sound Corporation (Case No. SC123679). In the complaint the plaintiff alleges a cause of action for breach of contract associated with the non-payment by the Company for certain services plaintiff agreed to provide to the Company. The Company interposed a cross-complaint against plaintiffs averring causes of action for breach of contract, fraud, and negligent misrepresentation by defendants with respect to defendants’ fraudulent and intentional undisclosed inability to perform the services that plaintiffs’ agreed to perform that are the subject of this dispute. This lawsuit will be vigorously defended and prosecuted. While this lawsuit is in its nacency, the Company believes there is a strong likelihood of success on the merits with respect to the defending and prosecuting this action.

 

No assurance can be given as to the ultimate outcome of these actions or its effect on the Company.

 

ITEM 4.         MINE SAFETY DISCLOSURES.

 

Not applicable.

 

PART II

 

ITEM 5.         MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Our shares of common stock are traded on the OTC Bulletin Board under the symbol “MAXD.” The following table sets forth, for the period indicated, the high and low bid quotations for the Company’s common stock.  These quotations represent inter-dealer quotations, without adjustment for retail markup, markdown or commission, and may not represent actual transactions.

 

Price

 

		High				Low
2013
First quarter		$	.39			$	.19
Second quarter		$	.32			$	.17
Third quarter		$	.30			$	.18
Fourth quarter		$	.28			$	.18
2014
First quarter		$	.22			$	.09
Second quarter		$	.18			$	.08
Third quarter		$	.28			$	.08
Fourth quarter		$	.13			$	.05

 

Holders

 

As of March 31, 2015, in accordance with our transfer agent records, we had 1,576 record holders of our Common Stock. This number excludes individual stockholders holding stock under nominee security position listings.

 

Dividends

 

To date, we have not declared or paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock, when issued pursuant to this offering. Although we intend to retain our earnings, if any, to finance the exploration and growth of our business, our Board of Directors will have the discretion to declare and pay dividends in the future.

 

Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our Board of Directors may deem relevant.

 

Securities Authorized For Issuance Under Equity Compensation Plans.

 

None.

 

Stock Option Grants

 

On January 17, 2011, the Company executed an employment agreement with an executive to be the President and CEO for five years.    As compensation for services, the executive will receive a monthly compensation of $8,000 beginning after the completion of at least one million dollars of new funding to the Corporation or can be paid as commissions from sales brought to the Company, whichever comes first. In addition to the base salary, the employee is entitled to receive a 20% commission of all sales the executive is directly responsible for bringing to

the Company.    The agreement also calls for the executive to receive, upon execution of the agreement, three million shares of Rule 144 common stock and twelve million options, which are good for three years, to buy shares of Rule 144 common stock at $0.12/share.    As a supplement to the agreement, on February 4, 2011, the executive received an additional twenty million common shares directly from the Chairman of the Company.    On August 25, 2011, the agreement was updated to increase the monthly compensation to $12,000 per month beginning September 1, 2011, terminate the initial 20% commission on sales and to add a commission on sales equal to 10% of gross quarterly profits.    On December 31, 2012, the agreement was updated to eliminate his previous annual bonus entitlement, which was previously 10% of revenues. In exchange for this consideration, the Company agreed that his bonus will be decreased to 7% of net profits which may be received in cash or Rule 144 stock or any combination. The agreement also called for the employee to receive health benefits.    In May of 2013, the Company amended the agreement for the President and CEO to receive monthly compensation of $18,000 beginning May 1, 2013.

 

On October 1, 2011, the Company executed an employment agreement with its Chief Technical Officer (“CTO”).   The term of the agreement is for five years.   As compensation for services, the CTO will receive a monthly compensation of $10,000, monthly commission equal to 5% of all profits derived from the sales of all products and services related to Max Sound, and an annual bonus of 5% of all profits derived from the sales of all products and services related to Max Sound that is over one million dollars.   In addition to the base salary, the employee is entitled to receive health benefits.  Effective January 1, 2012, the Company increased the monthly compensation to $12,000.   On December 31, 2012 the Company amended the agreement that effective January 1, 2013 the CTO will receive 300,000 shares of common stock and 700,000 three year options at 50 cents per share. On December 31, 2012, the agreement was also updated to eliminate his previous commission and annual bonus entitlement. Executive shall now be entitled to a commission on all sales of the Company equal to 6% of net profits. For the year ended 2013, the Company issued 300,000 common shares valued at $90,000.

 

On January 9, 2013, the Company executed an employment agreement with its Director of New Business Development. The term of the agreement is for three years.   As compensation for services, the Director will receive a monthly compensation of $10,000.   Upon the first million dollars in gross sales the salary will increase to $12,000 per month.  In addition, the Director will receive up to 1,000,000 shares of common stock payable in lots of 125,000 per quarter beginning on January 1, 2013.    Also, employee for the first eight quarters of employment has a right to earn 125,000 additional 3 year stock options with a strike price of $0.50 per share as follows:

 



For each million of new gross sales - 125,000 additional 3-year stock options with a strike price of $.50 per share.

 

For the year ended December 31, 2014 and year ended December 31, 2013, the employee received 375,000 and 500,000 shares with a fair value of $95,625 and $127,500, respectively.

 

On July 7, 2014, the Company issued 2,866,652 options to buy common shares of the Company’s stock at $.10 per share, good for three years to the Company’s CFO.  

 

Recent Sales of Unregistered Securities

 

Note Conversions

 

On January 3, 2014, the Company entered into a conversion agreement with Dominion Capital, LLC relating to a convertible promissory note dated May 5, 2013, with the original principal amount of $277,778 for 352,734 shares based on a conversion price of $0.142125 per share (See Note 6 to the Accompanying Financial Statements).

 

On January 7, 2014, the Company entered into a conversion agreement with Redwood Management, LLC relating to a convertible promissory note dated June 17, 2013, with the original principal amount of $166,667 for 360,490 shares based on a conversion price of $0.1388 per share (See Note 6 to the Accompanying Financial Statements).

 

On January 7, 2014, the Company entered into a conversion agreement with JMJ Financial relating to a convertible promissory note dated June 27, 2013, with the original principal amount of $50,000 for 300,000

shares based on a conversion price of $0.1295 per share (See Note 6 to the Accompanying Financial Statements).

 

On January 8, 2014, the Company entered into a conversion agreement with BOU Trust relating to a convertible promissory note dated June 17, 2013, with the original principal amount of $111,111 for 80,109 shares based on a conversion price of $0.1268 per share (See Note 6 to the Accompanying Financial Statements).

 

On January 15, 2014, the Company entered into a conversion agreement with Redwood Management, LLC relating to a convertible promissory note dated June 17, 2013, with the original principal amount of $166,667 for 505,050 shares based on a conversion price of $0.1325 per share (See Note 6 to the Accompanying Financial Statements).

 

On January 21, 2014, the Company entered into a conversion agreement with Dominion Capital, LLC relating to a convertible promissory note dated May 23, 2013, with the original principal amount of $277,778 for 646,465 shares based on a conversion price of $0.1268 per share (See Note 6 to the Accompanying Financial Statements).

 

On January 29, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC relating to a convertible promissory note dated May 3, 2013, with the original principal amount of $25,000 for 93,591 shares based on a conversion price of $0.1127 per share (See Note 6 to the Accompanying Financial Statements).

 

On February 5, 2014, the Company entered into a conversion agreement with JMJ Financial relating to a convertible promissory note dated June 27, 2013, with the original principal amount of $50,000 for 266,599 shares based on a conversion price of $0.0996 per share (See Note 6 to the Accompanying Financial Statements).

 

On February 11, 2014, the Company entered into a conversion agreement with Dominion Capital, LLC relating to a convertible promissory note dated May 23, 2013, with the original principal amount of $277,778 for 496,278 shares based on a conversion price of $0.1008 per share (See Note 6 to the Accompanying Financial Statements).

 

On February 12, 2014, the Company entered into a conversion agreement with BOU Trust relating to a convertible promissory note dated June 17, 2013, with the original principal amount of $111,111 for 67,340 shares based on a conversion price of $0.099 per share (See Note 6 to the Accompanying Financial Statements).

 

On February 12, 2014, the Company entered into a conversion agreement with BOU Trust relating to a convertible promissory note dated June 17, 2013, with the original principal amount of $111,111 for 44,893 shares based on a conversion price of $0.099 per share (See Note 6 to the Accompanying Financial Statements).

 

On February 14, 2014, the Company entered into a conversion agreement with Asher Enterprises, Inc. relating to a convertible promissory note dated August 8, 2013, with the original principal amount of $103,500 for 477,897 shares based on a conversion price of $0.0847 per share (See Note 6 to the Accompanying Financial Statements).

 

On February 18, 2014, the Company entered into a conversion agreement with Dominion Capital, LLC relating to a convertible promissory note dated June 3, 2013, with the original principal amount of $277,778 for executed by a note holder for 511,771 shares based on a conversion price of $0.0978 per share (See Note 6 to the Accompanying Financial Statements).

 

On February 18, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated May 2, 2013, with the original principal amount of $166,000 for 110,943 shares based on a conversion price of $0.13 per share (See Note 6 to the Accompanying Financial Statements).  Given the conversion occurred subsequent to the maturity date of the note, the Company recorded a $4,423 loss on conversion.

 

On February 19, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC relating to a convertible promissory note dated August 9, 2013, with the original principal amount of $25,000 for 147,929 shares based on a conversion price of $0.0910 per share (See Note 6 to the Accompanying Financial Statements). Conversion related to penalty fees incurred totaling $6,583.

 

On February 24, 2014, the Company entered into a conversion agreement with Asher Enterprises, Inc. relating to

a convertible promissory note dated August 8, 2013, with the original principal amount of $103,500 for 580,645 shares based on a conversion price of $0.0818 per share (See Note 6 to the Accompanying Financial Statements).

 

On February 27, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated May 2, 2013, with the original principal amount of $166,000 for 196,592 shares based on a conversion price of $0.12 per share (See Note 6 to the Accompanying Financial Statements).  Given the conversion occurred subsequent to the maturity date of the note, the Company recorded a $8,591 loss on conversion.

 

On February 28, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC relating to a convertible promissory note dated August 9, 2013, with the original principal amount of $25,000 for 250,000 shares based on a conversion price of $0.0763 per share (See Note 6 to the Accompanying Financial Statements).  Conversion related to penalty fees incurred totaling $6,113.

 

On March 3, 2014, the Company entered into a conversion agreement with Dominion Capital, LLC relating to a convertible promissory note dated June 3, 2013, with the original principal amount of $277,778 for 612,745 shares based on a conversion price of $0.0817 per share (See Note 6 to the Accompanying Financial Statements).

 

On March 4, 2014, the Company entered into a conversion agreement with Asher Enterprises, Inc. relating to a convertible promissory note dated August 8, 2013, with the original principal amount of $103,500 for 339,940 shares based on a conversion price of $0.0686 per share (See Note 6 to the Accompanying Financial Statements).

 

On March 6, 2014, the Company entered into a conversion agreement with Dominion Capital, LLC relating to a convertible promissory note dated May 23, 2013, with the original principal amount of $277,778 for 631,313 shares based on a conversion price of $0.0792 per share (See Note 6 to the Accompanying Financial Statements).

 

On March 12, 2014, the Company entered into a conversion agreement with Dominion Capital, LLC relating to a convertible promissory note dated June 3, 2013, with the original principal amount of $277,778 for 851,426 shares based on a conversion price of $0.0784 per share (See Note 6 to the Accompanying Financial Statements).

 

On March 13, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC relating to a convertible promissory note dated August 9, 2013, with the original principal amount of $25,000 for 352,801 shares based on a conversion price of $0.07 per share (See Note 6 to the Accompanying Financial Statements).  Conversion related to penalty fees incurred totaling $9,580.

 

On March 19, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated May 2, 2013, with the original principal amount of $166,000 for 229,753 shares based on a conversion price of $0.09 per share (See Note 6 to the Accompanying Financial Statements).  Given the conversion occurred subsequent to the maturity date of the note, the Company recorded a $6,795 loss on conversion.

 

On March 24, 2014, the Company entered into a conversion agreement with Dominion Capital, LLC relating to a convertible promissory note dated June 3, 2013, with the original principal amount of $277,778 for 1,260,835 shares based on a conversion price of $0.0705 per share (See Note 6 to the Accompanying Financial Statements).

 

On March 25, 2014, the Company issued 8,000 shares of common stock for accrued interest having a fair value of $1,020 ($.01275 / share).

 

On March 31, 2014, the Company entered into a conversion agreement with JMJ Financial relating to a convertible promissory note dated August 21, 2013, with the original principal amount of $50,000 for 1,002,999 shares based on a conversion price of $0.0658 per share (See Note 6 to the Accompanying Financial Statements).

 

 

On April 1, 2014, the Company entered into a conversion agreement with Redwood Management, LLC relating to a convertible promissory note dated October 3, 2013 with the original principal amount of $221,000 for 3,134,751 shares based on a conversion price of $0.0705 per share (See Note 6 to the Accompanying Financial Statements).

 

On April 3, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible

promissory note dated August 19, 2013 with the original principal amount of $227,222 for 1,503,382 shares based on a conversion price of $0.0665 per share (See Note 6 to the Accompanying Financial Statements).

 

On April 7, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC relating to a convertible promissory note dated October 7, 2013 with the original principal amount of $25,000 for 621,227 shares based on a conversion price of $0.0611 per share (See Note 6 to the Accompanying Financial Statements).

 

On April 18, 2014, the Company entered into a conversion agreement with Asher Enterprises, Inc. relating to a convertible promissory note dated October 10, 2013 with the original principal amount of $78,500 for 652,529 shares based on a conversion price of $0.0613 per share (See Note 6 to the Accompanying Financial Statements).

 

On April 23, 2014, the Company entered into a conversion agreement with Redwood Management, LLC relating to a convertible promissory note dated October 3, 2013 with the original principal amount of $221,000 for 118,062 shares based on a conversion price of $0.0681 per share (See Note 6 to the Accompanying Financial Statements).

 

On April 24, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated August 19, 2013 with the original principal amount of $227,222 for 864,304 shares based on a conversion price of $0.05785 per share (See Note 6 to the Accompanying Financial Statements).

  

On April 24, 2014, the Company entered into a conversion agreement executed with Asher Enterprises, Inc. relating to a convertible promissory note dated October 10, 2013 with the original principal amount of $78,500 for 719,171 shares based on a conversion price of $0.0579 per share (See Note 6 to the Accompanying Financial Statements).

 

On May 8, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC relating to a convertible promissory note dated October 7, 2013 with the original principal amount of $25,000 for 222,064 shares based on a conversion price of $0.0563 per share (See Note 6 to the Accompanying Financial Statements).

 

On May 14, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated August 19, 2013 with the original principal amount of $227,222 for 540,655 shares based on a conversion price of $0.0555 per share (See Note 6 to the Accompanying Financial Statements).

 

On May 15, 2014, the Company entered into a conversion agreement with Dominion Capital, LLC relating to a convertible promissory note dated June 3, 2013 with the original principal amount of $277,778 executed by a note holder for 763,942 shares based on a conversion price of $0.06545 per share (See Note 6 to the Accompanying Financial Statements).

 

On May 20, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC relating to a convertible promissory note dated October 7, 2013 with the original principal amount of $25,000 for 507,292 shares based on a conversion price of $0.0561 per share (See Note 6 to the Accompanying Financial Statements).

 

On May 22, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated August 19, 2013 with the original principal amount of $227,222 for 535,628 shares based on a conversion price of $0.056 per share (See Note 6 to the Accompanying Financial Statements).

 

On May 28, 2014, the Company entered into a conversion agreement with Dominion Capital, LLC relating to a convertible promissory note dated June 3, 2013 with the original principal amount of $277,778 executed by a note holder for 103,842 shares based on a conversion price of $0.0642 per share (See Note 6 to the Accompanying Financial Statements).

 

On May 30, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated August 19, 2013 with the original principal amount of $227,222 for 350,177 shares based on a conversion price of $0.057114 per share (See Note 6 to the Accompanying Financial Statements).

 

On June 9, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible

promissory note dated August 19, 2013 with the original principal amount of $227,222 for 314,842 shares based on a conversion price of $0.0611 per share (See Note 6 to the Accompanying Financial Statements).

 

On June 10, 2014, the Company entered into a conversion agreement with JMJ Financial relating to a convertible promissory note dated December 9, 2013 with the original principal amount of $100,000 executed by a note holder for 550,000 shares based on a conversion price of $0.062627 per share (See Note 6 to the Accompanying Financial Statements).

  

On June 10, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC relating to a convertible promissory note dated December 6, 2013 with the original principal amount of $25,000 for 162,338 shares based on a conversion price of $0.0616 per share (See Note 6 to the Accompanying Financial Statements).

 

On June 16, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated October 7, 2013 with the original principal amount of $282,778 for 469,366 shares based on a conversion price of $0.063916 per share (See Note 6 to the Accompanying Financial Statements).

 

On June 17, 2014, the Company entered into a conversion agreement with Asher Enterprises, Inc. relating to a convertible promissory note dated December 11, 2013 with the original principal amount of $153,500 for 635,930 shares based on a conversion price of $0.0629 per share (See Note 6 to the Accompanying Financial Statements).

 

On June 19, 2014, the Company entered into a conversion agreement with Asher Enterprises, Inc. relating to a convertible promissory note dated December 11, 2013 with the original principal amount of $153,500 for 818,331 shares based on a conversion price of $0.0611 per share (See Note 6 to the Accompanying Financial Statements).

 

On June 23, 2014, the Company entered into a conversion agreement with Asher Enterprises, Inc. relating to a convertible promissory note dated December 11, 2013 with the original principal amount of $153,500 for 725,000 shares based on a conversion price of $0.06 per share (See Note 6 to the Accompanying Financial Statements).

 

On June 30, 2014, the Company entered into a conversion agreement with Asher Enterprises, Inc. relating to a convertible promissory note dated December 11, 2013 with the original principal amount of $153,500 for 465,954 shares based on a conversion price of $0.0561 per share (See Note 6 to the Accompanying Financial StatementsSee Note 6).

 

On July 14, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated October 7, 2013 with the original principal amount of $282,778 for 1,105,481 shares based on a conversion price of $0.054275 per share (See Note 6 to the Accompanying Financial Statements).

 

On July 16, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated October 7, 2013 with the original principal amount of $282,778 for 1,092,399 shares based on a conversion price of $0.054925 per share (See Note 6 to the Accompanying Financial Statements).

 

On July 1, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated October 7, 2013 with the original principal amount of $282,778 for 549,451 shares based on a conversion price of $0.0546 per share (See Note 6 to the Accompanying Financial Statements).

 

On August 1, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated October 7, 2013 with the original principal amount of $282,778 for 673,446 shares based on a conversion price of $0.089094 per share (See Note 6 to the Accompanying Financial Statements).

 

On August 4, 2014, the Company entered into a conversion agreement with Tonaquint, Inc. relating to a convertible promissory note dated October 7, 2013 with the original principal amount of $282,778 for 881,419 shares based on a conversion price of $0.089094 per share (See Note 6 to the Accompanying Financial Statements).

 

On July 3, 2014, the Company entered into a conversion agreement with JMJ Financial relating to a convertible

promissory note dated December 9, 2013 with the original principal amount of $100,000 for 600,000 shares based on a conversion price of $0.058823 per share (See Note 6 to the Accompanying Financial Statements).

 

On July 22, 2014, the Company entered into a conversion agreement with JMJ Financial relating to a convertible promissory note dated December 9, 2013 with the original principal amount of $100,000 for 953,405 shares based on a conversion price of $0.057983 per share (See Note 6 to the Accompanying Financial Statements).

 

On July 11, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC relating to a convertible promissory note dated December 6, 2013 with the original principal amount of $25,000 for 169,463 shares based on a conversion price of $0.0590 per share (See Note 6 to the Accompanying Financial Statements).

 

On July 15, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC relating to a convertible promissory note dated December 6, 2013 with the original principal amount of $25,000 for 178,360 shares based on a conversion price of $0.0590 per share (See Note 6 to the Accompanying Financial Statements).

 

On August 5, 2014, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated December 30, 2013 with the original principal amount of $282,778 for 1,399,619 shares based on a conversion price of $0.08931 per share (See Note 6 to the Accompanying Financial Statements).

 

On September 12, 2014, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated December 30, 2013 with the original principal amount of $282,778 for 307,692 shares based on a conversion price of $0.0975 per share (See Note 6 to the Accompanying Financial Statements).

 

On September 23, 2014, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated December 30, 2013 with the original principal amount of $282,778 for 357,782 shares based on a conversion price of $0.08385 per share (See Note 6 to the Accompanying Financial Statements).

 

On August 25, 2014, the Company entered into a conversion agreement with JMJ Financial relating to a convertible promissory note dated February 20, 2014 with the original principal amount of $50,000 for 350,000 shares based on a conversion price of $0.102550 per share (See Note 6 to the Accompanying Financial Statements).

 

On September 9, 2014, the Company entered into a conversion agreement with JMJ Financial relating to a convertible promissory note dated February 20, 2014 with the original principal amount of $50,000 for 260,744 shares based on a conversion price of $0.102083 per share (See Note 6 to the Accompanying Financial Statements).

 

On July 30, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC relating to a convertible promissory note dated January 28, 2014 with the original principal amount of $25,000 for 505,297 shares based on a conversion price of $0.0604 per share (See Note 6 to the Accompanying Financial Statements).

 

On September 15, 2014, the Company entered into a conversion agreement with Asher Enterprises, Inc. relating to a convertible promissory note dated March 7, 2014 with the original principal amount of $103,500 for 307,692 shares based on a conversion price of $0.0975 per share (See Note 6 to the Accompanying Financial Statements).

 

On September 16, 2014, the Company entered into a conversion agreement with Asher Enterprises, Inc. relating to a convertible promissory note dated March 7, 2014 with the original principal amount of $103,500 for 344,296 shares based on a conversion price of $0.0973 per share (See Note 6 to the Accompanying Financial Statements).

 

On September 22, 2014, the Company entered into a conversion agreement with Asher Enterprises, Inc. relating to a convertible promissory note dated March 7, 2014 with the original principal amount of $103,500 for 526,103 shares based on a conversion price of $0.0839 per share (See Note 6 to the Accompanying Financial Statements).

 

On October 9, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC

relating to a convertible promissory note dated January 28, 2014 with the original principal amount of $25,000 for 150,000 shares based on a conversion price of $0.0666 per share (See Note 6 to the Accompanying Financial Statements).

 

On October 9, 2014, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated December 30, 2013 with the original principal amount of $282,778 for 483,668 shares based on a conversion price of $0.0620 per share (See Note 6 to the Accompanying Financial Statements).

 

On October 16, 2014, the Company entered into a conversion agreement with KC Gamma Opportunity Fund LLP relating to a convertible promissory note dated October 2, 2013 with the original principal amount of $110,000 for 1,386,667 shares based on a conversion price of $0.0825 per share (See Note 6 to the Accompanying Financial Statements).

 

On October 22, 2014, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated December 30, 2013 with the original principal amount of $282,778 for 484,974 shares based on a conversion price of $0.0619 per share (See Note 6 to the Accompanying Financial Statements).

 

On October 23, 2014, the Company entered into a conversion agreement with KBM Worldwide relating to a convertible promissory note dated April 17, 2014 with the original principal amount of $78,500 for 354,267 shares based on a conversion price of $0.0621 per share (See Note 6 to the Accompanying Financial Statements).

 

On October 27, 2014, the Company entered into a conversion agreement with KBM Worldwide relating to a convertible promissory note dated April 17, 2014 with the original principal amount of $78,500 for 960,386 shares based on a conversion price of $0.0621 per share (See Note 6 to the Accompanying Financial Statements).

 

On October 31, 2014, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated December 30, 2013 with the original principal amount of $282,778 for 520,336 shares based on a conversion price of $0.0577 per share (See Note 6 to the Accompanying Financial Statements).

 

On November 10, 2014, the Company entered into a conversion agreement with LG Capital relating to a convertible promissory note dated May 1, 2014 with the original principal amount of $105,000 for 541,435 shares based on a conversion price of $0.0577 per share (See Note 6 to the Accompanying Financial Statements).

 

On November 11, 2014, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated December 30, 2013 with the original principal amount of $282,778 for 834,371 shares based on a conversion price of $0.0577 per share (See Note 6 to the Accompanying Financial Statements).

 

On November 18, 2014, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated May 12, 2014 with the original principal amount of $105,000 for 17,056 shares based on a conversion price of $0.0586 per share (See Note 6 to the Accompanying Financial Statements).

 

On November 10, 2014, the Company entered into a conversion agreement with LG Capital relating to a convertible promissory note dated May 1, 2014 with the original principal amount of $105,000 for 631,580 shares based on a conversion price of $0.0578 per share (See Note 6 to the Accompanying Financial Statements).

 

On November 21, 2014, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated May 12, 2014 with the original principal amount of $105,000 for 173,055 shares based on a conversion price of $0.0578 per share (See Note 6 to the Accompanying Financial Statements).

 

On November 24, 2014, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated May 12, 2014 with the original principal amount of $105,000 for 138,444 shares based on a conversion price of $0.0578 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 1, 2014, the Company entered into a conversion agreement with Iliad Research and Trading, LP

relating to a convertible promissory note dated February 27, 2014 with the original principal amount of $282,778 for 583,987 shares based on a conversion price of $0.0514per share (See Note 6 to the Accompanying Financial Statements).

 

On December 1, 2014, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated May 12, 2014 with the original principal amount of $105,000 for 144,956 shares based on a conversion price of $0.0517 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 2, 2014, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated May 12, 2014 with the original principal amount of $105,000 for 179,122 shares based on a conversion price of $0.0502 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 4, 2014, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated May 12, 2014 with the original principal amount of $105,000 for 156,733 shares based on a conversion price of $0.0479 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 9, 2014, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated May 12, 2014 with the original principal amount of $105,000 for 161,943 shares based on a conversion price of $0.0432 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 10, 2014, the Company entered into a conversion agreement with Vista Capital Investments, LLC relating to a convertible promissory note dated January 28, 2014 with the original principal amount of $25,000 for 225,000 shares based on a conversion price of $0.0450 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 1, 2014, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated February 27, 2014 with the original principal amount of $282,778 for 732,601 shares based on a conversion price of $0.0409 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 11, 2014, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated May 12, 2014 with the original principal amount of $105,000 for 332,226 shares based on a conversion price of $0.0391 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 11, 2014, the Company entered into a conversion agreement with LG Capital relating to a convertible promissory note dated May 1, 2014 with the original principal amount of $105,000 for 535,314 shares based on a conversion price of $0.0391 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 15, 2014, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated May 12, 2014 with the original principal amount of $105,000 for 191,669 shares based on a conversion price of $0.0391 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 16, 2014, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated May 12, 2014 with the original principal amount of $105,000 for 194,040 shares based on a conversion price of $0.0361 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 18, 2014, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated May 12, 2014 with the original principal amount of $105,000 for 234,046 shares based on a conversion price of $0.0320 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 19, 2014, the Company entered into a conversion agreement with LG Capital relating to a convertible promissory note dated May 1, 2014 with the original principal amount of $105,000 for 654,764 shares based on a conversion price of $0.0320 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 22, 2014, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated May 12, 2014 with the original principal amount of $105,000 for 774,536

shares based on a conversion price of $0.0258 per share (See Note 6 to the Accompanying Financial Statements).

 

On December 26, 2014, the Company entered into a conversion agreement with LG Capital relating to a convertible promissory note dated November 21, 2014 with the original principal amount of $105,000 for 1,100,592 shares based on a conversion price of $0.0320 per share (See Note 6 to the Accompanying Financial Statements).

 

Compensation-based Issuances

 

On November 16, 2014, the Company issued 1,000,000 shares of common stock for services having a value of $90,000 ($0.09/share).

 

During the three months ended September 30, 2014, the Company issued 250,000 shares of common stock valued at $77,500 in connection with employment agreements entered into.

 

On August 6, 2014, the Company entered into an advisory board agreement for a period of three years. In consideration for these services, during the nine months ended September 30, 2014, the Consultant was granted 100,000 fully vested shares of common stock valued at $16,500 ($0.17/share). (See note 7(B)).

 

On September 23, 2014, the Company entered into service agreement for a period of two years with the Company’s transfer agent. In consideration for these services, during the nine months ended September 30, 2014, 300,000 shares of fully vested common stock valued at $49,500 ($0.17/share) were granted and expensed.

 

On September 10, 2014, the Company entered into an advisory board agreement. In consideration for these services, during the nine months ended September 30, 2014, the Consultant was granted 100,000 shares of fully vested common stock valued at $16,000 ($0.16/share). (See note 7(B)).

 

On July 29, 2014, the Company entered into an investor relations agreement. In connection with this agreement, the Company is to issue 100,000 shares of common stock monthly and $5,500 in monthly fees. As of September 30, 2014, the agreement was terminated. The consultant was issued 100,000 shares of fully vested common stock valued at $16,000 ($0.16/share) and was paid $5,500. (See note 7(B)).

 

On April 24, 2014 the Company issued 200,000 shares of common stock having a fair value of $31,000 ($0.1099/share) in exchange for consulting services.

 

On April 25, 2014, the Company issued 50,000 shares of common stock for services having a fair value of $5,500 ($0.11/share).

 

On August 18, 2014 the Company issued 200,000 shares of common stock having a fair value of $31,875 ($0.16/share) in exchange for consulting services.

 

On June 30, 2014, the Company issued 125,000 shares of common stock for services having a fair value of $31,250 ($0.25/share).

 

On June 30, 2014, the Company issued 125,000 shares of common stock for services having a fair value of $31,875 ($0.26/share).

 

On June 30, 2014, the Company issued 750,000 shares of common stock for services having a fair value of $191,250 ($0.26/share).

 

On June 30, 2014, the Company issued 125,000 shares of common stock for services having a fair value of $45,625 ($0.37/share).

 

On June 30, 2014, the Company issued 125,000 shares of common stock for services having a fair value of $45,625 ($0.37/share).

 

On June 30, 2014, the Company issued 125,000 shares of common stock for services having a fair value of

$45,625 ($0.37/share).

 

On June 30, 2014, the Company issued 125,000 shares of common stock for services having a fair value of $45,625 ($0.37/share).

 

On March 31, 2014, the Company issued 125,000 shares of common stock for services having a fair value of $31,250 ($0.25/share).

 

On March 31, 2014, the Company issued 125,000 shares of common stock for services having a fair value of $31,875 ($0.255/share).

 

On March 31, 2014, the Company issued 100,000 shares of common stock for services having a fair value of $9,300 ($0.093/share).

 

On January 15, 2013, the Company entered into an agreement for legal services pursuant to which the Company will pay $2,000 and issue 50,000 shares of common stock corresponding to the preparation, filing costs and fees of each provisional and regular patent application.  Through March 31, 2015, a total of 44 applications have been filed.  In connection with this agreement:

 

On March 15, 2013, the Company issued 700,000 shares of common stock for legal services having a fair value of $182,000 ($0.26/share).

 

On February 15, 2013, the Company issued 700,000 shares of common stock for legal services having a fair value of $173,600 ($0.25/share).

 

For the year ended December 31, 2013, the Company issued 500,000 shares of common stock for services having a fair value of $125,000 ($0.25/share).

 

For the year ended December 31, 2013, the Company issued 500,000 shares of common stock for services having a fair value of $127,500 ($0.26/share).

 

For the year ended December 31, 2013, the Company issued 31,250 shares of common stock for services having a fair value of $7,813 ($0.25/share).

 

For the year ended December 31,2013, the Company issued 400,000 shares of common stock for services having a fair value of $94,000 ($0.23 - $.37/share).

 

The Company determined that the securities described above were issued in transactions that were exempt from the registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) thereunder.   This determination was based on the non-public manner in which we offered the securities and on the representations of the recipients of the securities, which included, in pertinent part, that they were “accredited investors” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, that they were acquiring such securities for investment purposes for their own account and not with a view toward resale or distribution, and that they understood such securities may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.

 

ITEM 6.         SELECTED FINANCIAL DATA.

 

Not applicable.

 

ITEM 7.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following plan of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.

 

Overview

 

We were incorporated in the State of Delaware as of December 9, 2005 as 43010, Inc. to engage in any lawful corporate undertaking, including, but not limited to, locating and negotiating with a business entity for combination in the form of a merger, stock-for-stock exchange or stock-for-assets exchange. On October 7, 2008, pursuant to the terms of a stock purchase agreement, Mr. Greg Halpern purchased a total of 100,000 shares of our common stock from Michael Raleigh for an aggregate of $30,000 in cash. The total of 100,000 shares represents 100% of our issued and outstanding common stock at the time of the transfer. As a result, Mr. Halpern became our sole shareholder. As part of the acquisition, and pursuant to the Stock Purchase Agreement, Michael Raleigh, our then President, CEO, CFO, and Chairman resigned from all the positions he held in the company, and Mr. Halpern was appointed as our President, CEO CFO and Chairman. The current business model was developed by Mr. Halpern in September of 2008 and began when he joined the company on October 7, 2008. In October 2008, we became a development stage company focused on creating an Internet search engine and networking web site. 

 

In May of 2010, we acquired the world-wide rights to all fields of use for Max Sound HD Audio Technology. In November of 2010, we opened our post-production facility for Max Sound HD Audio in Santa Monica California. In February of 2012, after several successful demonstrations to multi-media industry company executives, we decided to shift the focus of the Company to the marketing of the Max Sound HD Audio Technology and commenced the name change from So Act Network, Inc. to Max Sound Corporation and the symbol from SOAN to MAXD.

 

On December 3, 2012, the Company completed the purchase of the assets of Liquid Spins, Inc., a Colorado corporation (“Liquid Spins”).  Pursuant to the Asset Purchase Agreement, the assets of Liquid Spins were exchanged for 24,752,475 shares of common stock of the Company (the “Shares”), equal to $10,000,000 and a purchase price of $.404 per share.  The assets of Liquid Spins purchased included: record label distribution agreements; Liquid Spins technology inventory; independent arts programs; retail contracts for music distribution; physical inventory and office equipment; design and retail ready concepts; brand value; records; publishing catalog; and web assets.

 

The Company is in negotiations with several multi-media companies that will utilize our HD Audio solution in the future.

 

Videos and news relating to the Company is available on the company website at http://www.maxsound.com. The MAX-D Technology Highlights Video summarizes the HD Audio™ process and shows the need for high definition (HD) Audio in several key vertical markets. The video explains MAX-D as what we believe to be the only dynamic HD Audio™ that is being offered to various markets.

 

Plan of Operation

 

We began our operations on October 8, 2008, when we purchased the Form 10 Company from the previous owners.  Since that date and through 2014, we have conducted financings to raise initial start-up money for the

building of our internet search engine and social networking website and to start our operations.  In 2011, the Company shifted the focus of its business operations from their social networking website to the marketing of the Max Sound HD Audio Technology.  

 

The Company believes that Max Sound HD Audio Technology is a game changer for several vertical markets whose demand will create revenue opportunities in 2014.

 

We expect our financial requirements to increase with the additional expenses needed to market and promote the MAX-D Audio technology.  We plan to fund these additional expenses through financings and through loans from our stockholders and/or officers based on existing lines of credit and we are also considering various private funding opportunities until such time that our revenue stream is adequate enough to provide the necessary funds.

 

Results of Operations

  

The following tables set forth key components of our results of operations for the periods indicated, in dollars, and key components of our revenue for the period indicated, in dollars.

 

		For the Years Ended,
		December 31, 2014				December 31, 2013
Revenue		$	2,491			$	2,498
Operating Expenses
General and administrative			3,090,128				3,215,834
Endorsement fees			—				480,000
Consulting			505,597				636,718
Professional fees			1,025,241				916,873
Compensation			1,004,800				1,116,300
Total Operating Expenses			5,625,766				6,365,725
Loss from Operations			(5,623,275	)			(6,363,227	)
Other Income / (Expense)
Other income			101,820				6,905
Gain on sale of intellectual property							220,000
Gain (Loss) on extinguishment of debt			(18,596	)			—
Interest expense			(292,835	)			(147,500	)
Derivative Expense			(327,964	)			(442,412	)
Amortization of debt offering costs			(168,053	)			(395,194	)
Loss on conversions			(183,907	)			(46,093	)
Amortization of debt discount			(3,070,714	)			(2,638,504	)
Change in fair value of embedded derivative liability			(280,405	)			1,001,138
Total Other Income / (Expense)			(4,240,654	)			(2,441,660	)
Provision for Income  Taxes			—				—
Net Loss		$	(9,863,929	)		$	(8,804,887	)
Net Loss Per Share  - Basic and Diluted		$	(0.03	)		$	(0.03	)
Weighted average number of shares outstanding
during the year Basic and Diluted			341,970,037				314,486,670

 

 

For the Fiscal Year Ended December 31, 2014 and for the Fiscal Year Ended December 31, 2013

 

General and Administrative Expenses: Our general and administrative expenses for the years ended December 31, 2014 and 2013, were $3,090,128 and $3,215,834, respectively. The decrease of $125,706 or approximately 4%, was a result of our decreased advertising and promotional expenses, which include the cost of public relations and product promotion activities

 

Consulting Fees:  Our consulting fees for the years ended December 31, 2014 and 2013, were $505,597 and $636,718, respectively. The decrease of $131,121 or approximately (21%) was a result of a decrease in expenses associated with the additional consulting, promotional and marketing services related to our social networking website during 2013.

 

Professional Fees: Our professional fees for the years ended December 31, 2014 and 2013, were $1,025,241 and $916,873, respectively. The increase of $108,368, or approximately 12%, was a result of an increase in the expenses associated with the preparation of our financial statements and regulatory filings required for publicly traded companies.

 

Compensation: Our compensation expenses for the years ended December 31, 2014 and 2013, were $1,004,800 and $1,116,300, respectively. The decrease of $111,500, or approximately 10%, was a result of our increased stock based compensation and additional employee salaries during 2013.

 

Net Loss: Our net loss for the year ended December 31, 2014, was $9,863,929, compared to $8,804,887 for the year ended December 31, 2013. The increase in net loss was the result of the expensing in stock based compensation, an increase in expenses associated with the promotion and marketing of the Max Sound HD Audio Technology, increased professional fees and salaries.

 

Liquidity and Capital Resources

 

Revenues for the fiscal years ended December 31, 2014, and 2013, were $2,491 and $2,498, respectively. We have an accumulated deficit of $37,136,982 for the period from December 9, 2005 (inception) to December 31, 2014, and have negative cash flow from operations of $2,956,189 for the year ended December 31, 2014.  

 

Our financial statements have been presented on the basis that it is a going concern, which contemplates the realization of revenues from our subscriber base and the satisfaction of liabilities in the normal course of business. We have incurred losses from inception. These factors raise substantial doubt about our ability to continue as a going concern.

 

From our inception through December 31, 2014, our primary source of funds has been the proceeds of private offerings of our common stock, private financing, and loans from stockholders.  Our need to obtain capital from outside investors is expected to continue until we are able to achieve profitable operations, if ever. There is no assurance that management will be successful in fulfilling all or any elements of its plans.  

 

Below is a summary of our capital-raising activities in the fiscal years ended December 31, 2014 and 2013.

 

Private Financings

 

On January 28, 2014, the Company entered into an agreement whereby the Company will issue up to $25,000 in a convertible note.    The note matures on January 27, 2015 and bears an interest rate of 10%.    The conversion price equals the “Variable Conversion Price”, which is 70% of the “Market Price”, which is the average the closing bid prices for the lowest three (3) trading prices of the common stock during the twenty (20) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months.    The Company received $25,000 proceeds, on January 28, 2014.   

 

On February 20, 2014, the Company entered into an agreement whereby the Company will issue up to $50,000 in a convertible note.    The note matures on February 19, 2015 and bears a onetime interest charge of 5% after 90 days.    The conversion price equals the “Variable Conversion Price”, which is 70% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the fifteen (15) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months.    The Company received $50,000 proceeds on February 20, 2014.  

 

On February 27, 2014, the Company entered into an agreement whereby the Company will issue up to $282,778 in a convertible note.    The note matures on February 26, 2015 and bears an interest rate of 4%.    The conversion price equals the “Variable Conversion Price”, which is 75% of the “Market Price”, which is the average the three (3) lowest closing bid prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months.    The Company received $282,778 proceeds, less the $27,778 original issue discount pursuant to the terms of this convertible note, on February 27, 2014 and finder’s fees of $5,000. In connection with this raise, the Company also issued 250,000 three year warrants exercisable at $0.40/share.

 

On March 7, 2014, the Company entered into an agreement whereby the Company will issue up to $103,500 in a convertible note.    The note matures on December 11, 2014, and bears an interest rate of 8%.    The conversion price equals the “Variable Conversion Price”, which is 65% of the “Market Price”, which is the average the closing bid prices for the lowest three (3) trading prices of the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months.    The Company received $103,500 proceeds, less the $3,500 finder’s fee pursuant to the terms of this convertible note, on March 12, 2014. 

 

On March 19, 2014, the Company entered into an agreement whereby the Company will issue up to $25,000 in a convertible note.    The note matures on March 18, 2015 and bears an interest rate of 10%.    The conversion price equals the “Variable Conversion Price”, which is 70% of the “Market Price”, which is the average the closing bid prices for the lowest three (3) trading prices of the common stock during the twenty (20) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months.    The Company received $25,000 proceeds, on March 19, 2014.    

 

On April 17, 2014, the Company entered into an agreement with KBM Worldwide, Inc., whereby the Company will issue up to $78,500 in a convertible note.  The note matures on January 21, 2015 and bears an interest rate of 8%.  The conversion price equals the “Variable Conversion Price”, which is 65% of the “Market Price”, which is the average the three (3) lowest closing bid prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months.

 

On May 1, 2014, the Company entered into an agreement with LG Capital Funding, LLC to issue up to $210,000 in two convertible notes.    Each note matures on May 1, 2015 and bears an interest rate of 8%.  The Company received $105,000 proceeds, less the $5,000 original issue discount pursuant to the terms of the first note, on May 8, 2014 and finder’s fees of $5,000.   The Company is due to receive a secured note in the amount of $105,000 from the investor as consideration for the second note. Both convertible notes are convertible at a “Variable Conversion Price”, which is 65% of the “Market Price”, which is the lowest closing bid price for the common stock during the ten (10) trading day period prior to the conversion. The holder of each note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date; provided, however, that the second note is not convertible until it has been fully paid for in cash.  The Company has a right to redeem each note as follows: (i) during the first 90 days after issuance, by paying an amount equal to 130% of the unpaid principal plus accrued unpaid interest; (ii) from the 90th to 180th day after issuance, by paying an amount equal to 140% of the unpaid principal plus accrued unpaid interest; and (iii) at any time upon a transfer of all or substantially all of the Company’s assets, a reclassification of the Company’s stock, a consolidation, merger or other reorganizational event, by paying an amount equal to 150% of the unpaid principal plus accrued unpaid interest. 

 

Also on May 12, 2014, the Company entered into an agreement with ADAR Bays, LLC to issue up to $210,000 in

two convertible notes. Each note matures on May 12, 2015 and bears an interest rate of 8%.  The Company received $105,000 proceeds, less the $5,000 original issue discount pursuant to the terms of the first note, on May 16, 2014 and finder’s fees of $5,000.   The Company received a secured note in the amount of $105,000 from the investor as consideration for the second note, payable by December 30, 2014, and secured by the pledge of the second note. Both convertible notes are convertible at a “Variable Conversion Price”, which is 65% of the “Market Price”, which is the lowest closing bid price for the common stock during the ten (10) trading day period prior to the conversion. The holder of each note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date; provided, however, that the second note is not convertible until it has been fully paid for in cash.  The Company has a right to redeem each note as follows: (i) during the first 90 days after issuance, by paying an amount equal to 130% of the unpaid principal plus accrued unpaid interest; (ii) from the 90th to 180th day after issuance, by paying an amount equal to 140% of the unpaid principal plus accrued unpaid interest; and (iii) at any time upon a transfer of all or substantially all of the Company’s assets, a reclassification of the Company’s stock, a consolidation, merger or other reorganizational event, by paying an amount equal to 150% of the unpaid principal plus accrued unpaid interest.   

 

On May 14, 2014, the Company entered into an agreement with Venture Champion Asia Limited to issue up to $200,000 in a convertible note.    The note matures on May 14, 2016, and bears an interest rate of 2.50%.  The initial conversion price equals $0.07/share. After six month from the date of this note, conversion price shall equal the lower of $0.07/share or the “variable conversion price”, which is 75% of the average three (3) lowest closing prices during the ten (10) trading day prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date. 

 

On May 21, 2014, the Company entered into an agreement with Venture Champion Asia Limited to issue up to $550,000 in a convertible note.    The note matures on May 21, 2016, and bears an interest rate of 2.50%.    The initial conversion price equals $0.07/share. After six month from the date of this note, conversion price shall equal the lower of $0.07/share or the “variable conversion price”, which is 75% of the average three (3) lowest closing prices during the ten (10) trading day prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months.    The Company received $550,000 proceeds on May 21, 2014. 

 

On May 22, 2014, the Company entered into an agreement with ICG USA, LLC to issue up to $15,000 in a convertible note.    The note matures on May 22, 2016, and bears an interest rate of 2.50%.    The conversion price equals $0.07/share. After six months from the date of this note, conversion price shall equal the lower of $0.07/share or the “variable conversion price”, which is 75% of the average three (3) lowest closing prices during the ten (10) trading day prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date.    The Company received $15,000 proceeds on May 23, 2014.    As of June 30, 2014, the convertible note balance and accrued interest is $15,051.

 

On May 23, 2014, the Company received $25,000 in proceeds in connection with a drawdown on an existing convertible note with Vista Capital Investments, LLC with total principal amount of up to $333,000.  The note matures on May 22, 2015 and bears an interest rate of 10%.  The conversion price equals the “Variable Conversion Price”, which is 70% of the “Market Price”, which is the average of the closing bids for the lowest three (3) trading prices of the common stock during the twenty (20) trading day period prior to the conversion.  The holder of the note has a right to convert all or any part of the outstanding and unpaid principal amount into shares of common stock at any time after issuance. 

 

On June 11, 2014, the Company entered into an agreement with Iliad Research and Trading, LP to issue up to

$282,778 in a convertible note.    The note matures on June 10, 2015 and bears an interest rate of 4%.    The note is immediately convertible at a “Variable Conversion Price”, which is 75% of the “Market Price”, which is the average the three (3) lowest closing bid prices for the common stock during the ten (10) trading day period prior to the conversion. The Company received $282,778 proceeds, less the $27,778 original issue discount pursuant to the terms of this convertible note, on June 12, 2014 and finder’s fees of $5,000. In connection with this raise, the Company also issued 250,000 three-year warrants exercisable at $0.40/share.

 

On July 25, 2014, the Company amended the terms of its February 6, 2013 convertible note with Vista Capital Investments, LLC, pursuant to which the total principal amount of the note was increased from up to $333,000 to up to $444,000. All other terms of and conditions of the note remain in full force and effect. On July 28, 2014, the Company received $50,000 in proceeds, increasing the current principal amount under the note to $140,000 and leaving available $304,000 to be drawn down under the note. 

 

On August 1, 2014, the Company entered into an agreement with KBM Worldwide, Inc. to issue up to $253,500 in a convertible note. The note matures on May 5, 2015 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $250,000 proceeds on August 4, 2014.

 

On August 13, 2014, the Company entered into an agreement with Iliad Research and Trading to issue up to $282,778 in a convertible note. The note matures on August 13, 2015 and bears an interest charge of 4%. The conversion price equals the “Variable Conversion Price”, which is 75% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $250,000 proceeds on August 14, 2014.

 

On August 21, 2014, the Company entered into an agreement with Horberg Enterprises LP to issue up to $250,000 in a convertible note. The note matures on August 21, 2015 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 70% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $250,000 proceeds on August 26, 2014.

 

On August 21, 2014, the Company entered into an agreement with JDF Capital Inc. to issue up to $111,000 in a

convertible note. The note matures on February 21, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $100,000 proceeds on August 25, 2014.

 

On November 4, 2014, the Company entered into an agreement with LG Capital Funding, LLC to issue up to $220,000 in convertible notes.    Note matures on May 1, 2015 and bears an interest rate of 8%.  The Company received $220,000 proceeds, less the $5,000 original issue discount pursuant to the terms of the first note.    Both convertible notes are convertible at a “Variable Conversion Price”, which is 65% of the “Market Price”, which is the lowest closing bid price for the common stock during the ten (10) trading day period prior to the conversion. The holder of each note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date; provided, however, that the second note is not convertible until it has been fully paid for in cash.  The Company has a right to redeem each note as follows: (i) during the first 90 days after issuance, by paying an amount equal to 130% of the unpaid principal plus accrued unpaid interest; (ii) from the 90th to 180th day after issuance, by paying an amount equal to 140% of the unpaid principal plus accrued unpaid interest; and (iii) at any time upon a transfer of all or substantially all of the Company’s assets, a reclassification of the Company’s stock, a consolidation, merger or other reorganizational event, by paying an amount equal to 150% of the unpaid principal plus accrued unpaid interest.

 

On December 11, 2014, the Company entered into an agreement with EMA Financial, LLC to issue up to $105,500 in convertible notes.    Note matures on December 10, 2015 and bears an interest rate of 8%.  The Company received $100,000 proceeds, less finder’s fees of $5,000.    Convertible note is convertible at a “Variable Conversion Price”, which is 65% of the “Market Price”, which is the lowest closing bid price for the common stock during the ten (10) trading day period prior to the conversion. The holder of each note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date;

 

On November 6, 2014, the Company entered into an agreement with KBM Worldwide, Inc. to issue up to $254,000 in a convertible note. The note matures on August 10, 2015 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months.

 

On December 18, 2014, the Company entered into an agreement with JDF Capital Inc. to issue up to $106,000 in a convertible note. The note matures on June 18, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the “Market Price”, which is the average of the lowest ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months.

 

As of December 31, 2013, the note remains outstanding and is currently in default. On February 1, 2014, the Company reissued the note for $150,000 to the investor to cover the $120,000 outstanding on the note, plus $30,000 for services rendered by the holder.  The new note becomes due on July 31, 2014. 

 

During the year ended December 31, 2013, the Company issued convertible notes totaling $3,843,221.

 

On May 23, 2013, the Company entered into a Securities Purchase Agreement (the “Aggregate SPA”) with three institutional investors. The Aggregate SPA provides for the sale by the Company to the investors of an aggregate principal amount of $2,222,222 of 4% Convertible Debentures, with 10% original issue discount that is due twelve months from their date of issuance (the “Debentures”). The subscription amount shall be funded in the amount of $277,777.77 (net amount of $250,000 less debt offering costs to the Company after the original issue discount) on the initial closing date of May 23, 2013 and thereafter, seven (7) additional installments in the

amount of $277,777.77 (net amount of $250,000 less debt offering costs to the Company after the original issue discount) shall each be funded on or about the first day of each successive calendar month commencing on June 1, 2013.

 

In addition, the Company issued debt offering costs (placement agent fees) equal to 7% of the aggregate purchase price paid by each purchase and equity equaling 2% of the gross proceeds received by the Company valued at the investors’ conversion price.

 

The Debentures have an interest rate of 4% and shall have an original issue discount of 10% from the stated principal amount. The Debentures may be prepaid in whole or in part on not less than thirty (30) days prior written notice to the investors for an amount equal to 115% multiplied by the sum of the then outstanding principal amount of the Debentures plus any accrued and unpaid interest.

 

The Debentures shall be convertible into common stock, at the investors’ option, at a 25% discount to the average price of the lowest three (3) closing bid prices for the common stock during the ten (10) trading days prior to the conversion date. In the event of default, the Debentures shall be convertible into common stock at a 35% discount to the market price. In the event that the Company fails in any material respect to comply with the reporting requirements of the Securities and Exchange Act of 1934, as amended, with regards to the filing of Form 10-Q's and 10-K's or ceases to be subject to the Exchange Act, the Debentures shall be convertible into common stock at a 50% discount to the market price, unless the Company has a registration statement declared effective by the SEC, which covers for resale the shares issued in connection with the investors’ conversion.

 

In connection with the Aggregate SPA, the investors were each issued warrants to purchase from the Company at any time after the Closing Date until 5:00 p.m., E.S.T on the third anniversary of the Closing Date (the “Expiration Date”), up to 250,000 fully-paid and non-assessable shares of common stock at a per share purchase price of $0.40 (the “Warrants”). The Company issued 750,000 three year warrants on the terms discussed above.

 

As of December 31, 2013, the Company (from the Aggregate SPA) received proceeds totaling $833,333 less $83,333 original issue discount and debt offering costs totaling $85,055, which includes 94,964 common shares of the Company’s common stock valued at $20,555 issued to the finder.

 

As of December 31, 2013, the Aggregate SPA convertible note balance and accrued interest is $643,343.

 

Loans and Advances

 

We have entered into three Credit Line Agreements with Greg Halpern.  The first two were for $100,000 each and matured and expired in 2011.  The third Credit Line Agreement issued by Mr. Halpern in March 2010 is for an additional $500,000 and matured and expired in 2012.  All three agreements accrue interest at the prime rate as of the date of issuance.  The prime rate of interest is the rate of interest that major banks charge their most creditworthy customers.  For the purposes of these agreements, we shall determine the prime rate by using the prime rate reported by the Wall Street Journal on the date funds are extended to the Company.  Based on the prime rate as of the date of issuance, the prime rate shall be 3.25%. On September 26, 2013, we entered into a Credit Line Agreement with Mr. Halpern for $1,000,000 that will mature and expire on or before the second anniversary of September 26, 2013.  Interest will accrue on each advance at an annual rate of 4%. As of December 31, 2013, the Company owed $0 in principal and $0 in accrued interest related to these loans and lines of credit.  We believe that the $1,000,000 line of credit issued will not be sufficient to cover the additional expense arising from maintenance of our regulatory filings with the SEC, and the marketing of our technology over the next twelve months, thus the Company will continue to pursue additional financing and/or additional funding in 2014 to continue marketing the Max Sound HD Audio Technology aggressively to Multi-Media Industry Users of Audio and Audio with Video products.

 

In 2013, the Company has received from Mr. Halpern additional net advances on the established lines of credit in the amount of $290,000, of which it has repaid $150,000.  As of December 31, 2013, the balance on the line of

credit is $140,000.  This further demonstrates our Chairman’s ongoing commitment to continue financing the Company’s needs.  While the Company expects to have ongoing needs for additional financing, the amount of those needs are not clearly established as the Company moves forward.

 

In 2014, the Company has received from Mr. Halpern additional net advances on the established lines of credit in the amount of $153,000 of which it has repaid $35,000.  As of December 31, 2014, the balance including accrued interest on the line of credit is $268,227.  This further demonstrates our Chairman’s ongoing commitment to continue financing the Company’s needs.  While the Company expects to have ongoing needs for additional financing, the amount of those needs are not clearly established as the Company moves forward.

 

In the event that we are unable to obtain additional financing and/or funding or Mr. Halpern either fails to extend us more financing, declines to loan additional cash, declines to fund the line of credit, or declines to defer his salary payments, we will no longer be able to continue to operate and will have to cease operations unless we begin to generate sufficient revenue to cover our costs.

 

Recent Accounting Pronouncements

 

On June 10, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation ("ASUE 2014-10"). The guidance is intended to reduce the overall cost and complexity associated with financial reporting for development stage entities without reducing the availability of relevant information. The Board also believes the changes will simplify the consolidation accounting guidance by removing the differential accounting requirements for development stage entities. As a result of these changes, there no longer will be any accounting or reporting differences in GAAP between development stage entities and other operating entities. For organizations defined as public business entities the presentation and disclosure requirements in Topic 915 will no longer be required starting with the first annual period beginning after December 15, 2014, including interim periods therein. Early application is permitted for any annual reporting period or interim period for which the entity's financial statements have not yet been issued (public business entities) or made available for issuance (other entities).

 

In June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-12, “Compensation – Stock Compensation (Topic 718); Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The amendments in this ASU apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. For all entities, the amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this ASU either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.  We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

 

In August 2014, the FASB issued Accounting Standards Update “ASU” 2014-15 on “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue

as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this Update provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

 

All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.

 

Critical Accounting Policies and Estimates

 

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

 

Use of Estimates:  

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period.  Actual results could differ from those estimates.

 

Revenue Recognition:  

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is assured. We had $2,498 and $5 in revenue for the years ended December 31, 2013 and 2012, respectively.

 

Stock-Based Compensation:

In December 2004, the FASB issued FASB Accounting Standards Codification No. 718, Compensation – Stock Compensation.  Under FASB Accounting Standards Codification No. 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.  As such, compensation cost is measured on the date of grant at their fair value.  Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.  The Company applies this statement prospectively.

 

Equity instruments (“instruments”) issued to other than employees are recorded on the basis of the fair value of the instruments, as required by FASB Accounting Standards Codification No. 718.  FASB Accounting Standards

Codification No. 505,  Equity Based Payments to Non-Employees defines the measurement date and recognition period for such instruments.  In general, the measurement date is when either a (a) performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the FASB Accounting Standards Codification.

 

Derivative Financial Instruments

Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model.  In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement.  If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.

 

Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives.  In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.  

 

Impairment of Long-Lived Assets

The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, Accounting for the Impairment or Disposal of Long-Lived Assets."  ASC Topic 360-10-05 requires that long-lived assets, such as technology rights, be reviewed for impairment annually, or whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate.  The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including the eventual disposition.  If the future net cash flows are less than the carrying value of an asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value or disposable value.  For the year ended December 31, 2013, the Company completed an impairment analysis on its' long-lived assets, their technology rights, and determined that no impairment was necessary.

 

The Company believes that the accounting estimate related to asset impairment is a "critical accounting estimate" because the impairment methodology is highly susceptible to change from period to period, because it requires management to make assumptions about future cash flows, and because the impact of recognizing impairment could have a significant effect on operations. Management's assumptions about future cash flows require significant judgment because actual business operations of marketing the technology rights is in its infancy stages and managements expects that their future operating levels to fluctuate. The analysis included assumptions that are based on annual business plans and other forecasted results which are used to reflect market-based estimates of the risks associated with the projected cash flows, based on the best information available as of the date of the impairment test. There can be no assurance that the estimates and assumptions used in the impairment tests will prove to be accurate predictions of the future.  If the future adversely differs from management's best estimate of key economic assumptions, and if associated future cash flows materially decrease, the Company may be required to record impairment charges related to its indefinite life intangible asset. 

 

Prior to February 2011, the Company's business operations were related to the development and launching of a social networking website.  However, since February 2011, our business focus has been on the marketing of our Max Sound HD Audio Technology.  Since 2011, was our initial year of marketing our technology, management considers past operational levels to be inconsistent with future operations mainly due to the shift in business focus.  In our impairment testing, the Company made assumptions towards the income and expenses expected in the future including, but not limited to, determining the actual expenses incurred in the current year that were attributable to the new business focus in order to develop an annual cost benchmark, trends in the marketplace, feedback from current and past marketing activities, and assessments upon the useful life of the technology rights.

 

The Company's primary focus over the next three to five years will be centered on the marketing and implementation of their technology in order to take advantage of the current trends in the marketplace for users of their technology.  In particular, the Company expects that expenses will increase significantly from year to year over the next five years, at which time in year six and beyond the year-to-year change will be a minimal increase.  In addition, the Company expects minimal revenue over the next two years, while in year three to six the Company expects to realize significant year to year increases in revenue, at which time in year seven and beyond the year to year change will be a minimal increase.

 

As part of the impairment test, the Company reviewed its' initial useful life analysis, in reference to their technology, and updated this analysis with factors that existed at the time of the impairment testing and determined that nothing had occurred in the marketplace that would change their initial determination of the useful life of their technology. The analysis included researching known technological advances in the marketplace and determining if those advances which are similar to the Company's products would limit the useful life of the asset. The Company believes that the technological advances in the marketplace are geared to developing different playback devices and the implementation of technology that is similar to the Company's technology. Thus, the Company concluded that their technology rights continue to have an indefinite useful life. However, it is understood that technological advancements could happen in the future that would limit the useful life of their technology.  If a technology was created in the future that would limit the useful life of the technology, the Company would be required to update their impairment testing to include a useful life determination of the technology and may be required to record impairment charges at some time in the future.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).

 

Subsequent Events

 

Through the filing of these financial statements, the Company converted a total of approximately $821,316 in convertible debt comprised of principal and accrued interest into approximately 31,381,442 common shares.

 

On November 10, 2014 the Company amended its Certificate of Incorporation filed on September 20, 2010 with the Secretary of State of Delaware by majority shareholder consent and unanimous consent of the Board of Directors to increase the authorized shares of common stock of the Company by 50,000,000 shares of common stock with an adjusted par value of $.00001 per share.

 

On March 4, 2015 the Company filed a form 8K with the SEC associated with the Company entering into a Securities Exchange Agreement and the Company filing with the Secretary of State Delaware a Certificate of Designations, Preferences and Rights whereby, among other things, the Company for good and valuable consideration, agreed that in consideration of a large shareholder exchanging 120,000,000 shares of common stock back to the Company, the shareholder would receive 5,000,000 shares of Series A Convertible Preferred Stock of the Company at a Stated Value of $0.96 per share and a Conversion Price of $.0.04 per share. The Series A Convertible Preferred Stock carries certain voting preferences and will accrue dividends at a rate of 8% per annum Stated Value, payable in cash or in kind at the election of the Board of Directors.

 

On December 24, 2014, the Company entered into an agreement whereby the Company will issue up to 225,750 in a convertible note. The note matures on December 24, 2015 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest three trading prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $210,000 of proceeds less $10,750 in debt issue costs on and $5,000 in legal costs on January 5, 2015.

 

 

On January 21, 2015, the Company entered into an agreement whereby the Company will issue up to $50,000 in a convertible note. The note matures on January 21, 2016 and bears an interest charge of 10. The conversion price equals the “Variable Conversion Price”, which is 70% of the lowest three trading prices for the common stock during the twenty (20) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $50,000 on January 21, 2015.

 

On February 27, 2015, the Company entered into an agreement whereby the Company will issue up to $115,500 in a convertible note. The note matures on February 27, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest three trading prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $100,000 of proceeds, after $10,500 in debt issue costs on and $5,000 in legal costs on March 3, 2015.

 

On May 12, 2014, the Company entered into an agreement whereby the Company will issue up to $105,000 in a convertible note. The note matures on May 12, 2015 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest daily prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $95,000 of proceeds less $10,000 in debt issue costs on January 12, 2015.

 

In January 2015, the Company repaid $40,000 in principal to the principal stockholder and received $25,000 in principal from the principle stockholder related to the line of credit.

 

On January 21, 2015, the Company entered into a consulting services agreement. In connection with this agreement, the consultant shall be paid $4,000 per month and receive up to 150,000 shares of common stock payable in lots of 50,000 per month and will be issued 90 days after the date of the signing of the agreement.

 

On January 21, 2015, the Company entered into a consulting services agreement. In connection with this agreement, the consultant shall be paid $4,000 per month and receive up to 150,000 shares of common stock payable in lots of 50,000 per month and will be issued 90 days after the date of the signing of the agreement.

 

On February 18, 2015, the Company issued an additional 700,000 shares of a stock to a consultant in connection with the Agreement entered into in September 2014.

 

March 17, 2015, the Company entered into a services agreement. In connection with this agreement, the consultant will receive 300,000 shares of fully vested common stock, payable in lots of 100,000 shares of common stock per month and $5,000 per month. The agreement will continue until June 17, 2015.

 

On March 4, 2015 the Company filed a form 8K with the SEC associated with the Company entering into a Securities Exchange Agreement and the Company filing with the Secretary of State Delaware a Certificate of Designations, Preferences and Rights whereby, among other things, the Company for good and valuable consideration, agreed that in consideration of a large shareholder exchanging 120,000,000 shares of common stock back to the Company, the shareholder would receive 5,000,000 shares of Series A Convertible Preferred Stock of the Company at a Stated Value of $0.96 per share and a Conversion Price of $.0.04 per share. The Series A Convertible Preferred Stock carries certain voting preferences and will accrue dividends at a rate of 8% per annum Stated Value, payable in cash or in kind at the election of the Board of Directors.

 

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are subject to certain market risks, including changes in interest rates and currency exchange rates.  We have

not undertaken any specific actions to limit those exposures.

 

ITEM 8.                      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  

MAX SOUND CORPORATION

 

 

PAGE	F - 2	REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
PAGE	F - 3	BALANCE SHEETS AS OF DECEMBER 31, 2014 AND AS OF DECEMBER 31, 2013.
PAGE	F - 4	STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
PAGE	F - 5	STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013.
PAGE	F - 6	STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013.
PAGES	F - 7	NOTES TO FINANCIAL STATEMENTS.

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Max Sound Corporation

 

We have audited the accompanying balance sheets of Max Sound Corporation as of December 31, 2014 and 2013, and the related statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2014. Max Sound Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these 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 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 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 financial statements referred to above present fairly, in all material respects, the financial position of Max Sound Corporation as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses including a net loss of $9,863,929 for the year ended December 31, 2014, has an accumulated deficit of $37,136,982 as of December 31, 2014, and has a negative cash flow from operations of $2,956,189 for the year ended December 31, 2014. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Alan R. Swift, CPA, P.A.                                

Alan R. Swift, CPA, P.A.

Certified Public Accountants and Consultants

 

Palm Beach Gardens, Florida

 

April 01, 2015 

 

 

800 VILLAGE SQUARE CROSSING, SUITE 118, PALM BEACH GARDENS, FL 33410

PHONE: (561) 656-0818  FAX (561) 658-0245

www.aswiftcpa.com

 

 

 

Max Sound Corporation
Balance Sheets
ASSETS
		December 31, 2014				December 31, 2013
Current Assets
Cash		$	35,747			$	166,778
Inventory			38,071				38,071
Prepaid expenses			30,207				65,069
Debt offering costs - net			27,456				58,009
Total  Current Assets			131,481				327,927
Property and equipment, net			188,896				255,317

Other Assets
Security deposit			413				413
Intangible assets			17,850,595				16,803,954
Total  Other Assets			17,851,008				16,804,367
Total  Assets		$	18,171,385			$	17,387,611
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	656,308			$	206,458
Accrued expenses			116,903				94,973
Line of credit - related party			268,227				140,000
Derivative liabilities			3,234,792				1,885,770
Convertible note payable, net of debt discount of $1,691,065 and $1,562,390, respectively			1,337,353				956,356
Total Current Liabilities			5,613,583				3,283,557
Commitments and Contingencies
Stockholders' Equity
Preferred stock,  $0.0001 par value; 10,000,000 shares authorized,
No shares issued and outstanding			—				—
Series, A Convertible Preferred stock,  $0.00001 par value; 10,000,000 shares authorized,
No shares issued and outstanding			—
Common stock,  $0.00001 par value; 450,000,000 shares authorized,
373,442,040 and 309,543,698 shares issued and outstanding, respectively			37,645				31,255
Additional paid-in capital			50,176,714				41,915,852

Deferred compensation			—				(50,000	)
Treasury stock			(519,575	)			(520,000	)
Accumulated deficit			(37,136,982	)			(27,273,053	)
Total Stockholders' Equity			12,557,802				14,104,054
Total Liabilities and Stockholders' Equity		$	18,171,385			$	17,387,611

 

See accompanying notes to financial statements.

 

Max Sound Corporation
Statements of Operations
		For the Years Ended,
		December 31, 2014				December 31, 2013
Revenue		$	2,491			$	2,498
Operating Expenses
General and administrative			3,090,128				3,215,834
Endorsement fees			—				480,000
Consulting			505,597				636,718
Professional fees			1,025,241				916,873
Compensation			1,004,800				1,116,300
Total Operating Expenses			5,625,766				6,365,725
Loss from Operations			(5,623,275	)			(6,363,227	)
Other Income / (Expense)

Other income			101,820				6,905
Gain on sale of intellectual property			—				220,000
Gain (Loss) on extinguishment of debt			(18,596	)			—
Interest expense			(292,835	)			(147,500	)
Derivative Expense			(327,964	)			(442,412	)
Amortization of debt offering costs			(168,053	)			(395,194	)
Loss on conversions			(183,907	)			(46,093	)
Amortization of debt discount			(3,070,714	)			(2,638,504	)
Change in fair value of embedded derivative liability			(280,405	)			1,001,138
Total Other Income / (Expense)			(4,240,654	)			(2,441,660	)
Provision for Income  Taxes			—				—
Net Income (Loss)		$	(9,863,929	)		$	(8,804,887	)
Net Loss Per Share  - Basic and Diluted		$	(0.03	)		$	(0.03	)
Weighted average number of shares outstanding
during the year Basic and Diluted			341,970,037				314,486,670

 

See accompanying notes to financial statements.

 

 

 

 

Max Sound Corporation

Statement of Changes in Stockholder’s Equity

Years ended December 31, 2014 and 2013 

 

		Series A
			Preferred Stock				Preferred stock				Preferred stock				Preferred stock				Common Stock				Common Stock				Additional								Total
																											paid-in				Accumulated				Subscription				Deferred				Treasury				Stockholder's
			Shares				Amount				Shares				Amount				Shares				Amount				capital				Deficit				Receivable				Compensation				Stock				Equity
Balance, December 31, 2012			—			$	—				—			$	—				287,366,648			$	28,737			$	35,243,005			$	(18,468,166	)		$	—			$	(605,000	)		$	—			$	16,198,576
Convertible debt and accrued interest conversion into common stock																			19,146,156				1,915				2,734,461				—				—				—				—				2,736,376
Shares issued as a finders fee			—				—				—				—				94,964				9				20,545				—				—				—				—				20,554
Exercise of stock warrants			—				—				—				—				540,901				54				43,026				—				—				—				—				43,080
Common stock issued for services ($0.19 - $0.37/sh)																			6,145,029				615				1,512,698				—				—				(60,000	)			—				1,453,313
Return of shares			—				—				—				—				(750,000	)			(75	)			75				—				—				—				—				—
Reclassification of derivative liability associated with convertible debt			—				—				—				—				—				—				2,162,726				—				—				—				—				2,162,726
Warrants issued for services			—				—				—				—				—				—				84,028				—				—				—				—				84,028
Stock opitons issued for services			—				—				—				—				—				—				115,288				—				—				—				—				115,288
Defered compensation realized			—				—				—				—				—				—				—				—				—				615,000				—				615,000
Repurchased shares			—				—				—				—				(3,000,000	)			—				—				—				—				—				(520,000	)			(520,000	)
Net loss for the year ended December 31, 2013			—				—				—				—				—				—				—				(8,804,887	)			—				—				—				(8,804,887	)
Balance December 31, 2013			—				—				—				—				309,543,698				31,255				41,915,852				(27,273,053	)			—				(50,000	)			(520,000	)			14,104,054
Convertible debt, accrued interest and penalty conversion into common stock			—				—				—				—				48,998,342				4,900				3,416,119				—				—				—				—				3,421,019
Common stock issued for services ($0.09 - $0.37/sh)			—				—				—				—				3,150,000				315				677,715				—				—				—				—				678,030
Return of shares			—				—				—				—				(4,250,000	)			(425	)							—				—				—				425				—
Reclassification of derivative liability associated with convertible debt			—				—				—				—				—				—				2,355,376				—				—				—				—				2,355,376
Defered compensation realized			—				—				—				—				—				—				—				—				—				50,000				—				50,000
Stock options issued for services			—				—				—				—				—				—				190,656				—				—				—								190,656
Loss on debt extinguishment			—				—				—				—				—				—				18,596				—				—				—				—				18,596
Common stock issued in exchange for assets ($0.10 - $0.12/sh)			—				—				—				—				15,000,000				1,500				1,512,500				—				—				—				—				1,514,000
Common stock issued to settle payables			—				—				—				—				1,000,000				100				89,900				—				—				—				—				90,000
Net loss for the year ended December 31, 2014			—				—				—				—				—				—				—				(9,863,929	)			—				—				—				(9,863,929	)
Balance, December 31, 2014			—			$	—				—			$	—				373,442,040			$	37,645			$	50,176,714			$	(37,136,982	)		$	—			$	—			$	(519,575	)		$	12,557,802

 

 

 

See accompanying notes to financial statements.

 

Max Sound Corporation
Statements of Cash Flows
		For the Years Ended,
		December 31, 2014				December 31, 2013
Cash Flows From Operating Activities:
Net Loss		$	(9,863,929	)		$	(8,804,887	)
Adjustments to reconcile net loss to net cash used in operations
Depreciation/Amortization			83,423				82,211
Stock and stock options issued for services			868,686				1,568,601
Warrants issued for services			—				84,028

Gain on settlement of accounts payable through issuance of common stock			(64,320	)			—
Loss on debt conversion settled through the issuance of stock			183,907				46,093
Amortization of intangible assets			1,017,359				343,898
Amortization of stock based compensation			50,000				615,000
Amortization of original issue discount			178,424				148,936
Amortization of debt offering costs			88,053				210,257
Amortization of debt discount			2,892,289				2,594,504
Change in fair value of derivative liability			280,405				(1,001,138	)
Loss on debt extinguishment			18,596				—
Derivative Expense			327,964				442,412
Warrants issued for services treated as derivative liabilities			11,973				43,809
Gain on sale of intellectual property			—				(220,000	)
Changes in operating assets and liabilities:
(Increase)/Decrease in prepaid expenses			34,862				(13,515	)
Increase/(Decrease) in inventory			—				(29,275	)
Increase/(Decrease) accounts payable			647,710				173,672
Increase/(Decrease) in accrued expenses			288,409				147,287

Net Cash Used In Operating Activities			(2,956,189	)			(3,568,107	)
Cash Flows From Investing Activities:
Cash paid in connection with acquisition of assets and intellectual property			(550,000	)			8,011
Purchase of property equipment			(17,002	)			(10,003	)
Net Cash Used In Investing Activities			(567,002	)			(1,992	)
Cash Flows From Financing Activities:
Proceeds from stockholder loans / lines of credit			153,000				318,000
Repayment from stockholder loans / lines of credit			(35,000	)			(178,000	)
Repayment of convertible note			(28,340	)			—
Proceeds from issuance of convertible note, less offering costs and OID costs paid			3,302,500				3,418,499
Proceeds from warrants exercised			—				43,080
Net Cash Provided by Financing Activities			3,392,160				3,601,579
Net Decrease in Cash			(131,031	)			31,480
Cash at Beginning of Period			166,778				135,298
Cash at End of Period		$	35,747			$	166,778
Supplemental disclosure of cash flow information:
Cash paid for interest		$	—			$	—
Cash paid for taxes		$	—			$	—

Supplemental disclosure of non-cash investing and financing activities:
Shares issued in connection with assets and intellectual property		$	1,514,000			$	—
Shares issued in conversion of convertible debt and accrued interest		$	3,236,092			$	2,684,915
Shares issued for accrued interest		$	1,020			$	5,368
Reclassification of derivative liability to additional paid in capital		$	2,355,376			$	2,162,726
Reclassification of accounts payable and penalties to convertible note		$	76,094			$	—
Stock issued for future services (Deferred Compensation)		$	—			$	60,000
Shares issued for direct offering costs		$	—			$	20,554
Accrued interest reclassified to principal		$	255,232			$	(113,386	)
Shares purchased in connection with sale of intellectual property		$	—			$	(300,000	)
Return of shares related to cancelled contract		$	425			$	—
Settlement of accounts payable through issuance of common stock		$	90,000
Debt discount recorded on convertible and unsecured debt accounted for as a derivative liability		$	3,084,057			$	3,397,127

 

 

See accompanying notes to financial statements.

 

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

 

NOTES

 

 

NOTE 1           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

 

(A) Organization and Basis of Presentation

 

Max Sound Corporation (the "Company") was incorporated in Delaware on December 9, 2005, under the name 43010, Inc. The Company business operations are focused primarily on developing and launching audio technology software.

 

Effective March 1, 2011, the Company filed with the State of Delaware a Certificate of Amendment of Certificate of Incorporation changing our name from So Act Network, Inc. to Max Sound Corporation.

 

(B) Use of Estimates

 

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.

 

(C) Cash and Cash Equivalents

 

For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of December 31, 2014 and 2013, the Company had no cash equivalents.

 

(D) Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is provided using the straight-line method over the estimated useful life of three to five years.

 

(E) Research and Development

 

The Company has adopted the provisions of FASB Accounting Standards Codification No. 350, Intangibles - Goodwill & Other (“ASC Topic 350”). Costs incurred in the planning stage of a website are expensed as research and development while costs incurred in the development stage are capitalized and amortized over the life of the asset, estimated to be three years. Expenses subsequent to the launch have been expensed as website development expenses.

 

(F) Concentration of Credit Risk

The Company at times has cash in banks in excess of FDIC insurance limits. The Company had $0 in excess of FDIC insurance limits as of December 31, 2014 and 2013.

 

(G) Revenue Recognition

 

The Company recognized revenue on arrangements in accordance with FASB Codification Topic 605, “Revenue Recognition” (“ASC Topic 605”). Under ASC Topic 605, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. We had revenues of $2,491 and $2,498 for the years ended December 31, 2014 and 2013, respectively.

 

(H) Advertising Costs

 

Advertising costs are expensed as incurred and include the costs of public relations activities. These costs are included in consulting and general and administrative expenses and totaled $238,086 and $59,642 for the years ended December 31, 2014 and 2013, respectively.

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

(I) Identifiable Intangible Assets

 

As of December 31, 2014 and 2013, $7,500,275 of costs related to registering a trademark and acquiring technology rights (audio technology known as Max Audio Technology (MAXD) have been capitalized. It has been determined that the trademark and technology rights have an indefinite useful life and are not subject to amortization. However, the trademark and technology rights will be reviewed for impairment annually or more frequently if impairment indicators arise.

 

On November 15, 2012, the Company acquired the rights to assets and audio technology known as Liquid Spins, Inc. through a share exchange, whereby the Company issued 24,752,475 shares of common stock for their rights in Liquid Spins technology (See Note 8 (H)). As of December 31, 2014 and 2013, $8,338,121 and $9,303,679, respectively, of costs related to this intangible remain capitalized. The technology was placed in service on August 23, 2013 with a useful life of 10 years. However, the technology will be reviewed for impairment annually or more frequently if impairment indicators arise.

 

On May 19, 2014, the Company entered into an agreement with VSL Communications to acquire the rights to intellectual property titled “Optimized Data Transmission System and Method” (“ODT”) through a cash payment of $500,000 in addition to a share issuance, whereby the Company issued 10,000,000 shares of common stock, valued at $1,000,000 ($0.10/share). In exchange, the Company received a perpetual, exclusive, worldwide license to the ODT technology for all fields of use. In addition, the Company issued 1,000,000 shares of common stock, valued at $120,000 ($0.12/share), as compensation for the introduction and identification of a seller based on the agreement dated April 10, 2014.

 

As of December 31, 2014, $1,620,000 of costs related to the “ODT” intangible asset remains capitalized. The technology will be reviewed for impairment annually or more frequently if impairment indicators arise. In connection with this agreement, the Company is obligated to make an additional five (5) payments totaling $1,000,000 to be made every 30 days, with the thirty (30) day periods to be waived if fund raising occurs on an anticipated faster time line. The payments of additional cash are contingent on the following funding criteria:

 

	●	The Company shall pay set increments of cash based on a percentage of gross funds received through funds raised.
	●	The Company shall pay 20% of such monies as soon as they are received.

 

In connection with funds raised through December 31, 2014, the Company recorded a liability and expensed $325,556 as royalty cost, related to the 20% fee, as of December 31, 2014, $30,000 has been paid . The remaining liability as of December 31, 2014, is $295,556 and is included in accounts payable.

 

The Company shall act as the exclusive agent to facilitate and negotiate any opportunities on behalf of ODT to Companies, Organizations and other qualified entities. Upon any closing, ODT shall receive 50% of gross dollars and the Company shall receive the other 50% at the time of a completion of any transaction opportunity, including legal settlements after subtracting applicable contingent legal fees. The term of the agreement is for the life of the acquired intellectual property.

 

On August 11, 2014, the Company and VSL simultaneously filed trade secret and patent infringement actions against Google, Inc. and its subsidiaries, YouTube, LLC and On2 Technologies, Inc., relating to proprietary and patented technology owned by Vedanti Systems Limited, a subsidiary of VSL.  The patent infringement complaint was brought in U.S. District Court for the District of Delaware and the trade secret suit was filed in Superior Court of California, County of Santa Clara.  The lawsuits contend that, in 2010, while Google was in discussions with Vedanti about the possibility of acquiring Vedanti's patented digital video streaming techniques and other proprietary methods, Google gained access to and received technical guidance regarding Vedanti’s proprietary codec, a computer program capable of encoding and decoding a digital data stream or signal.  The complaints allege that soon after the two companies initiated negotiations, Google began implementing Vedanti's

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

technology into its own WebM/VP8 video codec without informing Vedanti, and without compensating Vedanti for its use.  Plaintiffs are seeking a permanent injunction against Google, compensatory damages, as well as treble damages. As exclusive agent to VSL to enforce all rights with respect to the subject technology, the Company has hired Grant & Eisenhofer, PA to represent the Company and VSL in the suits. These cases will be vigorously prosecuted and the Company believes it has a good likelihood of success. 

 

On May 22, 2014, the Company entered into a five (5) year agreement to acquire the rights to intellectual property titled “Engineered Architecture” (“EA Technology”) through a cash payment of $50,000 in addition to a share issuance, whereby the Company issued 4,000,000 shares of common stock, valued at $394,000 ($0.0985/share). In exchange, the Company received for the term of the agreement, the exclusive worldwide right to use the EA Technology. As of December 31, 2014, $392,200 of costs related to this intangible remains capitalized. The technology will be reviewed for impairment annually or more frequently if impairment indicators arise. In connection with this agreement, the Company is obligated to make an additional five (5) payments totaling $500,000 to be made every 30 days, with the thirty (30) day periods to be waived if fund raising occurs on an anticipated faster time line. The payments of additional cash are contingent on the following funding criteria:

 

	●	The Company shall pay set increments of cash based on a percentage of gross funds received through funds raised.
	●	The Company shall pay 10% of such monies as soon as they are received.

 

In connection with funds raised through December 31, 2014, the Company recorded a liability and expensed $162,778 as royalty cost, related to the 10% fee, as of December 31, 2014, $25,000 has been paid . The remaining liability as of December 31, 2014, is $137,778 and is included in accounts payable.

  

The Company shall act as the exclusive agent to facilitate and negotiate any opportunities on behalf of EA Technology to Companies, Organizations and other qualified entities. Upon any closing, EA shall receive 50% of gross dollars and the Company shall receive the other 50% at the time of a completion of any transaction opportunity, including legal settlements after subtracting applicable contingent legal fees. In the event the Company sublicenses EA to other entities, profits shall be split evenly 50%/50%.

  

(J) Impairment of Long-Lived Assets

 

The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets, such as technology rights, be reviewed for impairment annually, or whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value. No impairments were recorded for the years ended December 31, 2014 and 2013, respectively.

 

(K) Loss Per Share

 

In accordance with accounting guidance now codified as FASB ASC Topic 260, “Earnings per Share,” Basic earnings per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive. Because of the Company’s

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

net losses, the effects of stock warrants and stock options would be anti-dilutive and accordingly, is excluded from the computation of earnings per share.

 

The computation of basic and diluted loss per share for the nine months ended December 31, 2014 and 2013, excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:

 

				December 31, 2014				December 31, 2013
	Stock Warrants (Exercise price - $0.25 - $.50/share)				6,500,000				3,135,000
	Stock Options (Exercise price - $0.10 - $.50/share)				15,566,652				12,700,000
	Convertible Debt  (Exercise price - $0.07 - $.0817/share)				81,673,783				16,893,930
	Total				103,740,435				32,728,930

 

 (L) Income Taxes

 

The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”) Income Taxes. Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The net deferred tax liability in the accompanying balance sheets includes the following amounts of deferred tax assets and liabilities:

		2014				2013
Deferred tax liability:	$				$
Deferred tax asset
Stock options for services			511,951				447,128
Net Operating Loss Carry forward			5,394,804				3,602,723
Valuation allowance			(5,906,755)				(4,049,851	)
Net deferred tax asset			—				—
Net deferred tax liability		$	—			$	—

 

 

The provision for income taxes has been computed as follows:

 

		2014				2013
Expected income tax recovery (expense) at the statuary rate of 34%		$	3,353,736			$	3,000,765
Tax effect of expenses that are not deductible for income tax purposes (net of other amounts deductible for tax purposes)			(19,120)				(5,523	)
Tax effect of differences in the timing of deductibility of items for income tax purposes:			(5,035,628)				(1,194,355	)

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

Utilization of non-capital tax losses to offset current taxable income		-				-
Change in valuation allowance			(1,635,122)				(1,800,887	)
Provision for income taxes		$	—			$	—

 

The valuation allowance was established to reduce the deferred tax asset to the amount that will more likely than not be realized. This is necessary due to the Company’s continued operating losses and the uncertainty of the Company’s ability to offset future taxable income through 2034.

 

The net change in the valuation allowance for the year ended December 31, 2014 and 2013 was an increase of $1,635,122 and $1,800,887, respectively.

 

The Company's federal income tax returns are no longer subject to examination by the IRS for the years prior to 2011, and the related state income tax returns are no longer subject to examination by state authorities for the years prior to 2011.

 

(M) Business Segments

 

The Company operates in one segment and therefore segment information is not presented.

 

(N) Recent Accounting Pronouncements

 

On June 10, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation ("ASUE 2014-10"). The guidance is intended to reduce the overall cost and complexity associated with financial reporting for development stage entities without reducing the availability of relevant information. The FASB also believes the changes will simplify the consolidation accounting guidance by removing the differential accounting requirements for development stage entities. As a result of these changes, there no longer will be any accounting or reporting differences in GAAP between development stage entities and other operating entities. For organizations defined as public business entities, the presentation and disclosure requirements in Topic 915 will no longer be required, starting with the first annual period beginning after December 15, 2014, including interim periods therein. Early application is permitted for any annual reporting period or interim period for which the entity's financial statements have not yet been issued (public business entities) or made available for issuance (other entities). The Company has elected early application of this ASU and implemented the changes in their financial statement for the year ended December 31, 2014.

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

In June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-12, “Compensation – Stock Compensation (Topic 718); Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The amendments in this ASU apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. For all entities, the amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this ASU either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.  We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

 

In August 2014, the FASB issued Accounting Standards Update “ASU” 2014-15 on “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this Update provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

 

All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.

 

(O) Fair Value of Financial Instruments

 

The carrying amounts on the Company’s financial instruments including prepaid expenses, accounts payable, accrued expenses, derivative liability, convertible note payable, and loan payable-related party, approximate fair value due to the relatively short period to maturity for these instruments.

 

(P) Stock-Based Compensation

 

In December 2004, the FASB issued FASB Accounting Standards Codification No. 718, Compensation - Stock Compensation. Under FASB Accounting Standards Codification No. 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. The Company applies this statement prospectively.

 

Equity instruments (“instruments”) issued to other than employees are recorded on the basis of the fair value of the instruments, as required by FASB Accounting Standards Codification No. 718. FASB Accounting Standards Codification No. 505, Equity Based Payments to Non-Employees defines the measurement date and recognition period for such instruments. In general, the measurement date is when either a (a) performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the FASB Accounting Standards Codification.

 

(Q) Reclassification

 

Certain amounts from prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on the Company's net loss or cash flows.

 

(R) Derivative Financial Instruments

 

Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.

 

Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model. 

 

(S) Original Issue Discount

 

For certain convertible debt issued, the Company provides the debt holder with an original issue discount. The original issue discount is recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.

 

(T) Debt Issue Costs and Debt Discount

 

The Company may pay debt issue costs, and record debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

  

(U) Licensing & Distribution

 

On May 28, 2014, the Company entered into a license agreement with Akyumen Technologies Corp. (“Akyumen”), an original equipment manufacturer of mobile devices, for the non-exclusive, non-transferable, indivisible worldwide license rights to the use of Company’s API technology in Akyumen’s mobile devices.  The license is for five years and is renewable, with the Company’s approval, at Akyumen’s request.

 

As consideration for the above-referenced license rights, Akyumen agreed to pay the Company royalties of $2.50 per Akyumen device that utilizes the API technology, to be payable on a monthly basis within 15 days after the

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

close of the calendar month.  Akyumen also agreed to pay, within three months of first sale, 50% of non-recurring engineering costs to port the Technology onto the operating systems of the Akyumen devices, inclusive of any local fees, taxes, or other charges.

 

On June 16, 2014, MAXD entered into a license and revenue share agreement with LOOKHU, an online subscription service that delivers movies, music, television shows, apps and games. The agreement grants LOOKHU non-exclusive, non-transferable, indivisible worldwide license rights to the distribution and use of the Company’s Application Programming Interface (“API”) audio processor technology. The license is for five years and is renewable, with the Company’s approval, at LOOKHU’s request.

 

As consideration for the above-referenced license rights, LOOKHU agreed to pay the Company royalties of $0.25 per month per paid subscription to the technology, to be payable on a monthly basis.  Additionally, LOOKHU agreed to pay the Company 4% of the net advertising revenue derived from advertising that utilizes the technology, to be payable on a quarterly basis.

 

Additionally, for the term of the agreement, the parties agreed to split, on a 50/50 basis, net revenue derived from sales of digital music or songs played from a LOOKHU software player, to be payable on a monthly basis.

 

NOTE 2           GOING CONCERN 

 

As reflected in the accompanying audited financial statements, the Company had a net loss of $9,863,929 for the year ended December 31, 2014, and an accumulated deficit of $37,136, 982 as of December 31, 2014, and has negative cashflow from operations of $2,956,189 as of and for the year ended December 31, 2014.

 

As the Company continues to incur losses, transition to profitability is dependent upon the successful commercialization of its products and achieving a level of revenues adequate to support the Company’s cost structure.

 

The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional cash. Management intends to fund future operations through additional private or public debt or equity offerings. Based on the Company’s operating plan, existing working capital at December 31, 2014 was not sufficient to meet the cash requirements to fund planned operations through January 31, 2015 without additional sources of cash. This raises substantial doubt about the Company’s ability to continue as a going concern.  The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty.

 

 

NOTE 3           DEBT

 

Debt consists of the following:

		As of				As of
		December 31, 2014				December 31, 2013
Line of credit - related party		$	268,227			$	140,000
Convertible debt			3,028,418				2,518,746
Less: debt discount			(1,691,065	)			(1,562,390	)
Convertible debt - net			1,337,353				956,356
Total current debt		$	1,605,580			$	1,096,356

 

(A)

Line of credit – related party

 

Line of credit with the principal stockholder consisted of the following activity and terms:

 

		Principal				Interest Rate				Maturity
Balance - December 31, 2012		$	—
Borrowings during the year ended December 31, 2013			318,000				4	%			September 26, 2015
Repayments			(178,000	)
Balance - December 31, 2013			140,000
Borrowings during the year ended December 31, 2014			153,000				4	%			September 26, 2015
Interest accrual			10,227
Repayments			(35,000	)
Balance - December 31, 2014		$	268,227

 

(B) Convertible Debt

 

During the years ended December 31, 2014 and 2013, the Company issued convertible notes totaling $3,475,334 and $3,843,221, respectively. The Convertible notes issued in the year ended December 31, 2014 and, 2013, consist of the following terms:

 

 

					Year ended				Year ended
					December 31, 2014				December 31, 2013
					Amount of				Amount of
					Principal Raised				Principal Raised
Interest Rate					2.5% - 10%				4% - 10%
Default interest rate					14% - 22%				14% - 22%
Maturity					February 26, 2015 - June 18, 2016				October 24, 2013 - December 29, 2014
Conversion terms 1		65% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the fifteen (15) trading day period prior to the conversion.		$	—			$	100,000
Conversion terms 2		65% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion.			689,500				501,500
Conversion terms 3		65% of the “Market Price”, which is the lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion.			747,500				—
Conversion terms 4		70% of the “Market Price”, which is lower of the average closing bid price for the common stock during the ten (10) trading day period			—				183,333
Conversion terms 5		70% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the fifteen (15) trading day period prior to the conversion.			—				50,000
Conversion terms 6		70% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion.			250,000				498,500
Conversion terms 7		70% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the twenty (20) trading day period prior to the conversion.			125,000				125,000
Conversion terms 8		70% of the lower of the average of the three (3) lowest trading prices for the fifteen (15) day trading period 1 day prior to conversion.			50,000				150,000
Conversion terms 9		75% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion.			848,334				2,234,888
Conversion terms 10		Convertible into $0.07/share.  After six month from the date of this note, conversion price shall equal the lower of $0.07/share or the variable conversion price - 75% of the average three (3) lowest closing priceds during the ten (10) trading day period.			765,000				—
				$	3,475,334			$	3,843,221

 

The debt holders are entitled, at their option, to convert all or part of the principal and accrued interest into shares of the Company’s common stock at conversion prices and terms discussed above.    The Company classifies embedded conversion features in these notes as a derivative liability due to management’s assessment that the Company may not have sufficient authorized number of shares of common stock required to net-share settle or due to the existence of a ratchet due to an anti-dilution provision. See Note 4 regarding accounting for derivative liabilities.

 

During the year ended December 31, 2014, the Company converted debt and accrued interest, totaling $3,421,019 into 48,998,342 shares of common stock.    Conversions of debt to equity occurring after the maturity date and penalties incurred resulted in a loss on settlement of $183,907.

 

During the year ended December 31, 2013, the Company converted debt and accrued interest, totaling $2,736,376 into 19,146,156 shares of common stock.

 

Convertible debt consisted of the following activity and terms:

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

Convertible Debt Balance as of December 31, 2012			1,247,052				0% - 10%
Borrowings during the year ended December 31, 2013			3,843,221				2.5% - 10%				October 24, 2013 - December 29, 2014
Non-Cash Reclassification of accrued interest converted			113,386
Conversion  of debt to into 19,146,156 shares of common stock with a valuation of $2,736,376 ($0.09 - $0.27/share) including the accrued interest of $113,386			(2,684,915	)
Convertible Debt Balance as of December 31, 2013			2,518,744				2.5% - 10%				February 2, 2014 - December 29, 2014
Borrowings during the year ended December 31, 2014			3,475,334				2.5% - 10%				February 26, 2015 - June 18, 2016
Non-Cash Reclassification of accounts payable to debt and addition of penalties			76,094
Non-Cash Reclassification of accrued interest converted			255,232
Repayments			(28,340	)
Conversion  of debt to into 48,998,342 shares of common stock with a valuation of $3,421,019 ($0.09 - $0.27/share) including the accrued interest of $255,232 and penalties/loss on conversions of $183,911			(3,268,646	)
Convertible Debt Balance as of December 31, 2014			3,028,418				4% - 10%				February 26, 2015 - June 18, 2016

 

On December 11, 2012, the Company entered into an agreement whereby the Company will issue up to $120,000 in a convertible note.    The note matured on December 11, 2013 and bears an interest rate of 8%. As of December 31, 2013 and 2012, the Company balance of the convertible note and accrued interest is $128,810 and 120,526, respectively.      The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months.    The conversion price equals to $0.50 per share.    For the year ended December 31, 2013, the Company issued 24,000 shares of common stock for accrued interest having a fair value of $5,368 ($0.21 - $0.25/share).

 

As of December 31, 2013, the note was outstanding and was in default.

 

During the three months ended March 31, 2014, the Company negotiated modifications to the December 11, 2012 convertible debt.  For the modification, the Company compared the value of both the old and new convertible debt.    The Company determined that the present value of the cash flows associated with the new convertible debt exceeded the present value of the old convertible debt by more than 10%, which resulted in the application of extinguishment accounting.

 

The modification of the note included extension of terms through July 31, 2014, decrease in the conversion price to $0.10 per share and an increase in the interest rate to 10%.  The Company also negotiated to convert $30,000 in accounts payable owed to the debt holder to be included in the convertible debt increasing the principal balance to $150,000.  In accordance with ASC 470-20-25-13, the convertible debt instrument was issued at a substantial premium which represented additional paid in capital.  In connection with the extinguishment, the Company recorded a loss on extinguishment of $18,596 with the offset recorded to additional paid in capital.

 

During the three months ended June 30, 2014, the Company negotiated a further extension of the note through July 31, 2014. During the year ended December 31, 2014, the Company repaid $28,340 and reclassified $13,540 of accounts payable owed to the note holder to be included in the principal balance of the note. As of December 31, 2014, the principal balance of the note including accrued interest totaled $145,149 of which the principal balance of $135,200 is included as a component of convertible debt. The note is currently in default.

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

(B) Debt Issue Costs

 

During the year ended December 31, 2014, the Company paid debt issue costs totaling $57,500.

 

During the year ended December 31, 2013, the Company paid debt issue costs totaling $180,388, which includes fees paid through the issuance of common stock in the amount of $20,554.

 

The following is a summary of the Company’s debt issue costs:

 

		Year ended				Year ended
		December 31, 2014				December 31, 2013
Debt issue costs		$	195,055			$	268,266
Accumulated amortization of debt issue costs			(167,599	)			(210,257	)
Debt issue costs - net		$	27,456			$	58,009

 

During the years ended December 31, 2014 and 2013, the Company amortized $88,053 and $210,257 of debt issue costs, respectively.

 

(D

Debt Discount & Original Issue Discount

 

During the years ended December 31, 2014 and 2013, the Company recorded debt discounts and original issue discounts totaling $3,199,391 and $3,662,016, respectively.

 

The debt discount recorded in 2014 and 2013 pertains to convertible debt that contains embedded conversion options that are required to bifurcated and reported at fair value and original issue discounts.

 

The Company amortized $3,070,714 and $2,743,440 during the year ended December 31, 2014 and 2013, respectively, to amortization of debt discount expense.

 

		Year ended				Year ended
		December 31, 2014				December 31, 2013
Debt discount		$	4,852,935			$	4,703,861
Accumulated amortization of debt discount			(3,161,870	)			(3,141,471	)
Debt discount - Net		$	1,691,065			$	1,562,390

 

  

NOTE 4           DERIVATIVE LIABILITIES

 

The Company identified conversion features embedded within convertible debt issued in 2014 and 2013 and warrants issued in 2014 and 2013. The Company has determined that the features associated with the embedded conversion option should be accounted for at fair value as a derivative liability.

 

As a result of the application of ASC No. 815, the fair value of the conversion feature is summarized as follow:

Derivative Liability - December 31, 2012		$	1,166,286
Fair value at the commitment date for convertible instruments			3,839,539
Fair value at the commitment date for warrants issued			43,809
Change in fair value of embedded derivative liability for warrants issued			(4,384	)
Change in fair value of embedded derivative liability for convertible instruments			(996,754	)
Reclassification to additional paid in capital for financial instruments that ceased to be a derivative liability			(2,162,726	)
Derivative Liability - December 31, 2013			1,885,770
Fair value at the commitment date for convertible instruments			3,412,020
Fair value at the commitment date for warrants issued			11,973
Change in fair value of embedded derivative liability for warrants issued			(41,470	)
Change in fair value of embedded derivative liability for convertible instruments			321,875
Reclassification to additional paid in capital for financial instruments that ceased to be a derivative liability			(2,355,376	)
Derivative Liability - December 31, 2014		$	3,234,792

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

The Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining value of the derivative as it exceeded the gross proceeds of the note.  The Company also recorded the value of the warrants issued for services as derivative expense for the year ended December 31, 2014.  The Company recorded a derivative expense for the year ended December 31, 2014 and 2013 of $327,964 and $442,412, respectively.

 

The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of December 31, 2014:

 

		Commitment Date				Re-measurement Date
Expected dividends:			0	%			0	%
Expected volatility:			109% - 304%				120% - 140%
Expected term:			0.44 - 3 Years				0.16 - 2.9 Years
Risk free interest rate:			0.06% - 0.94%				0.12% - 1.10%

 

  

The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of December 31, 2013:

 

		Commitment Date				Re-measurement Date
Expected dividends:			0	%			0	%
Expected volatility:			118.99% - 303.64%				120.24% - 299.6%
Expected term:			0.75 - 3 Years				0.002 - 2.82 Years
Risk free interest rate:			0.15% - 0.17%				0.11% - 0.17%

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

NOTE 5           PROPERTY AND EQUIPMENT

 

At December 31, 2014, and December 31, 2013, respectively, property and equipment is as follows:

 

		December 31, 2014				December 31, 2013
Website Development		$	294,795			$	294,795
Furniture and Equipment			99,881				99,881
Leasehold Improvements			6,573				6,573
Software			53,897				53,897
Music Equipment			2,247				—
Office Equipment			71,652				56,897
Domain Name			1,500				1,500
Sign			628				628
Total			531,173				514,171
Less: accumulated depreciation and amortization			(342,277	)			(258,854	)
Property and Equipment, Net		$	188,896			$	255,317

 

  

Depreciation/amortization expense for the year ended December 31, 2014 totaled $83,423.

 

Depreciation/amortization expense for the year ended December 31, 2013 totaled $82,211.

 

NOTE 6          STOCKHOLDERS’ EQUITY

 

On November 10, 2014, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors filed with the State of Delaware an Amended Certificate of Incorporation increasing the authorized shares of common stock by 50,000,000 shares of common stock, and changing the par value to $.00001 per share.

 

On March 4, 2015, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors created and authorized the issuance of Series A Convertible Preferred stock, with a par value of $0.00001 per share. The face amount of state value of each Preferred Share of stock is $0.96.

 

(A) Common Stock 

 

During the year ended December 31, 2014, the Company issued the following common stock:

 

Transaction Type		Quantity				Valuation				Range of Value per share
Conversion of convertible debt and accrued interest			48,998,342			$	3,421,019				$0.02715 - $0.14175
Services - rendered			3,150,000				678,030				$0.093 - $0.365
Acquisition of intangbiles			15,000,000				1,514,000				$0.0985 - $0.12
Return of shares			(4,250,000	)			—				$0.00 - $0.00
Settlement of accounts payable			1,000,000				90,000			$	0.09
Total shares issued			63,898,342			$	5,703,049

 

 

 The following is a detailed description of transactions noted above:

 

1. Conversion of convertible debt and accrued interest

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

During the year ended December 31, 2014, the Company converted debt and accrued interest, totaling $3,421,019 into 48,998,342 shares of common stock.    Conversions of debt to equity occurring after the maturity date and penalties incurred resulted in a loss on settlement of $183,911.

 

2. Services Rendered

 

During the year ended December 31, 2014, the Company issued 1,250,000 shares of common stock valued at $386,250 in connection with employment agreements entered into (See Note 9 (A).

 

On January 15, 2013, the Company entered into an agreement for legal services, pursuant to which the Company will pay $2,000 and issue 50,000 shares of fully vested common stock for the preparation, filing costs and fees of each provisional and regular patent application.  Through December 31, 2014, a total of 44 applications have been filed.  In connection with this agreement:

 

During the year ended December 31, 2014, the Company issued 800,000 shares of fully vested common stock for services having a fair value of $131,500 ($0.11 - $0.168/share).

 

On March 17, 2014, the Company entered into an advisory board agreement for a period of three years. In consideration for these services, during the year ended December 31, 2014, the Consultant was granted 100,000 shares of fully vested common stock valued at $9,300 ($0.09/share). (See note 7(B)).

 

On April 4, 2014, the Company entered into consulting services agreement. In consideration for these services, during the year ended December 31, 2014, the Consultant was granted 200,000 shares of fully vested common stock valued at $21,980 ($0.11/share). (See note 7(B)).

 

During the year ended December 31, 2014, the Company entered into a consulting services agreement related to marketing and the creation of Company awareness. In connection with this agreement, the consultant shall be paid $20,000 and was issued 200,000 fully vested shares of common stock valued at $31,000 ($0.16/share). (See note 7(B)).

 

On August 6, 2014, the Company entered into an advisory board agreement for a period of three years. In consideration for these services, during the year ended December 31, 2014, the Consultant was granted 100,000 fully vested shares of common stock valued at $16,500 ($0.17/share). (See note 7(B)).

 

On September 23, 2014, the Company entered into service agreement for a period of two years with the Company’s transfer agent. In consideration for these services, during the year ended December 31, 2014, 300,000 shares of fully vested common stock valued at $49,500 ($0.17/share) were granted and expensed.

 

On September 10, 2014, the Company entered into an advisory board agreement. In consideration for these services, during the year ended December 31, 2014, the Consultant was granted 100,000 shares of fully vested common stock valued at $16,000 ($0.16/share). (See note 7(B)).

 

On July 29, 2014, the Company entered into an investor relations agreement. In connection with this agreement, the Company is to issue 100,000 shares of common stock monthly and $5,500 in monthly fees. As of December 31, 2014, the agreement was terminated. In total, the consultant was issued 100,000 shares of fully vested common stock valued at $16,000 ($0.16/share) and was paid $5,500. (See note 7(B)).

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

3. Acquisition of intangibles

 

During the nine months ended December 31, 2014, the Company issued 15,000,000 common shares in connection with license agreements entered into and intangibles acquired. See Note 1(I)

 

4. Return of Shares

 

On August 3, 2012, the Company entered into an endorsement agreement with an unrelated third party for a period from August 3, 2012 through August 3, 2015.    In exchange for the services provided, the Company issued 3,000,000 shares of common stock having a fair value of $960,000 ($0.30/share) based upon fair value on the date of grant. As of January 2014, the August 3, 2012 agreement has been terminated and 3,000,000 shares have been returned to the Company (See note 7(B)).

 

In July of 2013, the Company entered into a financial advisor agreement for a period of six months with the advisor providing various assistance including introductions to potential investors. The Agreement calls for a fee of $25,000 with an additional $7,500 due and payable on the 1st day of the subsequent five months. On July 8, 2013, the Company issued 1,500,000 common shares as consideration for these services valued at $315,000. On April 15, 2014, the parties entered into a mutual termination agreement, as a result, 1,250,000 shares were returned to the Company.

 

5. Settlement of accounts payable

 

During the year ended December 31, 2014, the Company settled accounts payable totaling $154,320 through the issuance of $1,000,000 common shares with a valuation of $90,000. The Company recognize a gain on settlement of $64,320.

 

During the year ended December 31, 2013, the Company issued the following common stock:

 

Transaction Type		Quantity				Valuation				Range of Value per share
Conversion of convertible debt and accrued interest			19,146,156			$	2,736,376				$0.1215 - $0.1783
Services - rendered			6,145,029				1,453,313				$0.19 - $0.438
Cash and warrants			540,901				43,080				$0 - $0.10
Return of shares			(750,000	)			—				0
Shares issued as finders fees			94,964				20,554				$0.19 - $0.23
Repurchased shares			(3,000,000	)			520,000			$	0.17
Total shares issued			22,177,050			$	4,773,323

 

The following is a more detailed description of select transactions noted above:

 

1. Conversion of convertible debt and accrued interest

 

During the year ended December 31, 2013, the Company converted debt and accrued interest, totaling $ 2,736,376 into 19,146,156 shares of common stock.

 

2. Services Rendered

 

During the year ended December 31, 2013, the Company issued 2,350,000 shares of common stock valued at $623,500 in connection with employment agreements entered into (See Note 7 (A).

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

In July of 2013, the Company entered into a financial advisor agreement for a period of six months with the advisor providing various assistance including introductions to potential investors. The Agreement calls for a fee of $25,000 with an additional $7,500 due and payable on the 1st day of the subsequent five months. On July 8, 2013, the Company issued 1,500,000 common shares as consideration for these services valued at $315,000.

 

On February 1, 2013, the Company entered into a professional services agreement related to research and outreach media. In connection with this agreement, the Company issued 500,000 shares of common stock valued at $120,000 during the year ended December 31, 2013.

 

On January 15, 2013, the Company entered into an agreement for legal services, pursuant to which the Company will pay $2,000 and issue 50,000 shares of common stock for the preparation, filing costs and fees of each provisional and regular patent application.  Through December 31, 2014, a total of 44 applications have been filed.  In connection with this agreement:

 

During the year ended December 31, 2013, the Company issued 1,400,000 shares of common stock for legal services having a fair value of $355,600 ($0.25 - $0.26/share).

 

On January 21, 2013, the Company entered into a professional services agreement related conference presentations. In connection with this agreement, the Company issued 120,000 shares of common stock valued at $32,400 during the year ended December 31, 2013.

 

During the year ended December 31, 2013, the Company entered into a professional services agreements. In connection with these agreements, the Company issued 275,029 shares of common stock valued at $66,813 during the year ended December 31, 2013.

 

3. Cash and warrants

 

On January 31, 2013 an individual exercised 430,800 of stock warrants at an exercise price of $0.10 per share for proceeds of $43,080.

 

On December 26, 2013, the Company issued 110,101 shares of common stock in connection with a cashless exercise of warrants.  The number of warrants received was based on 190,000 warrants exercised using an average of five previous closing prices.

 

4. Return of shares

 

On February 6, 2012, the Company filed a suit for declaratory judgment and rescission of contract associated with a former consultant for failure to perform contractual requirements.  It seeks clarification that the former consultant is not owed 750,000 shares of restricted common stock.  The defendants have been served.  This case will be vigorously prosecuted and has a good likelihood of a favorable outcome. The case seeks in excess of the jurisdictional amount, which is $50,000 dollars.  On March 5, 2013, the suit was settled in favor of Max Sound Corporation and 750,000 shares issued to the former consultant were returned to the treasury.

 

5. Finders Fees

 

During the year ended December 31, 2013, in connection with debt raised of $833,333, the Company issued 94,964 common shares of the Company’s common stock valued at $20,555 issued to the finder.

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

6. Repurchased shares

 

During the year ended December 31, 2013, the Company entered into a settlement agreement with the seller of the software to reverse the original transaction which included the issuance of 3,000,000 shares of common stock in exchange for the software. The Company received back 3,000,000 shares of common stock which was recorded as treasury stock in exchange of returning the software to the seller. Upon the return of the shares, the Company recognized a gain of $220,000 based on the quoted trading price of the Company’s common stock, which was the best evidence of fair value.

 

 (B) Stock Warrants

  

On January 1, 2013, the Company issued 500,000 warrants under consulting agreements. The Company recognized an expense of $84,028 for the year ended December 31, 2013.    The Company recorded the fair value of the warrants    based on the fair value of each warrant grant estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2013, dividend yield of zero, expected volatility of 140.30%; risk-free interest rates of 0.37%, expected life of three years. The warrants vested immediately.      The warrants expire in three years from the date of issuance and have an exercise price of $0.45 per share (See Note 7(B)).

 

On August 7, 2013, the Company issued 100,000 warrants for services rendered. The Company recognized compensation expense of $43,809 on the date of issuance with the offset being recorded to derivative liabilities since the Company applied the provisions of ASC No. 815, pertaining to the potential settlement in a variable amount of shares given the company’s shares are tainted.    The Company recorded the fair value of the warrants    based on the fair value of each warrant grant estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions, dividend yield of zero, expected volatility of 297%; risk-free interest rates of 0.61%, expected life of three years. The warrants vested immediately.  The warrants expire in three years from the date of issuance and have an exercise price of $0.40 per share (See Note 9(B)).

 

On November 25, 2014, the Company issued 200,000 warrants for services rendered. The Company recognized compensation expense of $11,972 on the date of issuance with the offset being recorded to derivative liabilities since the Company applied the provisions of ASC No. 815, pertaining to the potential settlement in a variable amount of shares given the company’s shares are tainted.    The Company recorded the fair value of the warrants    based on the fair value of each warrant grant estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions, dividend yield of zero, expected volatility of 128%; risk-free interest rates of 0.91%, expected life of three years. The warrants vested immediately.  The warrants expire in three years from the date of issuance and have an exercise price of $0.10 per share (See Note 9(B)).

 

During the year ended December 31, 2013, the Company issued 2,000,000 warrants in connection with the entry into certain convertible debenture agreements. Each warrant vests immediately and expire April 26, 2016 – December 29, 2016 with an exercise price of $0.40.

 

During the year ended December 31, 2014, the Company issued 750,000 warrants in connection with the entry into certain convertible debenture agreements. Each warrant vests immediately and expire February 26, 2017 – August 12, 2017 with an exercise price of $0.40.

  

The following tables summarize all warrant grants as of December 31, 2014, and the related changes during these periods are presented below:

 

				Number of Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in Years)
	Balance, December 31, 2011				2,715,800			$	0.36
	Granted				200,000				0
	Exercised
	Cancelled/Forfeited				(500,000	)			0.52
	Balance, December 31, 2012				2,415,800				0.28				0.8
	Granted				2,600,000			$	0.41
	Exercised				(620,800	)		$	0.07
	Cancelled/Forfeited				(1,260,000	)		$	0.50
	Balance, December 31, 2013				3,135,000			$	0.38				2.2
	Granted				950,000			$	0.34
	Exercised				—			$	—
	Cancelled/Forfeited				(335,000	)		$	0.10
	Balance, December 31, 2014				3,750,000			$	0.38				1.7

 

 

A summary of all outstanding and exercisable warrants as of December 31, 2014 is as follows:

 

												Weighted Average
Exercise				Warrants				Warrants				Remaining				Aggregate
Price				Outstanding				Exercisable				Contractual Life				Intrinsic Value
$	0.10				200,000				200,000				2.90			$	—
$	0.25				200,000				200,000				0.44			$	—
$	0.40				2,850,000				2,850,000				1.73			$	—
$	0.45				500,000				500,000				1.00			$	—
					3,750,000				3,750,000				1.7 years			$	—

 

 

(C) Stock Options

 

On January 1, 2013, the Company issued 700,000 options to buy common shares of the Company's stock at $0.50 per share, good for three years, to the Chief Technical Officer pursuant to an amended employment agreement dated December 31, 2012. The Company recognized an expense of $115,288 for the year ended December 31, 2013. The Company recorded the fair value of the options based on the fair value of each option grant estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2013:

 

Expected dividends			0	%
Expected volatility			140.30	%
Expected  term			3 Years
Risk free interest rate			0.37	%

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

On July 7, 2014, as a benefit for the unsecured loans granted to the Company by the Company's Chief Financial Officer ("CFO"), the Company issued 2,866,520 options to buy common shares of the Company's stock at $0.10 per share, good for three years to the CFO. The Company recognized an expense of $190,656 for the year ended December 31, 2014. The Company recorded the fair value of the options based on the fair value of each option grant estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

Expected dividends			0	%
Expected volatility			137.82	%
Expected  term			3 Years
Risk free interest rate			1	%

 

The following tables summarize all option grants as of December 31, 2014, and the related changes during these periods are presented below:

 

		Number of Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in Years)
Outstanding - December 31, 2010			—			$	—				—
Granted			12,000,000				0.120
Exercised			—				—
Forfeited or Canceled			—				—
Outstanding - December 31, 2011			12,000,000				0.12				2.05
Granted			—				—				—
Exercised			—				—				—
Forfeited or Canceled			—				—				—
Outstanding - December 31, 2012			12,000,000				0.12				1.04
Granted			700,000			$	0.500				3.00
Exercised			—				—				—
Forfeited or Canceled			—				—				—
Outstanding - December 31, 2013			12,700,000				0				2
Granted			2,866,652			$	0.100				3.00
Exercised			—				—				—
Forfeited or Canceled			—				—				—
Outstanding - December 31, 2014			15,566,652				0.13				1.32
Exercisable - December 31, 2014			15,566,652
Per Detail Schedule			15,566,652
Difference			—

 

(D) Share Exchange

 

On May 11, 2010, the Company acquired the rights to an audio technology known as Max Audio Technology (Max) through a share exchange, whereby the Company issued 30,000,000 shares of common stock to two individuals in exchange for their rights in Max having a value of $7,500,000 based upon recent market value ($0.25/share) (See Note 8(B)).

 

On January 17, 2011, the Company acquired the rights to software technology known as Blog Software, Social Media Vault, Social Media Bar and Trending Topix (BSST) through a share exchange, whereby the Company issued 3,000,000 shares of common stock to two individuals in exchange for their rights to BSST having a value of $300,000 based upon recent market value ($0.10/share).

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

On November 15, 2012, the Company acquired the rights to an audio technology known as Liquid Spins, Inc. through a share exchange, whereby the Company issued 24,752,475 shares of common stock for their rights in Liquid Spins technology and other assets having a value of $10,000,000 based upon recent market value ($0.404/share).    The following assets were acquired in the transaction:

 

		Year Ended				Year Ended
		December 31, 2014				December 31, 2013
Goodwill at fair value, Opening Balance		$	9,303,679			$	9,655,588
Consideration transferred  at fair value:
Common stock - 24,752,475 Shares			—				—
Net assets acquired:
Current assets			—				—
Cash			—				8,011
Total net assets acquired			—				8,011
Amortization			(965,559	)			(343,898	)
Goodwill at fair value, Ending Balance		$	8,338,121			$	9,303,679

  

During the year ended December 31, 2013, the Company received an additional $8,011 related to the acquisition which reduced the carrying value of the goodwill as of December 31, 2013.  

 

For the year ended December 31, 2014 and 2013, the Company recorded $965,559 and $343,898, respectively, of amortization expense.

 

NOTE 7         COMMITMENTS

 

(A) Employment Agreement

 

On January 17, 2011, the Company executed an employment agreement with an executive to be the President and CEO for five years.    As compensation for services, the executive will receive a monthly compensation of $8,000 beginning after the completion of at least one million dollars of new funding to the Corporation or can be paid as commissions from sales brought to the Company, whichever comes first. In addition to the base salary, the employee is entitled to receive a 20% commission of all sales the executive is directly responsible for bringing to the Company.    The agreement also calls for the executive to receive, upon execution of the agreement, three million shares of Rule 144 common stock and twelve million options, which are good for three years, to buy shares of Rule 144 common stock at $0.12/share.    As a supplement to the agreement, on February 4, 2011, the executive received an additional twenty million common shares directly from the Chairman of the Company.    On August 25, 2011, the agreement was updated to increase the monthly compensation to $12,000 per month beginning September 1, 2011, terminate the initial 20% commission on sales and to add a commission on sales equal to 10% of gross quarterly profits.    On December 31, 2012, the agreement was updated to eliminate his previous annual bonus entitlement, which was previously 10% of revenues. In exchange for this

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

consideration, the Company agreed that his bonus will be decreased to 7% of net profits which may be received in cash or Rule 144 stock or any combination. The agreement also called for the employee to receive health benefits.    In May of 2013, the Company amended the agreement for the President and CEO to receive monthly compensation of $18,000 beginning May 1, 2013.

 

On October 1, 2011, the Company executed an employment agreement with its Chief Technical Officer (“CTO”).   The term of the agreement is for five years.   As compensation for services, the CTO will receive a monthly compensation of $10,000, monthly commission equal to 5% of all profits derived from the sales of all products and services related to Max Sound, and an annual bonus of 5% of all profits derived from the sales of all products and services related to Max Sound that is over one million dollars.   In addition to the base salary, the employee is entitled to receive health benefits.  Effective January 1, 2012, the Company increased the monthly compensation to $12,000.   On December 31, 2012 the Company amended the agreement that effective January 1, 2013 the CTO will receive 300,000 shares of common stock and 700,000 three year options at 50 cents per share. On December 31, 2012, the agreement was also updated to eliminate his previous commission and annual bonus entitlement. Executive shall now be entitled to a commission on all sales of the Company equal to 6% of net profits. For the year ended December 31, 2013, the Company issued 300,000 common shares valued at $90,000.

 

 

On January 9, 2013, the Company executed an employment agreement with its Director of New Business Development. The term of the agreement is for three years.   As compensation for services, the Director will receive a monthly compensation of $10,000.   Upon the first million dollars in gross sales the salary will increase to $12,000 per month.  In addition, the Director will receive up to 1,000,000 shares of common stock payable in lots of 125,000 per quarter beginning on January 1, 2013.    Also, employee for the first eight quarters of employment has a right to earn 125,000 additional 3 year stock options with a strike price of $0.50 per share as follows:

 

For each million of new gross sales - 125,000 additional 3-year stock options with a strike price of $.50 per share.

 

For the year ended December 31, 2014 and year ended December 31, 2013, the employee received 375,000 and 500,000 shares with a fair value of $95,625 and $127,500, respectively.

 

On October 1, 2013, the Company executed an employment agreement with its Senior Audio Engineer.   The term of the agreement is for three years.   As compensation for services, the Engineer will receive a monthly compensation of $6,000 beginning October 1, 2013.  In addition to the base salary, the employee is entitled to receive health benefits, and the employee received 50,000 shares of common stock during the year ended December 31, 2013 valued at $13,500 ($0.27/share).

 

On November 26, 2012, the Company executed an employment agreement with its VP of Music Entertainment. The term of the agreement is for two years.   As compensation for services, the VP will receive a monthly compensation of $8,000.   In addition, the employee will receive up to 1,000,000 shares of common stock payable in lots of 125,000 per quarter beginning on December 1, 2012.   In addition, the employee is entitled to a monthly commission equal to 5% of all profits from any sales of music from Liquid Spins that employee is directly responsible for bringing to the Company.   For the three months ended March 31, 2014 and year ended December 31, 2013, the employee received 125,000 and 500,000 shares with a fair value of $45,625 and $133,750, respectively. As of February 3, 2014, the employee was terminated with no additional compensation owed.

 

On November 26, 2012, the Company executed an employment agreement with its VP of Music Distribution. The term of the agreement is for two years.   As compensation for services, the VP will receive a monthly compensation of $7,000.    In addition, the employee will receive up to 1,000,000 shares of common stock payable in lots of 125,000 per quarter beginning on December 1, 2012.    In addition, the employee is entitled to a monthly commission equal to 5% of all profits from any sales of music from Liquid Spins that employee is directly responsible for bringing to the Company.   For the year ended December 31, 2014 and year ended

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

December 31, 2013, the employee received 500,000 and 500,000 shares with a fair value of $182,500 and $133,750, respectively.

 

On June 11, 2012, the Company executed an employment agreement with its Senior Audio Engineer.   The term of the agreement is for five years.   As compensation for services, the Engineer will receive a monthly compensation of $6,000 beginning July 1, 2012.  In addition to the base salary, the employee is entitled to receive health benefits, and the employee will receive 1,000,000 shares of common stock payable in 125,000 increments per quarter beginning on July 1, 2012.   For the year ended December 31, 2014 and year ended December 31, 2013, the employee received 250,000 and 500,000 shares with a fair value of $62,500 and $125,000, respectively.

 

On May 17, 2011, the Company executed an employment agreement with its Chief Internet Officer (“CIO”).    The term of the agreement is for five years.    As compensation for services, the CIO will receive a monthly compensation of $9,000 beginning at the completion of at least one million dollars of new funding.    In addition to the base salary, the employee is entitled to receive health benefits.    The agreement also calls for the CIO to receive two million shares of Rule 144 common stock upon the execution of the agreement.    On August 25, 2011, the agreement was updated to increase the monthly compensation to $12,000 per month beginning October 1, 2011. 

 

(B) Consulting Agreement

 

On June 10, 2011, the Company entered into a five year advisory board consulting agreement with three persons to provide for consulting and business services.    In exchange for the services provided, the consultants received 100,000 shares of common stock each. 

 

In September 2011, the Company entered into a five year advisory board consulting agreement with three persons to provide for consulting and business services.    In exchange for the services provided, the consultants received 100,000 shares of Company stock at $0.23 - 0.39 per share.    The terms of the agreements are for five years.

 

During the three months ended December 31, 2011, the Company entered into a five year advisory board consulting agreement with five persons to provide for consulting and business services.    In exchange for the services provided, the consultants received 100,000 shares of Company stock at $0.47 - 0.88 per share.  The terms of the agreements are for five years.

 

On August 3, 2012, the Company entered into an endorsement agreement with an unrelated third party for a period from August 3, 2012 through August 3, 2015.    In exchange for the services provided, the Company issued 3,000,000 shares of common stock having a fair value of $960,000 ($0.30/share) based upon fair value on the date of grant (See Note 8(B)). The delivery of the shares will be made in four 750,000 tranches to coincide with each of the four points listed below:

 

●

Record two (2) one-minute video endorsements (English and Spanish)

 

●

Release of Mobile Application

 

●

Use of MAX-D HD technology in the next two major music projects.

 

●

Any additional projects that effectively promote the use of MAXD technology.

 

As December 31, 2012, the first two of the four points listed above have been completed and the Company recorded $480,000 as deferred compensation and $480,000 in endorsement expense.    As of March 31, 2013, the second two of the four points listed above have been completed and the Company recognized $480,000 in endorsement expense (See Note 8(B)). The Company and the third party have completed the video endorsement and the mobile application and launched both in August 2013. In September 2013, the parties decided that they

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

would not be effective working together due to a change in marketing goals. The parties reached an agreement whereby the Company will not promote the endorsement or the mobile application and the third party will return all shares received to the Company who in turn will return them to the Company treasury.    As of January 2014, the August 3, 2012 agreement has been terminated and 3,000,000 shares have been returned to the Company.

 

On August 22, 2012, the Company entered into a consulting agreement with an unrelated third party for a period from September 1, 2012 through August 31, 2013.    In exchange for the services provided, the Company issued 500,000 shares of common stock having a fair value of $150,000 ($0.30/share) based upon fair value on the date of grant.

 

On September 14, 2012, the Company entered into a licensing agreement with an unrelated third party for a period from September 14, 2012 through September 14, 2013.    The agreement will automatically extend on a year to year basis unless terminated by either party.    Upon the execution of the agreement, the Company paid a non-refundable $15,000 upfront fee for the use of the license.    Any additional technical support will be provided on as needed basis at an hourly rate of $250/hour.

 

On December 1, 2012, the Company entered into a consulting agreement with an unrelated third party for a period from December 1, 2012 through November 30, 2013.    In exchange for the services provided, the Company will pay a monthly consulting fee of $10,000.    A bonus may be provided for $26,000 after one year of service in the sole discretion of the Company.    In addition, the Company will grant 500,000 three year warrants with an exercise price of $0.45 per share.    Within 10 days of executing the consulting agreement the consultant will loan the Company $120,000 in convertible note converted at 50 cents per share.

 

In July 2013, the Company entered into a financial advisor agreement for a period of six months with the advisor providing various assistance including introductions to potential investors. The Agreement calls for a fee of $25,000 with an additional $7,500 due and payable on the 1st day of the subsequent five months. On July 8, 2013, the Company issued 1,500,000 common shares as consideration for these services valued at $315,000.

 

In July 2013, the Company entered into a digital content distribution agreement for a period of 1 year.    The agreement calls for an advance of $25,000, the fees are recorded as prepaid expenses, earned based on downloaded content for a minimum of $120,000 per year.    The agreement also calls for a onetime fee of $50,000 for synchronization services of which $25,000 has been paid and has been recorded as a prepaid expense.    As of December 31, 2013, the Company paid a total of $50,000 in connection with this agreement which has been recorded as prepaid expenses.

 

On March 17, 2014, the Company entered into an advisory board agreement for a period of three years. In consideration for these services, during the year ended December 31, 2014, the Consultant was granted 100,000 shares of fully vested common stock valued at $9,300 ($0.09/share). Two additional blocks of 100,000 common shares shall be granted shall certain benchmarks be accomplished during the first year.

 

On April 24, 2014, the Company entered into consulting services agreement. In consideration for these services, during the year ended December 31, 2014, the Consultant was granted 200,000 shares of fully vested common stock valued at $21,980 ($0.11/share).

 

During the year ended December 31, 2014, the Company entered into a consulting services agreement related to marketing and the creation of Company awareness. In connection with this agreement, the consultant shall be paid $20,000 and was issued 200,000 shares of fully vested common stock valued at $31,000 ($0.16/share).

 

On August 6, 2014, the Company entered into an advisory board agreement for a period of three years. In consideration for these services, during the year ended December 31, 2014, the Consultant was granted 100,000 shares of fully vested common stock valued at $16,500 ($0.17/share).

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

On September 23, 2014, the Company entered into service agreement for a period of two years with the Company’s transfer agent. In consideration for these services, during the year ended December 31, 2014, 300,000 shares of fully vested common stock valued at $49,500 ($0.17/share) were granted.

 

On September 10, 2014, the Company entered into an advisory board agreement. In consideration for these services, during the year ended December 31, 2014, the Consultant was granted 100,000 shares of fully vested common stock valued at $16,000 ($0.16/share).

 

On July 29, 2014, the Company entered into an investor relations agreement. In connection with this agreement, the Company is to issue 100,000 shares of fully vested common stock monthly and $5,500 in monthly fees. As of September 30, 2014, the agreement was terminated. The consultant was issued 100,000 shares of common stock valued at $16,000 ($0.16/share) and was paid $5,500.

 

(C) Operating Lease Agreements

 

On September 20, 2012, the Company took over a month to month operating lease upon completing the asset purchase agreement with Liquid Spins. The lease began on October 1, 2012 at a monthly rate of $1,585. The Company gave notice to end this month to month lease, with a final end date of February 28, 2014.

 

On September 1, 2010, the Company executed a three-year non-cancelable operating lease for its new corporate office space. The lease began on October 1, 2010 and expires on September 30, 2013. Total base rent due during the term of the lease is $134,880. At the current time the Company is continuing on with the existing office space on a month to month basis based on the previous terms and conditions of the recently expired lease.

 

(C) Research Agreement

 

On July 1, 2014, the Company entered into a research agreement with University of Florida for the service period to begin July 15, 2014 and ending no later than October 31, 2014. Subsequently on December 3, 2014, the Company modified the terms of the service period of the agreement to start on September 30,214 and ending no later than January 15, 2015. The fee for research services is fixed at $49,910 and will be paid in four monthly installments of $12,678. For the year ended December 31, 2014 the Company recorded a liability and expensed $12,678 as research and development cost, as of December 31, 2014, $0 has been paid. The remaining liability as of December 31, 2014, is $12,678 and is included in accounts payable.

 

NOTE 8       LITIGATION

 

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business.

 

On February 21, 2012, the Company filed a suit for breach of contract, intentional misrepresentation, negligent misrepresentation, fraud, false advertising, and unfair competition with a former consultant.   It seeks damages due to their alleged failure to meet the contractual requirements regarding promotions.   The defendant has been served.   In September of 2014, the Company received a Default Judgment against the Defendant.    The Company is vigorously pursuing collection on this judgment.

 

On August 14, 2012, the Company, along with two shareholders of the Company, were named as a defendant in an action filed in the Superior Court for the State of California and the County of San Diego. The plaintiff alleges he was terminated by his former employer “Acoustics Control Sciences, LLC” (which is a company that is not affiliated with Max Sound Corporation) in August 2008 without receiving wages and other compensation allegedly due him. The plaintiff further claims that two of the members or “shareholders” of Acoustics Control Sciences, LLC, wrongfully transferred a patent owned by his former employer and this transfer prevented his former employer from paying the wages alleged due. According to the plaintiff, when the assets of his former

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

employer were sold to the Company, Max Sound Corporation became a successor-in-interest to the plaintiff’s former employer. Plaintiff thus seeks unpaid wages and other compensation from each alleged successor-in-interest named in his complaint. This case will be vigorously prosecuted and has a good likelihood of success.

 

On August 11, 2014, the Company and VSL simultaneously filed trade secret and patent infringement actions against Google, Inc., and its subsidiaries YouTube, LLC, and On2 Technologies, Inc., relating to proprietary and patented technology owned by Vedanti Systems Limited (“Vedanti”), a subsidiary of VSL.  The patent infringement complaint was originally filed in the U.S. District Court for the District of Delaware; the trade secret suit was filed in Superior Court of California, County of Santa Clara.  On September 30, 2014, the Company filed notices of voluntary dismissal without prejudice as to both lawsuits. On October 1, 2014, the Company amended the patent complaint and filed it in the U.S. District Court for the Northern District of California. In this patent lawsuit, which remains pending, the Company contends that, in 2010, while Google was in discussions with Vedanti about the possibility of acquiring Vedanti's patented digital video streaming techniques and other proprietary methods, Google gained access to and received technical guidance regarding Vedanti’s proprietary codec, a computer program capable of encoding and decoding a digital data stream or signal.  The lawsuit further alleges that soon after Google and Vedanti initiated negotiations, Google willfully infringed Vedanti's patent by incorporating Vedanti's patented technology into Google's own VP8, VP9, WebM, YouTube, Google Adsense, Google Play, Google TV, Chromebook, Google Drive, Google Chromecast, Google Play-per-view, Google Glasses, Google+, Google’s Simplify, Google Maps, and Google Earth, without compensating Vedanti for such use.  Plaintiffs are seeking a permanent injunction against Google, compensatory damages, as well as treble damages. As exclusive agent to VSL to enforce all rights with respect to the subject technology, the Company has hired Grant & Eisenhofer PA and Buether Joe & Carpenter LLC to represent the Company in the suit on a contingency fee basis. The case will be vigorously prosecuted, and the Company believes it has a good likelihood of success. 

 

Additionally, on December 5, 2014, the Company, along with renowned architect Eli Attia, filed a lawsuit in the Superior Court of California, County of Santa Clara, against Google, its co-founders Sergey Brin and Larry Page, Google’s spinoff company Flux Factory, and senior executives of Flux. Plaintiffs’ allege misappropriation of trade secrets, breach of contract and other contract-related claims, breach of confidence, slander of title, violation of California’s Unfair Competition Law (California Business and Professionals Code §§ 17200 et seq.), and fraud, and also bring a claim for declaratory relief. The lawsuit contends that Google and the other Defendants stole Mr. Attia’s trade secrets, proprietary information, and know-how regarding a revolutionary architecture design and building process that he alone had invented, known as Engineered Architecture. Defendants are alleged to have engaged Mr. Attia in 2010 and 2011 to translate his architectural technology into software for a proof of concept, with the goal of determining at that point whether to continue with full-scale development with Mr. Attia. Instead, the lawsuit claims that once Mr. Attia had disclosed the trade secrets and proprietary information

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

Defendants needed to bring the technology to market, they severed ties with Mr. Attia, and continued to use his technology without a license and without compensation, in order to bring the technology to market themselves. Plaintiffs seek a permanent injunction against Google, damages (including punitive damages), and restitution. As exclusive agent to Eli Attia to enforce all rights with respect to the subject technology, the Company has retained Buether Joe & Carpenter LLC to represent the Company in the suit, on a contingency fee basis. The case will be vigorously prosecuted, and the Company believes it has a good likelihood of success. 

 

On September 8 and 9, 2014, respectively, the Company and VSL were granted preliminary injunctions by the District Court of Berlin, Germany, against the Chinese company Shenzhen KTC Technology Co. Ltd. and the French company Pact Informatique S.A. Both companies have been offering products at the International Consumer Electronics Trade Show 2014 in Berlin, which, according to the company’s claim and the Preliminary Injunctions issued by the Court, infringed the rights to a patent. This patent is the German part of the patent on optimized data transmission, owned by Vedanti, which is already asserted the United States infringement proceedings. The products in question are tablet computers and smart phones with Android OS and with the ability to encode videos in the format H.264. The injunctions were issued ex-parte and can be appealed by the Defendants. However, currently there are no indications that any prospective appeals will be interposed. The Company can still enforce claims for cost reimbursement with regard to these legal proceedings.

 

On December 2, 2014, the Company filed a patent infringement action against Google, Inc., Germany GmBH, Google Commerce Ltd. and YouTube LLC with the District Court of Mannheim, Germany. The asserted patent infringement concerns the same patent infringement asserted in the in the prior Germany Preliminary Injunctions described herein. The Complaint alleges that Google Inc. and it above-named subsidiaries are offering and selling products which can also decode and show videos, which have been encoded in a patent protected and proprietary way. The complaint also avers that YouTube LLC offers to German customers, which are encoded and transmitted in a manner claimed and protected by the patent. The Company mainly seeks a permanent injunction against the Defendants, damages and information regarding past infringements.

 

The Company intends to vigorously prosecute these various patent infringement litigations. The Company believes it has a good likelihood of success associated with these patent infringement lawsuits. However, no assurance can be given by the Company as to the ultimate outcome of these actions or its effect on the Company. The law firm is prosecuting these action on a pure contingency fee basis.

 

On December 19, 2014, the Company announced that the San Diego County Superior Court has ruled in Max Sound's favor in a long running legal dispute with the former CEO Robert Steele of the now dissolved company Acoustic Control Sciences, LLC.

 

On January 26, 2015, the Company was named as a defendant in an action filed in the Superior Court for the State of California and the County of Los Angeles captioned Bibicoff Family Trust v. Max Sound Corporation (Case No. SC123679). In the complaint the plaintiff alleges a cause of action for breach of contract associated with the non-payment by the Company for certain services plaintiff agreed to provide to the Company. The Company interposed a cross-complaint against plaintiffs averring causes of action for breach of contract, fraud, and negligent misrepresentation by defendants with respect to defendants’ fraudulent and intentional undisclosed inability to perform the services that are the subject of this dispute. This lawsuit will be vigorously defended and prosecuted. While this lawsuit is in its nacency, the Company believes there is a strong likelihood of success on the merits with respect to the defending and prosecuting this action.

 

No assurance can be given as to the ultimate outcome of these actions or its effect on the Company.

  

NOTE 9        INTANGIBLE ASSETS

 

As of December 31, 2014 and December 31, 2013, the Company owns certain trademarks and technology rights.    See Note 1 (I).

 

Max Sound Corporation

Note to Financial Statements

As of December 31, 2014

 

Intangible assets were comprised of the following at December 31, 2014 and December 31, 2013:

 

		Useful Life		December 31, 2014				December 31, 2013
Distribution rights		10 Years			9,647,577			$	9,647,577	(2)
Trademarks		Indefinite			7,500,000				7,500,000
Licensing Rights		Indefinite			2,064,000
Software		3 Years			—				—	(1)
Other		Indefinite			275				275
Intellectual property		5 Years			—				—
Intellectual property		Indefinite			—				—
Accumulated amortization					(1,361,257	)			(343,898	)
Net carrying value					17,850,595			$	16,803,954

 

1)

During the year ended December 31, 2013, the Company entered into a settlement agreement with the seller of the software to reverse the original transaction which included the issuance of 3,000,000 shares of common stock in exchange for the software.    The Company received back 3,000,000 shares of common stock which was recorded as treasury stock in exchange of returning the software to the seller.    Upon the return of the shares, the Company recognized a gain of $220,000 based on the quoted trading price of the Company’s common stock, which was the best evidence of fair value.

 

2)

During the year ended December 31, 2013, the Company received $8,011 as a refund in cash from the seller of the distribution rights.  The refund reduced the carrying value of the purchased intangible.

 

For the year ended December 31, 2014 and 2013, amortization expense related to the intangibles with finite lives totaled $1,017,359 and $343,898, respectively, and was included in general and administrative expenses in the statement of operations.   

 

At December 31, 2014, future amortization of intangible assets is as follows:

 

	Year ending December 31:
	2015			$	1,054,359
	2016				1,054,359
	2017				1,054,359
	2018				1,054,359
	2019				1,002,559
	Thereafter				3,510,326
				$	8,730,321

 

NOTE 10        SUBSEQUENT EVENTS

 

Through the filing of these financial statements, the Company converted a total of approximately $821,316 in convertible debt comprised of principal and accrued interest into approximately 31,381,442 common shares.

 

On December 24, 2014, the Company entered into an agreement whereby the Company will issue up to $225,750 in a convertible note. The note matures on December 24, 2015 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest three trading prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $210,000 of proceeds less $10,750 in debt issue costs on and $5,000 in legal costs on January 5, 2015.

 

 

On January 21, 2015, the Company entered into an agreement whereby the Company will issue up to $50,000 in a convertible note. The note matures on January 21, 2016 and bears an interest charge of 10. The conversion price equals the “Variable Conversion Price”, which is 70% of the lowest three trading prices for the common stock during the twenty (20) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $50,000 on January 21, 2015.

 

On February 27, 2015, the Company entered into an agreement whereby the Company will issue up to $115,500 in a convertible note. The note matures on February 27, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest three trading prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $100,000 of proceeds after $10,500 in debt issue costs on and $5,000 in legal costs on March 5, 2015.

 

On May 12, 2014, the Company entered into an agreement whereby the Company will issue up to $105,000 in a convertible note. The note matures on May 12, 2015 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest daily prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $95,000 of proceeds after $10,000 in debt issue costs on March 12, 2015.

 

In January of 2015, the Company repaid $40,000 in principal to the principal stockholder and received $25,000 in principal from the principal stockholder related to the line of credit.

 

On January 21, 2015, the Company entered into a consulting services agreement. In connection with this agreement, the consultant shall be paid $4,000 per month and receive up to 150,000 shares of common stock payable in lots of 50,000 per month and will be issued 90 days after the date of the signing of the agreement.

 

On January 21, 2015, the Company entered into a consulting services agreement. In connection with this agreement, the consultant shall be paid $4,000 per month and receive up to 150,000 shares of common stock payable in lots of 50,000 per month and will be issued 90 days after the date of the signing of the agreement.

 

On February 18, 2015, the Company issued an additional 700,000 shares of stock to a consultant in connection with the agreement entered into in September of 2014.

 

On March 17, 2015, the Company entered into a services agreement. In connection with this agreement, the consultant will receive 300,000 shares of fully vested common stock, payable in lots of 100,000 shares of common stock per month and $5,000 per month. The agreement will continue until June 17, 2015.

 

On January 21, 2015, the Company filed a patent infringement action against Netflix Inc., Netflix Luxembourg S.a.r.l. and Netflix International B.V. with the District Court of Mannheim, Germany. The asserted patent is the same patent as in the German proceedings against Google Inc. and its subsidiaries. The Complaint alleges that Netflix Inc. and its subsidiaries are offering and transmitting video streams to German customers as part of their video-on-demand business model; the videos being encoded and transmitted in a manner claimed and protected by the patent. The Company primarily seeks a permanent injunction against the Defendants, plus damages and information regarding past infringements.

 

 

On January 26, 2015, the Company was named as a defendant in an action filed in the Superior Court for the State of California and the County of Los Angeles captioned Bibicoff Family Trust v. Max Sound Corporation (Case No. SC123679). In the complaint the plaintiff alleges a cause of action for breach of contract associated with the non-payment by the Company for certain services plaintiff agreed to provide to the Company. The Company interposed a cross-complaint against plaintiffs averring causes of action for breach of contract, fraud, and negligent misrepresentation by defendants with respect to defendants’ undisclosed inability to perform the services that are the subject of this dispute. This lawsuit will be vigorously defended and prosecuted. While this lawsuit is in its infancy, the Company believes there is a strong likelihood of success on the merits with respect to the defending and prosecuting this action.

 

On March 4, 2015 the Company filed a form 8K with the SEC associated with the Company entering into a Securities Exchange Agreement and the Company filing with the Secretary of State Delaware a Certificate of Designations, Preferences and Rights whereby, among other things, the Company for good and valuable consideration, agreed that in consideration of a large shareholder exchanging 120,000,000 shares of common stock back to the Company, the shareholder would receive 5,000,000 shares of Series A Convertible Preferred Stock of the Company at a Stated Value of $0.96 per share and a Conversion Price of $.0.04 per share. The Series A Convertible Preferred Stock carries certain voting preferences and will accrue dividends at a rate of 8% per annum Stated Value, payable in cash or in kind at the election of the Board of Directors.

 

On March 27, 2015, the Company, Hong Kong Opportunities LLC ("HKO") and John Blaisure entered into an amendment to the Securities Exchange Agreement ("Agreement") associated with the Company's Form 8K filing on March 4, 2015 (the, "Amendment").

 

In particular, the Amendment states that of the 120,000,000 shares of the Company's common stock, par value $0.0001 per share redeemed by the Company in exchange for the issuance of 5,000,000 shares of Series A Convertible Stock to HKO, HKO has requested and the Company and John Blaisure have agreed that 1,332,427 of such deliverable shares will be tendered to the Company by John Blaisure for redemption and no consideration. Pursuant to the Amendment, upon such delivery by John Blaisure, HKO shall be deemed to have satisfied the Company's conditions to closing the Agreement. 

 

 

ITEM 10.       DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Our executive officers and directors and their respective age as of March 29, 2014, are as follows:

 

NAME		AGE		POSITION
Greg Halpern		56		Chairman, Chief Financial Officer
John Blaisure		56		President & Chief Executive Officer
Lloyd Trammel		61		Chief Technical Officer

 

Set forth below is a brief description of the background and business experience of our executive officers and directors for the past five years.

 

Greg Halpern, Chairman, CFO & Founder

 

Greg Halpern is the founder and visionary of MAX-D, Mr. Halpern has invested over a million dollars into the Company in cash, notes, accrued salary, office space, and debt conversions.

 

Greg Halpern is the founder of Max Sound Corporation From 1997 to 2001 Mr. Halpern was the CEO of Circle Group Internet, Inc. (CRGQ: OTCBB). From 2002 to 2005, Mr. Halpern was the Chief Executive Officer of Circle Group Holdings Inc. (AMEX: CXN, formerly CRGQ.OB) and continued to be the CEO after it changed its name to Z-Trim Holdings Inc. (AMEX: ZTM) from 2006 - 2007. Circle Group was a venture capital firm for emerging technology companies which provided small business infrastructure, funding and intellectual capital to bring timely life-changing technologies to market through all early phases of the commercialization process. Mr. Halpern’s efforts there were focused on acquiring life improving technologies and bringing these products to the marketplace. In 2003, Mr. Halpern and his wife founded an unincorporated non-profit organization “People for Ultimate Kindness Toward All Living Creatures on Earth” whose purpose is and has been to identify problems on earth and those who are working to solve them. The Ultimate Kindness is a non-profit organization independent from the So Act Network. The Ultimate Kindness and the So Act Network share no financial interest or otherwise. In 2007, Mr. Halpern resigned from his position at Z-Trim Holdings and took a one (1) year sabbatical from business touring the Continental United States in his RV with his family. Currently, Mr. Halpern serves as the Chairman and Chief Financial Officer of Max Sound Corporation, and devotes approximately 50 hours each week to the management and operations of Max Sound Corporation.

 

John Blaisure, President & Chief Executive Officer.

 

John Blaisure is the President and Chief Executive officer of Max Sound Corporation.  Prior to Mr. Blaisure joining Max Sound Corporation, he was the Founder, President, and CEO of Effective Network Systems (ENS) from 1996 to 2010.  Effective Network Systems is a telephony software company that was debuted at the Intel Technology Summit in 1999 as one of the top 40 telephony software companies in the world.  Prior to his work at ENS, he was the Founder, President, and CEO of Fonz By The Day Stores from 1990 to 1996.  Fonz By The Day Stores is a cellular communication reseller and retailer in Dallas Texas. Fonz By The Day Stores achieved success as a market leader in the Dallas Fort Worth area in retail sales. The company also achieved success as a national leader in cellular rentals. Mr. Blaisure brings over 20 years of experience in managing and marketing of communication technology companies from the ground up.

 

Lloyd Trammell, Chief Technical Officer

 

Lloyd Trammell is the Chief Technical officer of MAX-D.  Mr. Trammell has more than 30 years experience designing high-end professional audio and musical equipment and sound design for industry leaders, such as Yamaha, Korg, Roland, Atlas Sound, Crest, Peavey Electronics, Alesis, Kawai and Ensoniq.  In the early eighties, Mr. Trammell was instrumental in creating MIDI, the Musical Instrument Digital Interface.  Because of his standing, Mr. Trammell aided in achieving standardized specifications and approval from electronic keyboard manufacturers for MIDI.  In the mid-eighties, he designed one of the first working surround sound processors, selling it to Hughes Audio, which later spun off to become SRS (NASDAQ:SRSL).  Today’s SRS technology is still based on this design.  Mr. Trammell holds several patents, including patent # 7,136,493 for “Sub-harmonic generator and stereo expansion processor.”  He holds numerous patents for Dimensional Sound Processing and ACM (Analog Acoustic Modeling).  He was Senior Product Development Manager at Atlas Sound, developing new digital and analog products for the high-end audio contractor market.  At Peavey, he invented the Kosmos audio processor, winning the “Rack Processor of the Year Award” at the 2002 National Association of Music Merchants (NAMM).  While at Peavey, Mr. Trammell managed the prestigious MediaMatrix product line of high-end professional digital audio systems used by Disney, U.S. Congress, Sydney Opera House and the Olympics. In his roles as Product Manager, he has overseen all aspects of product development from initial design and manufacturing to marketing.  Mr. Trammell also designs custom sounds for many of the world’s top musicians and performing artists: U2, Pink Floyd, Robert Plant, Yes, Heart, Boston, Madonna, Genesis, Prince, Cher, Bonnie Raitt, Hank Williams, Jr., Rippingtons, Emerson Lake and Palmer, Journey and Def Leppard.

 

Term of Office

 

Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board

  

Current Issues and Future Management Expectations

 

No board audit committee has been formed as of the filing of this Annual Report.

 

Compliance With Section 16(A) Of The Exchange Act.

 

Section 16(a) of the Exchange Act requires the Company’s officers and directors, and persons who beneficially own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and are required to furnish copies to the Company. To the best of the Company’s knowledge, any reports required to be filed were timely filed in fiscal year ended December 31, 2013, except that two sales by Greg Halpern were inadvertently reported late on a Form 4.

 

 

Code of Ethics

 

The Company has adopted a Code of Ethics applicable to its Chief Executive Officer and Chief Financial Officer. This Code of Ethics is filed herewith as an exhibit.

 

ITEM 11.       EXECUTIVE COMPENSATION

 

The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officers during the years ended December 31, 2013, and 2012 in all capacities for the accounts of our executive, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO):

 

SUMMARY COMPENSATION TABLE

 

Name and Principal Position	Year		Salary			Bonus		Stock			Option Awards		All Other Compensation			Total
			($)			($)		Awards			($)		($)			($)
								($)
Greg Halpern,(1)	2014			288,000		0		0			0			0		288,000
CFO	2013			268,000		0			0		0			0		216,000
John Blaisure,	2014			216,000		0			0		0			0		216,000
CEO (2)	2013			198,000		0			0		994,141			0		1,192,141
Lloyd Trammel,	2014			162,000		0			0		-			0		162,000
CTO (3)	2013			148,500		0			0		115,288			0		263,788

  

Outstanding Equity Interests

 

The following table sets forth information concerning outstanding stock options for each named executive officer as of December 31, 2014.

 

Outstanding Option Awards at Fiscal Year-End 

 

		Number of Securities Underlying Unexercised Options
Name		Exercisable Options				Unexercisable Options				Option Weighted Average Exercise Price			Option Expiration Date
John Blaisure			12,000,000				-			$	0.12		January 19, 2016
Lloyd Trammell			700,000				-			$	0.50		January 17, 2016

 

Pursuant to an employment agreement dated January 17, 2011, the Company issued options to purchase

12,000,000 shares of our common stock at $0.12 per share to John Blaisure.  On June 14, 2013, the Company amended the terms of the options to extend the expiration date by two years

 

On January 1, 2013, the Company issued options to purchase 700,000 shares of the Company’s common stock at $0.50 per share to Lloyd Trammel pursuant to an amended employment agreement dated December 31, 2012.  The options are immediately exercisable for a period of three years.

 

Other than as disclosed above, there were no stock options issued or exercised during the fiscal year ended December 31, 2014 by a named executive officer, and no awards were made to a named executive officer in the last completed fiscal year under any long-term incentive plan.

 

Compensation of Directors

 

Directors are permitted to receive fixed fees and other compensation for their services as directors. The Board of Directors has the authority to fix the compensation of directors. No amounts have been paid to, or accrued to, directors in such capacity.

 

Employment Agreements

 

Mr. Greg Halpern, our President and CFO, entered into an employment agreement with us on October 13, 2008. Pursuant to the Employment Agreement, the term of the employment shall be for a period of ten (10) years commencing on October 13, 2008. The term of this employment agreement shall automatically be extended for additional terms of one (1) year each unless either party gives prior written notice of non-renewal to the other party no later than sixty (60) days prior to the expiration of the end of the 10 years. Subject to the terms of the employment agreement, we shall pay Mr. Halpern $18,000 per month as compensation for his services rendered as provided in the employment agreement. In addition to the base salary, Mr. Halpern shall be entitled to a monthly commission equal to 10% of all of our sales. On May 1, 2013, the Company amended its employment agreement with Greg Halpern to increase his salary to $24,000 per month.  

 

Mr. John Blaisure, our CEO, entered into an employment agreement with us on January 17, 2011.  Pursuant to the employment agreement, the term of employment shall be for a period of five (5) years commencing on January 7, 2011.  Subject to the terms of the employment agreement, we agreed to pay Mr. Blaisure $8,000 per month as compensation for his services rendered as provided in the employment agreement.  On August 25, 2012, the agreement was updated to increase the monthly compensation to $12,000 per month beginning September 1, 2012. On May 1, 2013, the Company further amended the agreement to increase Mr. Blaisure’s salary to $18,000 per month. In addition, to the base salary, Mr. Blaisure is entitled to and shall receive a monthly commission equal to 20% of the gross sales of the Company derived from the efforts of Mr. Blaisure after deducting $8,000 from such amount.  Further, as of the date of the employment agreement, the Company issued to Mr. Blaisure, 3,000,000 shares of common stock and, within 10 days of the signing of the employment agreement, 12,000,000 options to buy common stock of the Company at $.12 per share for a period not to exceed three years from the date of the employment agreement. On June 14, 2013, such expiration date was extended for two more years.

 

On October 1, 2011, the Company executed an employment agreement with its Chief Technical Officer (“CTO”).  The term of the agreement is for five years.  As compensation for services, the CTO will receive a monthly compensation of $10,000, monthly commission equal to 5% of all profits derived from the sales of all products and services related to Max Sound, and an annual bonus of 5% of all profits derived from the sales of all products and services related to Max Sound that is over one million dollars. On December 31, 2012, the Company amended the agreement to grant Mr. Trammel options to purchase 700,000 shares of the Company’s common stock at $0.50 per share.  The options are immediately exercisable for a period of three years.

 

On December 31, 2012, Lloyd Trammell - CTO, John Blaisure – CEO and Greg Halpern - CFO amended their employment agreements with the Company to eliminate their previous annual bonus entitlements which was previously 10% each of revenues. In exchange for this consideration, the Company agreed that Executives

Trammell and Blaisure will each be decreased as their new bonuses to 6% of net profits, and Executive Halpern will each be decreased as his new bonus to 7% of net profits. All three Executives may elect at their option to receive such bonuses in cash or Rule 144 stock or any combination of both.

 

We have not had a promoter at any time during our past five fiscal years.

 

ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table provides the names and addresses of each person known to us to own more than 5% of our outstanding shares of common stock as of April 1, 2015 and by the officers and directors, individually and as a group. Except as otherwise indicated, all shares are owned directly.

 

On April 1, 2015, there were 285,044,350 issued and outstanding shares of common stock. Unless otherwise noted, each person identified below possesses sole voting and investment power with respect to the shares listed.  The information contained in this table is based upon information received from or on behalf of the named individuals or from publicly available information and filings by or on behalf of those persons with the SEC.

 

Title of Class		Name and Address of Beneficial Owner(1)		Amount and Nature of Beneficial Owner				Percent of Class (2)
Preferred Stock		Greg Halpern			5,000,000	(2)			33.4	%
Common Stock		Greg Halpern			2,510,933				0.88	%
Common Stock		John Blaisure			33,067,573	(3)			11.59	%
Common Stock		Lloyd Trammell			19,000,000	(4)			6.66	%
Common Stock		Total Shares owned by Directors and officers			57,067,573				52.53	%

 

 

 

 

(1)	Unless otherwise indicated, the address for each stockholder listed in the above table is c/o Max Sound Corporation, 2902A Colorado Avenue, Santa Monica, CA 90404.
(2)	Reference Event of Stock conversion from Common to Preferred Shares.
(3)	On January 17, 2011, we entered into an employment agreement with our CEO, John Blaisure. Pursuant to the employment agreement with Mr. Blaisure, we issued to Mr. Blaisure 12,000,000 immediately exercisable options to buy common stock of the Company at $.12 per share for an exercise period of three years from the date of the employment agreement. On June 14, 2013, the Company amended the terms of the options to extend the expiration date by two years.
(4)	On January 1, 2013, the Company issued options to purchase 700,000 shares of the Company’s common stock at $0.50 per share to Lloyd Trammel pursuant to an amended employment agreement dated December 31, 2012.  The options are immediately exercisable for a period of three years.

  

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTION, AND DIRECTOR INDEPENDENCE

 

On March 27, 2015, the Company, Hong Kong Opportunities LLC ("HKO") and John Blaisure entered into an amendment to the Securities Exchange Agreement ("Agreement") associated with the Company's Form 8K filing on March 4, 2015 (the, "Amendment").

 

In particular, the Amendment states that of the 120,000,000 shares of the Company's common stock, par value $0.00001 per share redeemed by the Company in exchange for the issuance of 5,000,000 shares of Series A Convertible Stock to HKO, HKO has requested and the Company and John Blaisure have agreed that 1,332,427 of such deliverable shares will be tendered to the Company by John Blaisure for redemption and no consideration. Pursuant to the Amendment, upon such delivery by John Blaisure, HKO shall be deemed to have satisfied the Company's conditions to closing the Agreement.

During the year ended December 31, 2014, the Company received $153,000 from Mr. Halpern.  The Company repaid $35,000 in principal to the principal stockholder under the term of this line of credit.  Pursuant to the terms of the loan, the loan is bearing an annual interest rate of 4% and is due on demand.

 

During the year ended December 31, 2013, the Company received $318,000 from Mr. Halpern.  The Company repaid $178,000 in principal in 2013 to the principal stockholder under the term of this line of credit.  Pursuant to the terms of the loan, the loan is bearing an annual interest rate of 4% and is due on demand.

 

On September 26, 2013, we entered into a Credit Line Agreement with Mr. Halpern for $1,000,000 that will mature and expire on or before the second anniversary of September 26, 2015.  Interest will accrue on each advance at an annual rate of 4%. As of December 31, 2014, the Company owed $268,227 in principal and accrued interest related to these loans and lines of credit.

 

ITEM 14.       PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Audit Fees

 

For the Company’s fiscal years ended December 31, 2014 and 2013, we were billed approximately $64,613, and $58,354, respectively, for professional services rendered for the audit and review of our financial statements.

  

Audit Related Fees

 

There were no fees for audit related services for the years ended December 31, 2014 and 2013.

 

Tax Fees

 

For the Company’s fiscal years ended December 31, 2014 and 2013, we were not billed for professional services rendered for tax compliance, tax advice, and tax planning.

 

All Other Fees

 

The Company did not incur any other fees related to services rendered by our principal accountant for the years ended December 31, 2014 and 2013.

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:

 

●	approved by our audit committee; or

 

●

entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular  service,  the  audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.

 

We do not have an audit committee.  Our entire board of directors pre-approves all services provided by our independent auditors.

 

The pre-approval process has just been implemented in response to the new rules. Therefore, our board of directors does not have  records of what percentage of the above fees were pre-approved.  However, all of the above services and fees were reviewed and approved by the entire board of directors either before or after the respective services were rendered. 

 

PART IV

 

ITEM 15.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

All Exhibits in calender year 2014 associated with all prior Form10 filings are incorporated herein by reference.

 

3. Exhibits

 

	1.1			Form of 8% Convertible Debenture Note dated October 29, 2014 in the amount of $110,000 entered into with LG Capital Funding, LLC.
	1.2			Form of 8% Convertible Debenture Note dated October 29, 2014 in the amount of $110,000 entered into with LG Capital Funding, LLC.
	1.3			Form of 8% Convertible Debenture Note dated December 24, 2014 in the amount of $225,000 entered into with Blue Citi.
	1.4			Form of 8% Convertible Debenture Note dated December 11, 2014 in the amount of $105,500 entered into with EMA Financial, LLC.
	1.5			Form of 8% Escrow Agreement dated November 5, 2014 in the amount of $105,000 entered into with Adar Bays, LLC.
	1.6			Form of 8% Convertible Debenture Note dated October 29, 2014 in the amount of $105,000 entered into with LG Capital Funding, LLC.
	1.7			Form of 8% Convertible Debenture Note dated November 5, 2014, in the amount of $254,000 entered into with LG Capital Funding, LLC.
	1.8			Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
	1.9			Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
	2.1			Certification of the Principal Executive and Principal Financal Officers pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

   

 

  

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated:  April 01, 2015

 

By

/s/ John Blaisure

John Blaisure,

President and Chief Executive Officer

(Duly Authorized Officer and Principal Executive Officer)

 

By

/s/ Greg Halpern

Greg Halpern,

Chief Financial Officer

(Duly Authorized Officer and Principal Financial Officer)

 

Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ John Blaisure		President, Chief Executive Officer and Director		April 01, 2015
John Blaisure		(Principal Executive Officer)
/s/ Greg Halpern		Chief Financial Officer and Director		April 01, 2015
Greg Halpern		(Principal Financial Officer)