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MAXD > SEC Filings for MAXD > Form 10-K on 1-Apr-2013All Recent SEC Filings

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Form 10-K for MAX SOUND CORP


1-Apr-2013

Annual Report


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

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

Overview

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

In May of 2010, we acquired the world-wide rights to all fields of use for Max Sound HD Audio technology. In November of 2010, we opened our post-production facility for Max Sound HD Audio in Santa Monica California. In February of 2011, 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 ("LSI"). Pursuant to the Asset Purchase Agreement, the assets of LSI 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. T he assets of LSI purchased included: record label distribution agreements; Liquid Spins technology inventory; independent arts programs; retail contracts for music distribution; gift card retail contracts via incomm; physical inventory and office equipment; design and retail ready concepts; brand value; records; publishing catalog; and web assets.

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

A new video is currently available on the company website at http://www.maxsound.com. The amazing Max Sound® Technology Highlights Video is 10 minutes long and summarizes the HD Audio™ process including meeting the inventor of the technology and showing the need for high definition audio in several key vertical markets. The video explains Max Sound® as currently the only Company offering dynamic HD Audio™ to various markets and how the technology reduces the audio file size during the conversion process to help reduce bandwidth issues companies are currently facing and how it also decreases compressed square waves which can damage listeners hearing.


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 2011, we have completed financing 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.

We have also received three loans from Mr. Greg Halpern, in the amount of $9,500, $15,000 or $16,700 on May 11, May 22, and May 26, 2009, respectively. Each of the loans bears an interest rate equal to the primate rate as of the date of issuance. These loans matured and expired in 2011. 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 will mature 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%. As of December 31, 2012, the Company owed $0 in principal and $0 in accrued interest related to these loans and lines of credit. We believe that the $500,000 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 2013 to continue marketing the Max Sound HD Audio Technology aggressively to Multi-Media Industry Users of Audio and Audio with Video products.

In 2011, the Company has received from Mr. Halpern additional net advances on the established lines of credit in the amount of $134,000 and forgiveness of $244,000 through conversion of debt notes and accrued salary into shares at 11 cents per share. 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.

The Company believes that Max Sound HD Audio Technology is a game changer for several vertical markets whose demand will create revenue opportunities in 2013 that will meet the Company's needs to eliminate its going concern status in 2014.

We expect our financial requirements to increase with the additional expenses needed to market and promote the Max Sound® Audio technology. We plan to fund these additional expenses by loans from Mr. Halpern 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.

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.


Results of Operations

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

                                                                 For the Years Ended December 31,
                                                                     2012                  2011


Revenue                                                        $               5       $      13,000

Operating Expenses
General and Administrative                                             1,385,540             255,589
Endorsement Fees                                                               -           1,573,273
Consulting                                                               614,298           1,348,753
Professional Fees                                                        164,059             146,935
Website Development                                                            -                   -
Compensation                                                             704,223           2,182,794
Total Operating Expenses                                               2,868,120           5,507,344

Loss from Operations                                                  (2,868,115 )        (5,494,344 )

Other Income / (Expense)
Interest Income                                                              177                 511
Interest Expense                                                         (41,371 )            (5,940 )
Derivative Expense                                                     (201,395)                   -
Amortization of debt offering costs                                    (126,854)                   -
Amortization of Debt Discount                                           (825,819 )           (13,710 )
Change in fair value of embedded derivative liability                   (44,805)              21,836
Total Other Income / (Expense)                                       (1,240,067)               2,697 )

Provision for Income Taxes                                                     -                   -

Net Loss                                                       $      (4,108,182 )     $  (5,491,647 )

Net Loss Per Share - Basic and Diluted                         $           (0.02 )     $       (0.02 )

Weighted average number of shares outstanding
 during the year Basic and Diluted                                   260,207,229         242,287,741


For the Fiscal Year Ended December 31, 2012 and for the Fiscal Year Ended December 31, 2011

General and Administrative Expenses: Our general and administrative expenses for the years ended December 31, 2012 and 2011, were $1,385,540 and $255,589, respectively. The increase of 1,129,951 or approximately 442%, was a result of our increased advertising and promotional expenses which include the cost of public relations and product promotion activities, and a decrease in other expenses associated with the operation of the company.

Endorsement Fees: Our endorsement fees for the years ended December 31, 2012 and 2011, were $0 and $1,573,273, respectively. The decrease of $1,573,273 or approximately (100%) was a result of a decrease in expenses associated with having high profile individuals promote and market our social networking website.

Consulting Fees: Our consulting fees for the years ended December 31, 2012 and 2011, were $614,298 and $1,348,753, respectively. The decrease of $734,455 or approximately (54%) was a result of a decrease in expenses associated with the additional consulting, promotional and marketing services related to our social networking website, and an increase in expenses associated with the further development of our Max Sound® HD Audio technology.

Professional Fees: Our professional fees for the years ended December 31, 2012 and 2011, were $164,059 and $146,935, respectively. The increase of $17,124, or approximately12%, was a result of an increase in the expenses associated with the preparation of our financial statements and regulatory filings required for publicly traded companies.

Compensation: Our compensation expenses for the years ended December 31, 2012 and 2011, were $704,223 and $2,182,794, respectively. The decrease of $1,478,571, or approximately (68%), was a result of our decrease in the expensing of stock options, , and an increase due to additional employees hired during 2012.

Net Loss: Our net loss for the year ended December 31, 2012, was $4,108,182, compared to $5,491,647 for the year ended December 31, 2011. The decrease in net loss was the result of the decrease in expenses associated with our prior business operations which were abandoned in 2011, expensing in stock options, and an increase in expenses associated with the promotion and marketing of the Max Sound HD Audio Technology.

Liquidity and Capital Resources

Revenues for the fiscal years ended December 31, 2012, and 2011, were $5 and $13,000, respectively. We have an accumulated deficit of $18,468,166 for the period from December 9, 2005 (inception) to December 31, 2012, and have negative cash flow from operations of $3,676,694 from inception.

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

From our inception through December 31, 2012, 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.


We have received three loans from Mr. Greg Halpern, in the amount of $9,500, $15,000 or $16,700 on May 11, May 22, and May 26, 2009, respectively. During the year ended December 31, 2011, the Company repaid $18,000 in principal and $2,116 of accrued interest to the principal stockholder. Each of these loans accrue interest at the prime rate as of the date of issuance. These loans matured and expired in 2011. The prime rate of interest is the rate of interest that major banks charge their most creditworthy customers. For the purposes of this agreement, 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, we have determined that the prime rate shall be 3.25%. As of December 31, 2012, we owed $0 in principal and $0 in accrued interest.

For the year ended December 31, 2011, we received $134,000 from Mr. Greg Halpern, our principal shareholder, by way of the established lines of credit. Pursuant to the lines of credit agreements, the lines of credits bear an annual interest rate of 3.25% and are due on May 29, 2011, November 11, 2011, and March 25, 2012. During the year ended December 31, 2011, the Company repaid $255,480 in principal and $11,283 in accrued interest to the principal stockholder. As of December 31, 2012, we owe $0 in principal and accrued interest of $0.

On October 13, 2008, the Company entered into an employment agreement with the principal stockholder whereby the principal stockholder would be paid $18,000 per month for a term of ten (10) years for services rendered as the Chief Executive Officer of the Company.

On February 18, 2011 the Company's Board authorized the issuance and conversion of 2,218,182 shares of par value $.0001 common stock at $.11 per share as payment to the principal stockholder for conversion of $100,000 of the debt outstanding and the full $144,000 in accrued wages payable owed as of January 31, 2011. Pursuant to the Board's authorization and resulting issuance of shares, the principal shareholder has entered into an agreement (the "Conversion Agreement") with the Company relinquishing the Company from any further obligation to the principal shareholder with respect to $100,000 of the note payable outstanding and all amounts due and payable as wages as of January 31, 2011.

Subscription Agreement

On August 2, 2011 the Company entered into a subscription agreement ("Subscription Agreement") with certain investors (the "Investors") for the issuance and sale of 18,857,000 shares of the Company's common stock, $.0001 par value per share, for $0.10 per share, aggregating $1,857,000 in gross proceeds (the "Offering"). The shares sold pursuant to the Offering do not have any registration rights. The officers of the Company conducted the offering. Other than an Asset Sale Agreement that the Company previously entered into with Adam Nelson, as disclosed in the Form 8-K filed with the SEC on January 21, 2011, there are no other material relationships between the Company and the Investors.

As more fully described in paragraph above, on August 2, 2011, pursuant to the Subscription Agreement, we issued an aggregate of 18,857,000 shares of common stock, for aggregate gross proceeds of $1,885,700. Such securities were not registered under the Securities Act. The issuance of these securities was exempt from registration under Rule 506 of Regulation D and/or Regulation S promulgated under the Securities Act of 1933, as amended. We made this determination based on the representations of Investors, which included, in pertinent part, that such shareholders were either (a) "accredited investors" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, or (b) not a "U.S. person" as that term is defined in Rule 902(k) of Regulation S under the Act, and that such shareholders were acquiring our common stock, for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that the shareholders understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.

However, additional expenses may arise from existing employee agreements, and the maintenance of our regulatory filings and responsibilities which include legal, accounting and electronic filing services. It is anticipated that the cost to maintain these activities will be no less than $780,000 and no more than $1,000,000. We have entered into a Line of Credit Note with Greg Halpern who has agreed to establish a revolving line of credit for us with a maximum amount of $500,000 that will mature and expire on March 25, 2012. The Line of Credit Note shall 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 this agreement, 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%.

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

In February 2013, FASB issued Accounting Standards Update 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force). This guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This stipulates that (1) it will include the amount the entity agreed to pay for the arrangement between them and the other entities that are also obligated to the liability and (2) any additional amount the entity expects to pay on behalf of the other entities. The objective of this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements. The amendments in this update are effective for fiscal periods (and interim reporting periods within those years) beginning after December 15, 2013. This standard is not expected to have a material impact on the Company's reported results of operations or financial position.

In February 2013, FASB issued Accounting standards update 2013-02, Comprehensive Income Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. This update requires an entity to provide information amount the amount reclassified out of accumulated other comprehensive income by component. The entity is also required to disclose significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting periods. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other discourses required under U.S. GAAP that provide additional detail about those amounts. The objective in this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this update should be applied prospectively for reporting periods beginning after December 15, 2012. This standard is not expected to have a material impact on the Company's reported results of operations or financial position.


Critical Accounting Policies and Estimates

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

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

Revenue Recognition:
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is assured. We had $5 and $13,000 in revenue for the years ended December 31, 2012 and 2011, respectively.

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

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

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

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

Impairment of Long-Lived Assets
The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, Accounting for the Impairment or Disposal of Long-Lived Assets." ASC Topic 360-10-05 requires that long-lived assets, such as technology rights, be reviewed for impairment annually, or whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including the eventual disposition. If the future net cash flows are less than the carrying value of an asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value or disposable value. For the year ended December 31, 2012, 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 . . .

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