UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

_______________

 

FORM 10-Q

_______________

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2015

 

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

 

 For the transition period from ______to______. 

 

Commission file number  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)

_______________

 

(800) 327-6293

(Registrant’s telephone number, including area code)

_______________

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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

 

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

Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock.

 

As of August 14, 2015, the registrant had  330,072,426 shares, par value $0.00001 per share, of common stock issued and outstanding.

 

 

MAX SOUND CORPORATION

 

FORM 10-Q

for the period ended June 30, 2015

 

INDEX 

 

PART I-- FINANCIAL INFORMATION
Item 1.	Condensed Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
PART II-- OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
SIGNATURES		31

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Quarterly 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 Ð FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

MAX SOUND CORPORATION

 

CONTENTS

 

PAGE	3	CONDENSED BALANCE SHEETS AS OF JUNE 30, 2015 (UNAUDITED) AND AS OF DECEMBER 31, 2014 .
PAGE	4	CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTH ENDED JUNE 30, 2015 AND 2014.
PAGE	5	CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED).
PAGES	6 - 19	NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED).

 

  

Max Sound Corporation

Condensed Balance Sheets

ASSETS

 

		June 30, 2015				December 31, 2014
		(UNAUDITED)
Current Assets
Cash		$	6,215			$	35,747
Inventory			8,796				38,071
Prepaid expenses			27,717				30,207
Debt offering costs - net			46,927				27,456
Total  Current Assets			89,655				131,481
Property and equipment, net			158,050				188,896
Other Assets
Security deposit			413				413
Intangible assets			17,323,416				17,850,595
Total  Other Assets			17,323,829				17,851,008
Total  Assets		$	17,571,534			$	18,171,385
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	1,359,063			$	656,308
Accrued expenses			163,563				116,903
Line of credit - related party			44,251				268,227
Derivative liabilities			2,983,397				3,234,792
Convertible note payable, net of debt discount of $1,655,775  and $1,691,065 respectively			1,507,964				1,337,353
Total Current Liabilities			6,058,238				5,613,583
Commitments and Contingencies
Stockholders' Equity
Preferred stock,  $0.00001 par value; 10,000,000 shares authorized			—				—
Series, A Convertible Preferred stock,  $0.00001 par value; 10,000,000 shares authorized,
5,000,000 and 0 shares issued and outstanding, respectively			50				—
Common stock,  $0.00001 par value; 570,000,000 shares authorized,
323,740,168  and 373,442,040 shares issued and outstanding, respectively			3,236				3,733
Additional paid-in capital			53,970,678				50,209,989
Treasury stock			(519,575	)			(519,575	)
Accumulated deficit			(41,941,093	)			(37,136,345	)
Total Stockholders' Equity			11,513,296				12,557,802
Total Liabilities and Stockholders' Equity		$	17,571,534			$	18,171,385

  

See accompanying notes to condensed unaudited financial statements.

 

  

Max Sound Corporation

Condensed Statements of Operations

(UNAUDITED)

 

		For the Three Months Ended,								For the six months ended
		June 30, 2015				June 30, 2014				June 30, 2015				June 30, 2014
Revenue		$	—			$	152			$	—			$	1,388
Operating Expenses
General and administrative			829,361				916,940				1,616,664				1,680,606
Consulting			174,712				140,894				244,549				274,706
Professional fees			219,653				128,858				337,277				406,332
Website development			10,000				—				15,000				—
Compensation			228,000				246,800				469,300				503,200
Total Operating Expenses			1,461,726				1,433,492				2,682,790				2,864,844
Loss from Operations			(1,461,726	)			(1,433,340	)			(2,682,790	)			(2,863,456	)
Other Income / (Expense)
Other income			20,710				37,500				20,710				37,500
Loss on inventory write off			—								(29,275	)
Gain (Loss) on extinguishment of debt			—				—				—				(18,596	)
Interest expense			(91,893	)			(80,612	)			(148,336	)			(197,195	)
Derivative Expense			(866,758	)			(47,506	)			(1,034,281	)			(47,506	)
Amortization of debt offering costs			—				(18,053	)			(41,929	)			(97,036	)
Loss on conversions			(125,953	)			(48,398	)			(125,953	)			(90,483	)
Amortization of debt discount			(1,001,924	)			(772,139	)			(1,932,848	)			(1,558,294	)
Change in fair value of embedded derivative liability			696,219				2,407,587				1,169,954				690,323
Total Other Income / (Expense)			(1,369,599	)			1,478,379				(2,121,958	)			(1,281,287	)
Provision for Income  Taxes			—				—				—				—
Net Income (Loss)		$	(2,831,325	)		$	45,039			$	(4,804,748	)		$	(4,144,743	)
Net Income (Loss) Per Share  - Basic		$	(0.01	)		$	0.00			$	(0.01	)		$	(0.01	)
Net Income (Loss) Per Share  - Diluted		$	(0.01	)		$	0.00			$	(0.01	)		$	(0.01	)
Weighted average number of shares outstanding
during the year Basic			305,550,413				333,384,831				335,473,464				323,325,126
Weighted average number of shares outstanding
during the year Diluted			305,550,413				373,140,081				335,473,464				323,325,126

   

See accompanying notes to condensed unaudited financial statements.

 

 

Max Sound Corporation

Condensed Statements of Cash Flows

(UNAUDITED)

 

		For the Six Months Ended,
		June 30, 2015				June 30, 2014
Cash Flows From Operating Activities:
Net Loss		$	(4,804,748	)		$	(4,144,749	)
Adjustments to reconcile net loss to net cash used in operations
Depreciation/Amortization			566,034				53,449
Stock and stock options issued for services			212,925				662,780
Warrants issued for services			—				—
Loss on debt conversion settled through the issuance of stock			105,246				90,483
Amortization of intangible assets			—				482,779
Amortization of stock based compensation			—				37,500
Amortization of original issue discount			—				104,870
Amortization of debt offering costs			41,929				57,036
Amortization of debt discount			1,932,848				1,453,425
Change in fair value of derivative liability			(1,169,954	)			(690,323	)
Loss on debt extinguishment			—				18,596
Derivative Expense			1,034,281				47,506
Changes in operating assets and liabilities:
Decrease in inventory			29,275				—
Decrease in prepaid expenses			2,490				47,739
Increase in accounts payable			702,735				166,179
Increase in accrued expenses			161,678				196,148
Net Cash Used In Operating Activities			(1,185,261	)			(1,416,582	)
Cash Flows From Investing Activities:
Cash paid in connection with acquisition of assets and intellectual property			—				(550,000	)
Purchase of property equipment			(8,009	)			(14,979	)
Net Cash Used In Investing Activities			(8,009	)			(564,979	)
Cash Flows From Financing Activities:
Proceeds from stockholder loans / lines of credit			144,024				142,000
Repayment from stockholder loans / lines of credit			(368,000	)			(28,340	)
Repayment of convertible note			(231,000	)			—
Proceeds from issuance of convertible note, less offering costs and OID costs paid			1,687,816				1,755,000
Cash paid on interest expense			(69,102	)			—
Net Cash Provided by Financing Activities			1,163,738				1,868,660
Net Decrease in Cash			(29,532	)			(112,901	)
Cash at Beginning of Period			35,747				166,778
Cash at End of Period		$	6,215			$	53,877
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 conversion of convertible debt and accrued interest		$	3,520,886			$	2,684,915
Conversion of common to preferred stock		$	1,200			$	5,368
Original debt discounts against derivative liabilities		$	1,782,232			$	—
Original issuance discounts		$	115,326			$	—

  

See accompanying notes to condensed unaudited financial statements. 

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

 

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 June 30, 2015 and 2014, 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 June 30, 2015 and 2014.

 

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

 

(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 $0 and $1,236 for the years ended June 30, 2015 and 2014, 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 $0 and $0 for the six months ended June 30, 2015 and 2014, respectively.

 

(I) Inventories

 

Inventory consists primarily of finished goods and is valued at the lower of cost or market. Cost is determined using the weighted average method and average cost is recomputed after each inventory purchase or sale. Inventory is periodically reviewed in order to identify obsolete or damaged inventory and impaired values. Inventory is comprised of gift cards valued at $8,796 at June 30, 2015.

 

(J) Identifiable Intangible Assets

 

As of June 30, 2015 and December 31, 2014, $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 June 30, 2015 and December 31, 2014, $7,885,341 and $8,338,121, 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 June 30, 2015 and 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.

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

 

In connection with funds raised through June 30, 2015, the Company recorded a liability and expensed $695,076 as royalty cost, related to the 20% fee, as of June 30, 2015, $30,000 has been paid . The remaining liability as of June 30, 2015, is $665,076 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 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 June 30, 2015, $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 June 30, 2015, the Company recorded a liability and expensed $347,538 as royalty cost, related to the 10% fee, as of June 30, 2015, $40,000 has been paid . The remaining liability as of June 30, 2015, is $307,538 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%.

  

(k) 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 six months ended June 30, 2015 and 2014, respectively.

 

(l) 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 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 six months ended June 30, 2015 and 2014, excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:

 

		June 30, 2015				June 30, 2014
Stock Warrants (Exercise price - $0.25 - $.40/share)			0				3,635,000
Stock Options (Exercise price - $0.10 - $.50/share)			0				12,700,000
Convertible Debt  (Exercise price - $0.07 - $.0817/share)			134,002,173				39,755,250
Series A Convertible Preferred Shares ($0.04/share)			125,000,000				—
Total			259,002,173				56,090,250

 

(M) 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 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 2010.

 

(N) Business Segments

 

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

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

 

(O) Recent Accounting Pronouncements

 

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

 

(P) Fair Value of Financial Instruments and Fair Value Measurements

 

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.

 

We adopted accounting guidance for financial and non-financial assets and liabilities (ASC 820). The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

·

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

·

Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

·

Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

 

The following are the major categories of liabilities measured at fair value on a recurring basis: as of June 30, 2015 and December 31, 2014, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

 

		Fair Value Measurement Using																Fair Value Measurement Using
			Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
Derivative Liabilities			—				2,983,397				—				2,983,397				—				3,234,792				—				3,234,792

 

(Q) 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.

 

(R) 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.

  

(S) 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. 

 

(T) 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.

 

(U) 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.

  

(V) Licensing & Distribution

 

On June 20, 2015, the Company entered into a license agreement with Santok LTD of United Kingdom (“Santok). The term of the agreement is three years. Santok, will pay the Company a royalty fee of $1.50 for each licensed product. Santok guarantees to the Company a minimum total of 150,000 cumulative licensed product installation with a minimum total guaranteed value of $225,000 over the five quarter of the agreement. If the total royalty paid is less than the guaranteed value, Santok will pay the difference.

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

 

NOTE 2           GOING CONCERN 

 

As reflected in the accompanying audited financial statements, the Company had a net loss of $4,804,748 for the six months ended June 30, 2015, has an accumulated deficit of $41,941,093 as of June 30, 2015, and has negative cash flow from operations of $1,185,261 as of and for the six months ended June 30, 2015.

 

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 December 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.

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

 

NOTE 3           DEBT

 

Debt consists of the following:

		As of				As of
		June 30, 2015				December 31, 2014
Line of credit - related party		$	44,251			$	268,227
Convertible debt			3,163,739				3,028,418
Less: debt discount			(1,655,775	)			(1,691,065	)
Convertible debt - net			1,507,964				1,337,353
Total current debt		$	1,552,215			$	1,605,580

 

 

(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, 2014		$	268,227
Borrowings during the six  months ended June 30, 2015			141,000				4	%			September 26, 2015
Interest accrual			3,024
Repayments			(368,000	)
Balance - June 30, 2015		$	44,251				4	%			September 26, 2015

 

(B) Convertible Debt

 

During the six months ended June 30, 2015 and December 31, 2014, the Company issued convertible notes totaling $1,990,495 and $3,475,334, respectively. The Convertible notes issued for six months ended June 30, 2015 and year ended December 31, 2014, consist of the following terms:

 

					Six Months Ended				Year ended
					June 30, 2015				December 31, 2014
					Amount of				Amount of
					Principal Remaining				Principal Remaining
Interest Rate					0% - 10%				2.5% - 10%
Default interest rate					14% - 22%				14% - 22%
Maturity					February 26, 2015 - December 10, 2016				February 26, 2015 - June 18, 2016
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.		$	107,100			$	—
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.			110,000				253,500
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.			989,179				1,006,500
Conversion terms 4		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.			150,000				—
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 twenty (20) trading day period prior to the conversion.			61,283				79,886
Conversion terms 6		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.			1,310,977				1,553,332
Conversion terms 7		60% of the “Market Price”, which is the lowest closing prices for 15 days prior to conversion			300,000				—
Conversion terms 8		Conversion at $0.10 per share			135,200				135,200
				$	3,163,739			$	3,028,418

 

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 six months ended June 30, 2015, the Company converted debt and accrued interest, totaling $1,649,363 into 63,498,128 shares of common stock.    

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

 

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.

 

Convertible debt consisted of the following activity and terms:

 

Convertible Debt Balance as of December 31, 2014			3,028,418
Borrowings during the six months ended June 30, 2015			1,990,495
Repayments			(231,000	)
Conversion  of debt to into 69,498,128 shares of common stock with a valuation of $1,689,572 ($0.017 - $0.042/share) including the accrued interest of $40,209			(1,609,174	)
Forgiveness of debt			(15,000	)
Convertible Debt Balance as of  June 30, 2015			3,163,739

 

 

(C)

Debt Issue Costs

 

During the six months ended June 30, 2015, the Company paid debt issue costs totaling $63,238.

 

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

 

		Six Months Ended				Six Months Ended
		June 30, 2015				June 30, 2014
Debt issue costs		$	103,738			$	164,555
Accumulated amortization of debt issue costs			(56,811	)			(136,582	)
Debt issue costs - net		$	46,927			$	27,973

 

 

During the six months ended June 30, 2015 and 2014 the Company amortized $41,929 and $38,983 of debt issue costs, respectively.

 

(D)

Debt Discount & Original Issue Discount

During the six months ended June 30, 2015 and December 31, 2014, the Company recorded debt discounts and original issue discounts totaling $1,819,095 and $3,199,391, respectively.

 

The debt discount recorded in 2015 and 2014 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 $1,932,848 and $1,453,424 during the six months ended June 30, 2015 and 2014, respectively, to amortization of debt discount expense.

 

		Six Months Ended				Six Months Ended
		June 30, 2015				June 30, 2014
Debt discount		$	3,510,160			$	2,923,369
Accumulated amortization of debt discount			(1,932,848	)			(1,712,320	)
Debt discount - Net		$	1,577,312			$	1,211,049

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

 

NOTE 4           DERIVATIVE LIABILITIES

 

The Company identified conversion features embedded within convertible debt issued in 2015 and 2014 and warrants issued in 2015 and 2014. 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, 2014		$	3,234,792
Fair value at the commitment date for convertible instruments			2,816,513
Change in fair value of embedded derivative liability for warrants issued			86,304
Change in fair value of embedded derivative liability for convertible instruments			(1,256,258	)
Reclassification to additional paid in capital for financial instruments that ceased to be a derivative liability			(1,897,954	)
Derivative Liability -June 30, 2015		$	2,983,397

 

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 six months ended June 30, 2015.  The Company recorded a derivative expense for the six months ended June 30, 2015 and 2014 of $1,034,281 and $47,506, 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 June 30, 2015:

 

			Commitment Date				Re-measurement Date
Expected dividends:			0	%			0	%
Expected volatility:			109% - 205%				143% - 205%
Expected term:			0.33 - 3 Years				0.11 - 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, 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%

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

   

NOTE 5           PROPERTY AND EQUIPMENT

 

At June 30, 2015 and December 31, 2014, respectively, property and equipment is as follows:

 

		June 30, 2015				December 31, 2014
Website Development		$	294,797			$	294,795
Furniture and Equipment			99,881				99,881
Leasehold Improvements			6,573				6,573
Software			53,897				53,897
Music Equipment			2,247				2,247
Office Equipment			79,658				71,652
Domain Name			1,500				1,500
Sign			628				628
Total			539,181				531,173
Less: accumulated depreciation and amortization			(381,131	)			(342,277	)
Property and Equipment, Net		$	158,050			$	188,896

 

Depreciation/amortization expense for the three and six months ended June 30, 2015 totaled $19,645 and $38,854, respectively.

 

Depreciation/amortization expense for the three and six months ended June 30, 2014 totaled $26,985 and $53,449, respectively.

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

 

NOTE 6          STOCKHOLDERS’ EQUITY

 

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.

 

On June 24, 2015, 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 120,000,000 shares of common stock from 450,000,000 million shares of common stock to 570,000,000 shares of common stock.

 

(A) Common Stock 

 

During the six months ended June 30, 2015, the Company issued the following common stock:

 

Transaction Type		Quantity				Valuation				Range of Value per share
Conversion of convertible debt and accrued interest			63,498,128			$	16,493,863				$0.017 - $0.042
Services - rendered			1,800,000				62,925				$0.03 - $0.06
Return of shares			(120,000,000	)			(1,200	)		$	0.000010
Conversion of line of credit in common stock			5,000,000				150,000			$	0.03
Total shares issued			(49,701,872	)		$	16,705,588

 

 The following is a detailed description of transactions noted above:

 

1. Conversion of convertible debt and accrued interest

 

During the six months ended June 30, 2015, the Company converted debt and accrued interest, totaling $1, 649,383 into 63,498,128 shares of common stock

 

2. Services Rendered

 

On March 1, 2015, the Company issued 250,000 shares of common stockhaving a fair value of $15,750 ($0.06/sh) in connection with employment agreements.

 

On April 1, 2015, the Company issued 150,000 shares of common stock having a fair value of $4,455 ($0.0284/sh) in exchange for consulting services.

 

On April 1, 2015, the Company issued 150,000 shares of common stock having a fair value of $4,455 ($0.0284/sh) in exchange for consulting services.

 

On April 1, 2015, the Company issued 300,000 shares of common stock having a fair value of $8,910 ($0.0284/sh) in exchange for consulting services.

 

On April 1, 2015, the Company issued 250,000 shares of common stock to employee having a fair value of $10,975 ($0.04/sh) in exchange for services.

 

On February 28, 2015, the Company entered into a services agreement. In connection with this agreement, the consultant will receive 700,000 shares of fully vested common stock having a fair value of $22,400 ($0.03/sh) in exchange for services.

 

3. Return of Shares and Issuance of Preferred shares

 

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. For the six months ended June 30, 2015, the Company has not declared dividends.

 

4. Conversion of line of credit into Common shares

 

On April 1, 2015, the principal stockholder converted $150,000 of the line of credit owed into 5,000,000 shares of common stock at $0.03 per share.

 

				Number of Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in Years)
	Balance, December 31, 2014				3,750,000			$	0.38				1.7
	Granted				—			$	—
	Exercised				—			$	—
	Cancelled/Forfeited				-200,000			$	—
	Balance, June 30, 2015				3,550,000			$	0.38				1.3

 

 A summary of all outstanding and exercisable warrants as of June 30, 2015 is as follows:

 

													Weighted Average
	Exercise				Warrants				Warrants				Remaining				Aggregate
	Price				Outstanding				Exercisable				Contractual Life				Intrinsic Value
$	0.10				200,000				200,000				2.41			$	—
$	0.40				2,850,000				2,850,000				1.24			$	—
$	0.45				500,000				500,000				0.51			$	—
					3,550,000				3,550,000				1.3 years			$	—

 

 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

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

 

The following tables summarize all option grants as of June 30, 2015, and the related changes during these periods are presented below:

 

	Outstanding - December 31, 2014				15,566,652				0.13				1.32
	Outstanding - June 30, 2015				15,566,652				—				0.82
	Exercisable - June 30, 2015				15,566,652

 

(D) Intangibles

 

As of June 30, 2015 and December 31, 2014, the Company owns certain trademarks and technology rights.    See Note 1 (I).

 

Intangible assets were comprised of the following at June 30, 2015 and December 31, 2014:

 

		Useful Life		June 30, 2015				December 31, 2014
Distribution rights		10 Years		$	9,647,577	(2)		$	9,647,577
Trademarks		Indefinite			7,500,000				7,500,000
Licensing Rights		Indefinite			2,064,000				2,064,000
Software		3 Years			—				—	(1)
Other		Indefinite			275				275
Accumulated amortization					(1,888,437	)			(1,361,257	)
Net carrying value				$	17,323,416			$	17,850,595

 

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 six months ended June 30, 2015 and 2014, amortization expense related to the intangibles with finite lives totaled $527,179 and $482,779, respectively, and was included in general and administrative expenses in the statement of operations.   

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

 

NOTE 7         COMMITMENTS

 

(A) Consulting Agreement

 

On June 11, 2015, the Company entered into a consulting services agreement with two consultant. The agreement will continue until September 10, 2015. In connection with this agreement, the consultant shall be paid $6,000 per month and receive up to 100,000 shares of common stock each upon completion, submission and approval of the first stage of working APP. An additional 100,000 shares will be issued upon the completion, submission and approval of the second stage working APP. As of June 30, 2015, no shares were issued.

 

On May 4, 2015, the Company entered into a consulting services agreement. The agreement will remain in effect for three years. In connection with this agreement, the consultant shall be paid $7,500 per month and receive 200,000 shares of common stock upon the execution of the agreement. An additional 200,000 shares of common still will be grated within 10 days of achieving each of the following milestones, whichever comes first, up to one million shares of stock based on marketing goals. For six months June 30, 2015, the Company recorded $10,700 in stock based compensation payable for 200,000 shares of common stock at ($0.05/share) based on trading price.

 

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. For three months June 30, 2015, the Company recorded $4,455 in stock based compensation.

 

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. For six months June 30, 2015, the Company recorded $4,455 in stock based compensation.

 

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. For six months June 30, 2015, the Company recorded $8,910 in stock based compensation.

 

On February 18, 2015, the Company entered into service agreement for a period of two years with the Company’s transfer agent for a period from September 23, 2014 to September 23, 2016. . In consideration for these services, during the six months ended June 30, 2015, 700,000 shares of fully vested common stock valued at $22,400 ($0.03/share) were granted.

 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED)

 

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 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 nascency, the Company believes there is a strong likelihood of success on the merits with respect to the defending and prosecuting this action.

 

On May 13, 2015 Google's “motion to dismiss” was denied by the Northern District of California court in a seven page order, stating that Max Sound had sufficiently alleged the existence and validity of the '339 Patent.

 

On June 11, 2015, the District Court of Mannheim announced it had scheduled the hearing in the video streaming patent case against Google and YouTube for December 8, 2015. According to German practice, the hearing will be closed on the same day, and a court decision is expected a few weeks later. The case was filed by Max Sound against Google Inc., Mountain View, USA, Google Commerce Ltd., Dublin, Ireland, Google Germany GmbH, Hamburg, Germany, and the Google subsidiary YouTube LLC, San Bruno, USA, in December 2014 because of the infringement of a video streaming patent, which is valid for the world's most important markets. Max Sound requested the German court to order Google and YouTube to stop streaming video via using the current VP8 or H.264 video codecs and to stop selling video-enabled devices like Nexus Phones and Chromecast sticks. Further requests are that information about any profits is rendered and that Google and YouTube are declared liable for damages based on patent infringement. Max Sound claims that Google and YouTube are using the technology protected by European Patent EP 2 026 277, which allows far more economically efficient transport of digital content due to greatly optimized data capacity.

 

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

  

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF JUNE 30, 2015

(UNAUDITED) 

 

NOTE 9        SUBSEQUENT EVENTS

 

Through the filing of these financial statements, the note holders converted a total of approximately $128,581 in convertible debt comprised of principal and accrued interest into approximately 6,132,258 common shares.

 

On July 2, 2015, the Company issued 200,000 shares of common stock having a fair value of $ ($0.0535/sh) in exchange for consulting services agreement dated May 4, 2015.

 

On July 13, 2015, the Company entered into a license agreement with Luna Mobile, Inc. of United States (“Luna). The term of the agreement is three years. Luna, will pay the Company a royalty fee of $1.50 for each licensed product

 

On July 28, 2015, the Company entered into a new engagement with its corporate counsel, McMenamin Law Group, for corporate legal services to be provided by legal counsel for a twelve month period, or until July 28, 2016 pursuant to which the Company will pay legal counsel $40,000 in fully vested shares of restricted common stock of the Company valued at ($0.04) per share for those services. 

 

On June 24, 2015, the Company entered into an agreement whereby the Company will issue up to $104,000 in a convertible note. The note matures on May 26, 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 less and $4,000 in legal costs on July 2, 2015.

 

On June 29, 2015, the Company entered into an agreement whereby the Company will issue up to $50,000 in a convertible note. The note matures on March 25, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 60% of the lowest trading price 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 $50,000 of proceeds on July 2, 2015.

 

On July 2, 2015, the Company entered into an agreement whereby the Company will issue up to $35,000 in a convertible note. The note matures on July 2, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest trading price for the common stock during the lower of (i) ten (10) trading days period prior to the conversion or (ii) ten (10) trading days immediately preceding the issuance date of the Note. 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 $30,250 of proceeds, less $1,750 in original issue discount and $3,000 in legal costs on July 14, 2015.

 

On July 13, 2015, the Company entered into an agreement whereby the Company will issue up to $35,000 in a convertible note. The note matures on July 13, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest trading price for the common stock during the lower of (i) ten (10) trading days period prior to the conversion or (ii) ten (10) trading days immediately preceding the issuance date of the Note. 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 $30,250 of proceeds, less $1,750 in original issue discount and $3,025 in legal costs on July 15, 2015.

 

On August 5, 2015, the Company entered into an agreement whereby the Company will issue up to $57,500 in a convertible note. The note matures on August 4, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest two 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 unpaid principal amount into shares of common stock after six months. The Company received $54,750 of proceeds less and $2,750 in legal costs on August 7, 2015.

 

On August 7, 2015, the Company entered into an agreement whereby the Company will issue up to $143,888.89 in a convertible note. The note matures on August 7, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest two 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 $125,000 of proceeds less and $5,000 in legal costs and $13,889 in original issue discount on August 9, 2015.

 

Subsequent to June 30, 2015, the Company received $115,000 from the principal stockholder under the terms of the line of credit and repaid $5,000 to the principal stockholder under the terms of the line of credit.

 

 

ITEM 2.       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 has entered into agreements with a few technology companies’ to use our HD Audio solution, and is in negotiations with several other multi-media companies that we believe 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/discover and http://mymaxd.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 2015.

 

We expect our financial requirements to increase with the additional expenses needed to market and promote the MAX-D HD 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 Three Months Ended,								For the six months ended
		June 30, 2015				June 30, 2014				June 30, 2015				June 30, 2014
Revenue		$	—			$	152			$	—			$	1,388
Operating Expenses
General and administrative			829,361				916,940				1,616,664				1,680,606
Consulting			174,712				140,894				244,549				274,706
Professional fees			219,653				128,858				337,277				406,332
Website development			10,000				—				15,000				—
Compensation			228,000				246,800				469,300				503,200
Total Operating Expenses			1,461,726				1,433,492				2,682,790				2,864,844
Loss from Operations			(1,461,726	)			(1,433,340	)			(2,682,790	)			(2,863,456	)
Other Income / (Expense)
Other income			20,710				37,500				20,710				37,500
Loss on inventory write off			—								(29,275	)
Gain (Loss) on extinguishment of debt			—				—				—				(18,596	)
Interest expense			(91,893	)			(80,612	)			(148,336	)			(197,195	)
Derivative Expense			(866,758	)			(47,506	)			(1,034,281	)			(47,506	)
Amortization of debt offering costs			—				(18,053	)			(41,929	)			(97,036	)
Loss on conversions			(125,953	)			(48,398	)			(125,953	)			(90,483	)
Amortization of debt discount			(1,001,924	)			(772,139	)			(1,932,848	)			(1,558,294	)
Change in fair value of embedded derivative liability			696,219				2,407,587				1,169,954				690,323
Total Other Income / (Expense)			(1,369,599	)			1,478,379				(2,121,958	)			(1,281,287	)
Provision for Income  Taxes			—				—				—				—
Net Income (Loss)		$	(2,831,325	)		$	45,039			$	(4,804,748	)		$	(4,144,743	)
Net Income (Loss) Per Share  - Basic		$	(0.01	)		$	0.00			$	(0.01	)		$	(0.01	)
Net Income (Loss) Per Share  - Diluted		$	(0.01	)		$	0.00			$	(0.01	)		$	(0.01	)
Weighted average number of shares outstanding
during the year Basic			305,550,413				333,384,831				335,473,464				323,325,126
Weighted average number of shares outstanding
during the year Diluted			305,550,413				373,140,081				335,473,464				323,325,126

 

 

For the three months ended June 30, 2015 and for the three months ended June 30, 2014.

 

General and Administrative Expenses: Our general and administrative expenses were $829,361 for the three months ended June 30, 2015 and $916,940 for the three months ended June 30, 2014, representing a decrease of $87,579, or approximately 10%, as a result of decrease in the general operation of the Company included added personnel, product development and marketing of our Max Sound Technology.

 

Consulting Fees:  Our consulting fees were $174,712 for the three months ended June 30, 2015 and $140,894 for the three months ended June 30, 2014, representing an increase of $33,818, or approximately 24%. The Company has increased the use of consultants to assist the Company.

 

Professional Fees: Our professional fees were $219,653 for the three months ended June 30, 2015 and $128,858 for the three months ended June 30, 2014, representing an increase of $90,795, or approximately 70%, as a result of increased legal fees.

 

Compensation: Our compensation expenses were $228,000 for the three months ended June 30, 2015 and $246,800 for the three months ended March 31, 2014, representing a decrease of $18,800, or approximately 8%, as a result of our expensing of monthly compensation to our CFO, CEO, CIO and to our CTO pursuant to their employment agreements.

 

Net Loss: Our net loss for the three months ended June 30, 2015 was $2,831,325, compared to net income of $45,039 for the three months ended June 30, 2014. While the operational expenses in marketing our Max Sound technology decreased from the same period of last year, the overall amount of our net loss substantially increased as a result of an increase in the change in the fair value of embedded derivative liability associated with the convertible debt.

 

For the six months ended June 30, 2015 and for the six months ended June 30, 2014.

 

General and Administrative Expenses: Our general and administrative expenses were $1,616,664 for the six months ended June 30, 2015 and $1,680,606 for the six months ended June 30, 2014, representing a decrease of $63,942, or approximately 27%, as a result of decrease in the general operation of the Company included added personnel, product development and marketing of our Max Sound Technology.

 

Consulting Fees:  Our consulting fees were $244,549 for the three months ended June 30, 2015 and $274,706 for the six months ended June 30, 2014, representing a decrease of $30,157, or approximately 11%. The Company has decreased the use of consultants to assist the Company.

 

Professional Fees: Our professional fees were $337,277 for the six months ended June 30, 2015 and $406,332 for the six months ended June 30, 2014, representing a decrease of $69,055 or approximately 17%, as a result of decrease in legal fees.

 

Compensation: Our compensation expenses were $469,300 for the six months ended June 30, 2015 and $503,200 for the six months ended June 30, 2014, representing a decrease of $33,900, or approximately 7%, as a result of our expensing of monthly compensation to our CFO, CEO, CIO and to our CTO pursuant to their employment agreements.

 

Net Loss: Our net loss for the three months ended June 30, 2015 was $4,804,747, compared to net loss of $4,144,743 for the six months ended June 30, 2014. While the operational expenses in marketing our Max Sound technology decreased from the same period of last year, the overall amount of our net loss substantially increased as a result of an increase in the change in the fair value of embedded derivative liability associated with the convertible debt.

 

 

Liquidity and Capital Resources

 

Revenues for the six months ended June 30, 2015 and 2014, were $0 and $0, respectively. We have an accumulated deficit of $41,941,093 for the period from December 9, 2005 (inception) to June 30, 2015, and have negative cash flow from operations of $1,185,261 for the six months ended June 30, 2015.  

 

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 June 30, 2015, 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 for the three months ended June 30, 2015:

 

On April 21, 2015, the Company entered into an agreement whereby the Company will issue up to $54,600 in a convertible note. The note matures on April 21, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest two 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 unpaid principal amount into shares of common stock after six months. The Company received $52,000 of proceeds less and $2,600 in legal costs on April 21, 2015.

 

On April 21, 2015, the Company entered into an agreement whereby the Company will issue up to $204,000 in a convertible note. The note matures on January 23, 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 $200,000 of proceeds less and $4,000 in legal costs on April 27, 2015.

 

On April 24, 2015, the Company entered into an agreement whereby the Company will issue up to $103,000 in a convertible note. The note matures on December 10, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is lower of the either (i) the closing sale price of the common stock on the trading day immediate receding the conversion or and (ii) 65% of the lowest 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 less and $3,000 in legal costs on April 27, 2015.

 

On April 21, 2015, the Company entered into an agreement whereby the Company will issue up to $105,000 in a convertible note. The note matures on April 21, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest two 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 $95,000 of proceeds less $5,000 in debt issue costs and $5,000 in legal costs on April 21, 2015.

 

On May 1, 2015, the Company entered into an agreement whereby the Company will issue up to $150,000 in a convertible note. The note matures on November 1, 2015 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 60% of the lowest two 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 $147,000 of proceeds less and $3,000 in legal costs on May 1, 2015.

 

On May 8, 2015, the Company entered into an agreement whereby the Company will issue up to $52,500 in a convertible note. The note matures on May 9, 2016 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest trading prices for the common stock during the (i) fifteen (15) trading days including the day a notice of conversion is received or (ii) fifteen (15) days prior to May 8, 2015. 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 $45,000 of proceeds less and $5,000 in legal costs and $2,500 in original issue discount on May 11, 2015.

 

On May 19, 2015, the Company entered into an agreement whereby the Company will issue up to $126,000 in a convertible note. The note matures on November 27, 2015 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 60% 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 $120,000 of proceeds less and $6,000 in legal costs on May 21, 2015.

 

On May 19, 2015, the Company entered into an agreement whereby the Company will issue up to $110,000 in a convertible note. The note matures on November 4, 2015 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the lowest two 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 $110,000 of proceeds less $5,000 in legal costs on May 21, 2015.

 

On June 22, 2015, the Company entered into an agreement whereby the Company will issue up to $150,000 in a convertible note. The note matures on December 22, 2015 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 60% of the lowest 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 $147,000 of proceeds less and $3,000 in legal costs on June 29, 2015.

 

 

During the six months ended June 30, 2015 and December 31, 2014, the Company issued convertible notes totaling $1,990,495 and $3,475,334, respectively. The Convertible notes issued for six months ended June 30, 2015 and year ended December 31, 2014, consist of the following terms:

 

					Six Months Ended				Year ended
					June 30, 2015				December 31, 2014
					Amount of				Amount of
					Principal Remaining				Principal Remaining
Interest Rate					0% - 10%				2.5% - 10%
Default interest rate					14% - 22%				14% - 22%
Maturity					February 26, 2015 - December 10, 2016				February 26, 2015 - June 18, 2016
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.		$	107,100			$	—
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.			110,000				253,500
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.			989,179				1,006,500
Conversion terms 4		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.			150,000				—
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 twenty (20) trading day period prior to the conversion.			61,283				79,886
Conversion terms 6		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.			1,310,977				1,553,332
Conversion terms 7		60% of the “Market Price”, which is the lowest closing prices for 15 days prior to conversion			300,000				—
Conversion terms 8		Conversion at $0.10 per share			135,200				135,200
				$	3,163,739			$	3,028,418

 

 

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 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.

 

During the three months ended June 30, 2015, the principal stockholder loaned an additional $116,000 and was repaid $293,000, including the conversion of $150,000 into Company’s common stock.  As of June 30, 2015, the line of credit balance including accrued interest totaled $44,251.

 

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

  

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.

 

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”.

 

Item 3. 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 4.  Controls and Procedures

 

Disclosure controls and procedures. Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

 

 

PART II - OTHER INFORMATION 

Item 1. 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 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 nascency, the Company believes there is a strong likelihood of success on the merits with respect to the defending and prosecuting this action.

 

On May 13, 2015 Google's “motion to dismiss” was denied by the Northern District of California court in a seven page order, stating that Max Sound had sufficiently alleged the existence and validity of the '339 Patent.

 

On June 11, 2015, the District Court of Mannheim announced it had scheduled the hearing in the video streaming patent case against Google and YouTube for December 8, 2015. According to German practice, the hearing will be closed on the same day, and a court decision is expected a few weeks later. The case was filed by Max Sound against Google Inc., Mountain View, USA, Google Commerce Ltd., Dublin, Ireland, Google Germany GmbH, Hamburg, Germany, and the Google subsidiary YouTube LLC, San Bruno, USA, in December 2014 because of the infringement of a video streaming patent, which is valid for the world's most important markets. Max Sound requested the German court to order Google and YouTube to stop streaming video via using the current VP8 or H.264 video codecs and to stop selling video-enabled devices like Nexus Phones and Chromecast sticks. Further requests are that information about any profits is rendered and that Google and YouTube are declared liable for damages based on patent infringement. Max Sound claims that Google and YouTube are using the technology protected by European Patent EP 2 026 277, which allows far more economically efficient transport of digital content due to greatly optimized data capacity.

 

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

 

 

Item 1A.

Risk Factors.

 

Not required for smaller reporting companies.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

Below is a summary of our capital-raising activities for the three months ended June 30, 2015 and underlying terms:

 

On April 16, 2015, the Company entered into a conversion agreement with Blue Citi, LLC relating to a convertible promissory note dated January 1, 2015, with the original principal amount of $225,000 for 2,500,000 shares based on a conversion price of $0.020 per share (See Note 6).

 

On April 2, 2015, the Company entered into a conversion agreement with Horberg Ventures, relating to a convertible promissory note dated August 21, 2014, with the original principal amount of $250,000 for 1,433,486 shares based on a conversion price of $0.017 per share (See Note 6).

 

On April 17, 2015, the Company entered into a conversion agreement with Horberg Ventures, relating to a convertible promissory note dated August 21, 2014, with the original principal amount of $250,000 for 1,049,930 shares based on a conversion price of $0.021 per share (See Note 6).

 

On April 22, 2015, the Company entered into a conversion agreement with Horberg Ventures, relating to a convertible promissory note dated August 21, 2014, with the original principal amount of $250,000 for 1,005,917 shares based on a conversion price of $0.025 per share (See Note 6).

 

On April 13, 2015, 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 1,717,820 shares based on a conversion price of $0.017 per share (See Note 6).

 

On June 25, 2015, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated June 11, 2014 with the original principal amount of $282,776 for 1,065,719 shares based on a conversion price of $0.028 per share (See Note 6).

 

On June 16, 2015, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated June 11, 2014 with the original principal amount of $282,776 for 921,659 shares based on a conversion price of $0.033 per share (See Note 6).

 

On June 1, 2015, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated June 11, 2014 with the original principal amount of $282,776 for 784.827 shares based on a conversion price of $0.038 per share (See Note 6).

 

On May 7, 2015, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated June 11, 2014 with the original principal amount of $282,776 for 773,196 shares based on a conversion price of $0.039 per share (See Note 6).

 

On April 27, 2015, the Company entered into a conversion agreement with Iliad Research and Trading, LP relating to a convertible promissory note dated June 11, 2014 with the original principal amount of $282,776 for 718,563 shares based on a conversion price of $0.042 per share (See Note 6).

 

On June 30, 2015, the Company entered into a conversion agreement with KBM Worldwide, Inc. relating to a convertible promissory note dated November 6, 2014, with the original principal amount of $254,000 for 3,707,489 shares based on a conversion price of $0.023 per share (See Note 6).

 

On June 23, 2015, the Company entered into a conversion agreement with KBM Worldwide, Inc. relating to a convertible promissory note dated November 6, 2014, with the original principal amount of $254,000 for 3,174,603 shares based on a conversion price of $0.025 per share (See Note 6).

 

On June 17, 2015, the Company entered into a conversion agreement with KBM Worldwide, Inc. relating to a convertible promissory note dated November 6, 2014, with the original principal amount of $254,000 for 2,707,581 shares based on a conversion price of $0.028 per share (See Note 6).

 

On June 15, 2015, the Company entered into a conversion agreement with KBM Worldwide, Inc. relating to a convertible promissory note dated November 6, 2014, with the original principal amount of $254,000 for 850,340 shares based on a conversion price of $0.029 per share (See Note 6).

 

On May 12, 2015, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated January 12, 2015, with the original principal amount of $105,000 for 318,509 shares based on a conversion price of $0.027 per share (See Note 6)

 

On April 16, 2015, the Company entered into a conversion agreement with JDF Capital, Inc. relating to a convertible promissory note dated December 18, 2014, with the original principal amount of $106,000 for 5,398,858 shares based on a conversion price of $0.020 per share (See Note 6)

 

On April 23, 2015, the Company entered into a conversion agreement with JDF Capital, Inc. relating to a convertible promissory note dated August 21, 2014, with the original principal amount of $111,000 for 1,279,181 shares based on a conversion price of $0.036 per share (See Note 6)

 

On June 12, 2015, the Company entered into a conversion agreement with EMA Financial, LLC convertible promissory note dated December 11, 2014, with the original principal amount of $105,000 for 600,000 shares based on a conversion price of $0.032 per share (See Note 6)

 

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

Item 5.

Other Information.

 

None.

 

Item 6.

Exhibits

 

All 10 Form exhibits previously exhibited associated with all Company 10 Form filings are incorporated herein.

  

Exhibit Number				Description
	10.1			Agreement with Alexander Mendeluk, Dated 5.4.2015
	10.2			License Agreement with Santok Dated 6.17.15
	10.3			Convertable Redeemable Note, Dated 4.21.15 issued to LG Capital
	10.4			Convertable Redeemable Note, Dated 4.21.15 issued to Vis Vires
	10.5			Convertable Redeemable Note, Dated 4.24.15 issued to EMA Financial
	10.6			Convertable Redeemable Note, Dated 4.24.15 issued to Union Capital
	10.7			Convertable Redeemable Note, Dated 5.01.15 issued to JSJ Investments
	10.8			Convertable Redeemable Note, Dated 5.07.15 issued to GW Holdings Group
	10.9			Convertable Debenture, Dated 5.19.15 issued to Macallan Partners
	10.1			Convertable Redeemable Note, Dated 5.21.15 issued to LG Capital
	10.11			Convertable Redeemable Note, Dated 6.22.15 issued to JSJ Investments
	10.12			Convertable Redeemable Note, Dated 6.29.15 issued to Darling Capital
	10.13			Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer
	10.14			Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer
	10.15			Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

  

SIGNATURES

 

Pursuant to the requirements 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.

 

	MAX SOUND CORPORATION
	(Registrant)
Date: August 14, 2015	By:	/s/ John Blaisure
		John Blaisure
		Chief Executive Officer (Principal Executive Officer)
	By:	/s/ Greg Halpern
		Greg Halpern
		Chief Financial Officer (Principal Financial and Accounting Officer)