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MAXD > SEC Filings for MAXD > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for MAX SOUND CORP

Form 10-Q for MAX SOUND CORP


15-May-2014

Quarterly Report


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.

Corporate History and Structure

Max Sound Corporation (the "Company") was 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") (the "Asset Purchase Agreement"). 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 $0.404 per share. The 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.

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

Plan of Operation

We began our operations on October 8, 2008, when we purchased the Form 10 company from the previous owners. Since that date and through 2013, we have conducted financings to raise initial start-up money for the building of our internet search engine and social networking website and to start our operations. In 2011, the Company shifted the focus of its business operations from their social networking website to the marketing of the Max Sound HD Audio Technology.

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

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

Results of Operations

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

                                                                 For the Three Months Ended
                                                                 March 31,         March 31,
                                                                   2014              2013
Revenue                                                                1,236     $         988

Operating Expenses
General and administrative                                           740,785           947,816
Endorsement fees                                                           -           480,000
Consulting                                                           133,812           127,076
Professional fees                                                    277,474           492,758
Website development                                                   22,881
Compensation                                                         256,400           270,359
Total Operating Expenses                                           1,431,352         2,318,009

Loss from Operations                                              (1,430,116 )      (2,317,021 )

Other Income / (Expense)
Gain (Loss) on extinguishment of debt                                (18,596 )               -
Interest expense                                                    (116,582 )         (29,656 )
Derivative expense                                                         -           (24,126 )
Amortization of debt offering costs                                  (78,983 )         (49,237 )
Loss on conversions                                                  (42,085 )         (46,093 )
Amortization of debt discount                                       (786,155 )        (421,763 )
Change in fair value of embedded derivative liability             (1,717,264 )         188,493
Total Other Income / (Expense)                                    (2,759,665 )        (382,382 )

Provision for Income Taxes                                                 -

Net Loss                                                       $  (4,189,781 )   $  (2,699,403 )

Net Loss Per Share - Basic and Diluted                         $       (0.01 )   $       (0.01 )

Weighted average number of shares outstanding during the
year Basic and Diluted                                           313,207,471       290,407,275


For the three months ended March 31, 2014 and for the three months ended March 31, 2013

General and Administrative Expenses: Our general and administrative expenses were $740,785 for the three months ended March 31, 2014 and $947,816 for the three months ended March 31, 2013, representing a decrease of $207,031, or approximately 22%, as a result of decrease in license fees. Our expenses on the general operation of the Company included added personnel, product development and marketing of our Max Sound Technology.

Endorsement Fees: Our endorsement fees were $0 for the three months ended March 31, 2014 and $480,000 for the three months ended March 31, 2013, representing a decrease of $480,000, or approximately 100%, as a result of an endorsement agreement with Pitbull signed in 2013.

Consulting Fees: Our consulting fees were $133,812 for the three months ended March 31, 2014 and $127,076 for the three months ended March 31, 2013, representing an increase of $6,736, or approximately 5%. The Company has increased the use of consultants to assist the Company in raising capital and promoting the Max Sound Technology.

Professional Fees: Our professional fees were $277,474 for the three months ended March 31, 2014 and $492,758 for the three months ended March 31, 2013, representing a decrease of $215,284, or approximately 44%, as a result of reduced legal fees.

Compensation: Our compensation expenses were $256,400 for the three months ended March 31, 2014 and $270,359 for the three months ended March 31, 2013, representing a decrease of $13,959, or approximately 5%, 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 March 31, 2014 and 2013, was $4,189,781, compared to $2,699,403 for the three months ended March 31, 2013. 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 three months ended March 31, 2014 and 2013 were $1,236 and $988, respectively. We have an accumulated deficit of $31,462,834 for the period from December 9, 2005 (inception) to March 31, 2014, and have negative cash flow from operations of $7,896,600 from inception.

As reflected in the accompanying financial statements, the Company is in the development stage with minimal operations, has an accumulated deficit of $31,462,834 for the period from December 9, 2005 (inception) to March 31, 2014, and has negative cash flow from operations of $7,896,600. 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 March 31, 2014 was not sufficient to meet the cash requirements to fund planned operations through December 31, 2014 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.


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

Private Financings

Below is a summary of our capital-raising activities for the three months ended March 31, 2014:

On January 28, 2014, the Company entered into an agreement whereby the Company will issue up to $25,000 in a convertible note. The note matures on January 27, 2015 and bears an interest rate of 10%. The conversion price equals the "Variable Conversion Price", which is 70% of the "Market Price", which is the average the closing bid prices for the lowest three (3) trading prices of the common stock during the twenty (20) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months. The Company received $25,000 proceeds, on January 28, 2014. As of March 31, 2014, the convertible note balance and accrued interest is $30,525.

On February 20, 2014, the Company entered into an agreement whereby the Company will issue up to $50,000 in a convertible note. The note matures on February 19, 2015 and bears a onetime interest charge of 5% after 90 days. The conversion price equals the "Variable Conversion Price", which is 70% of the "Market Price", which is the average of the lowest three (3) trading prices for the common stock during the fifteen (15) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months. The Company received $50,000 proceeds on February 20, 2014. As of March 31, 2014, the convertible note balance is $50,000.

On February 27, 2014, the Company entered into an agreement whereby the Company will issue up to $282,778 in a convertible note. The note matures on February 26, 2015 and bears an interest rate of 4%. The conversion price equals the "Variable Conversion Price", which is 75% of the "Market Price", which is the average the three (3) lowest closing bid prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months. The Company received $282,778 proceeds, less the $27,778 original issue discount pursuant to the terms of this convertible note, on February 27, 2014 and finder's fees of $5,000. As of March 31, 2014, the convertible note balance and accrued interest is $283,752. In connection with this raise, the Company also issued 250,000 three year warrants exercisable at $0.40/share.

On March 7, 2014, the Company entered into an agreement whereby the Company will issue up to $103,500 in a convertible note. The note matures on December 11, 2014, and bears an interest rate of 8%. The conversion price equals the "Variable Conversion Price", which is 65% of the "Market Price", which is the average the closing bid prices for the lowest three (3) trading prices of the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months. The Company received $103,500 proceeds, less the $3,500 finder's fee pursuant to the terms of this convertible note, on March 12, 2014. As of March 31, 2014, the convertible note balance and accrued interest is $104,044.


On March 19, 2014, the Company entered into an agreement whereby the Company will issue up to $25,000 in a convertible note. The note matures on March 18, 2015 and bears an interest rate of 10%. The conversion price equals the "Variable Conversion Price", which is 70% of the "Market Price", which is the average the closing bid prices for the lowest three (3) trading prices of the common stock during the twenty (20) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months. The Company received $25,000 proceeds, on March 19, 2014. As of March 31, 2014, the convertible note balance and accrued interest is $30,525.

During the three months ended March 31, 2014 and the year ended December 31, 2013, the Company issued convertible notes totaling $486,278 and $3,843,221 respectively. The Convertible notes consist of the following terms:

                                                                Three months
                                                                    ended          Year ended
                                                                  March 31,         December
                                                                    2014            31, 2013
                                                                  Amount of         Amount of
                                                                  Principal         Principal
                                                                   Raised            Raised
Interest
Rate                                                                  4% - 10 %        4% - 10 %
Default interest rate                                                14% - 22 %       14% - 22 %
                                                                                 October 24,
                                                               December 11,         2013 -
                                                             2014 - March 18,    December 29,
Maturity                                                           2015              2014

             70% of the "Market Price", which is lower of
Conversion   the average closing bid price for the common
terms 1      stock during the ten (10) trading day period       $           -      $   100,000
             70% of the "Market Price", which is lower of
Conversion   the average closing bid price for the common
terms 2      stock during the ten (10) trading day period                   -           83,333
             70% of the "Market Price", which is the average
             of the lowest three (3) trading prices for the
Conversion   common stock during the ten (10) trading day
terms 3      period prior to the conversion.                                -          166,000
             70% of the "Market Price", which is the average
             of the lowest three (3) trading prices for the
Conversion   common stock during the twenty (20) trading day
terms 4      period prior to the conversion.                                -           25,000
             70% of the "Market Price", which is the average
             of the lowest three (3) trading prices for the
Conversion   common stock during the ten (10) trading day
terms 5      period prior to the conversion.                                -          111,000
             70% of the "Market Price", which is the average
             of the lowest three (3) trading prices for the
Conversion   common stock during the ten (10) trading day
terms 6      period prior to the conversion.                                -           55,500
             65% of the "Market Price", which is the average
             of the lowest three (3) trading prices for the
Conversion   common stock during the ten (10) trading day
terms 7      period prior to the conversion.                                -           62,500
             65% of the "Market Price", which is the average
             of the lowest three (3) trading prices for the
Conversion   common stock during the fifteen (15) trading
terms 8      day period prior to the conversion.                            -          100,000
             75% of the three (3) lowest closing prices of
Conversion   the common stock during the ten (10) day
terms 9      trading period prior to the conversion date.                   -          277,777
             70% of the lower of the average of the three
Conversion   (3) lowest trading prices for the ten (10) day
terms 10     trading period prior to conversion.                            -          166,000
             65% of the lower of the average of the three
Conversion   (3) lowest trading prices for the ten (10) day
terms 11     trading period prior to conversion.                            -          103,500
             75% of the three (3) lowest closing prices of
Conversion   the common stock during the ten day trading
terms 12     period prior to the conversion date.                           -          833,334
             70% of the lower of the average of the three
Conversion   (3) lowest trading prices for the twenty (20)
terms 13     day trading period 1 day prior to conversion.                  -           25,000
             70% of the lower of the average of the three
Conversion   (3) lowest trading prices for the fifteen (15)
terms 14     day trading period 1 day prior to conversion.                  -           50,000
             75% of the three (3) lowest closing prices of
Conversion   the common stock during the ten day trading
terms 15     period prior to the conversion date.                           -          227,222
             70% of the "Market Price", which is the average
             of the lowest three (3) trading prices for the
Conversion   common stock during the fifteen (15) trading
terms 16     day period prior to the conversion.                            -           50,000
             65% of the "Market Price", which is the average
             of the lowest three (3) trading prices for the
Conversion   common stock during the ten (10) trading day
terms 17     period prior to the conversion.                                -          103,500
             70% of the lower of the average of the three
Conversion   (3) lowest trading prices for the twenty (20)
terms 18     day trading period 1 day prior to conversion.                  -           25,000


The Convertible notes consist of the following terms (continued):

                                                                Three months
                                                                    ended            Year ended
                                                                  March 31,         December 31,
                                                                    2014                2013
                                                                  Amount of          Amount of
                                                                  Principal          Principal
                                                                   Raised              Raised
Interest
Rate                                                                  4% - 10 %           4% - 10 %
Default interest rate                                                14% - 22 %          14% - 22 %
                                                               December 11,         October 24,
                                                             2014 - March 18,    2013 - December
Maturity                                                           2015             29, 2014


             75% of the three (3) lowest closing prices of
Conversion   the common stock during the ten (10) day
terms 19     trading period prior to the conversion date.                   -             110,000
             75% of the three (3) lowest closing prices of
Conversion   the common stock during the ten (10) day
terms 20     trading period prior to the conversion date.                   -             282,778
             70% of the lower of the average of the three
Conversion   (3) lowest trading prices for the twenty (20)
terms 21     day trading period 1 day prior to conversion.                  -              25,000
             65% of the "Market Price", which is the average
             of the lowest three (3) trading prices for the
Conversion   common stock during the ten (10) trading day
terms 22     period prior to the conversion.                                -              78,500
             70% of the lower of the average of the three
Conversion   (3) lowest trading prices for the fifteen (15)
terms 23     day trading period 1 day prior to conversion.                  -             100,000
             65% of the "Market Price", which is the average
             of the lowest three (3) trading prices for the
Conversion   common stock during the ten (10) trading day
terms 24     period prior to the conversion.                                -             153,500
             70% of the lower of the average of the three
Conversion   (3) lowest trading prices for the twenty (20)
terms 25     day trading period 1 day prior to conversion.                  -              25,000
             75% of the three (3) lowest closing prices of
Conversion   the common stock during the ten (10) day
terms 26     trading period prior to the conversion date.                   -             282,778
             75% of the three (3) lowest closing prices of
Conversion   the common stock during the ten (10) day
terms 27     trading period prior to the conversion date.                   -             221,000
             70% of the lower of the average of the three
Conversion   (3) lowest trading prices for the fifteen (15)
terms 28     day trading period 1 day prior to conversion.             50,000                   -
             75% of the three (3) lowest closing prices of
Conversion   the common stock during the ten (10) day
terms 29     trading period prior to the conversion date.             282,778
             70% of the lower of the average of the three
Conversion   (3) lowest trading prices for the twenty (20)
terms 30     day trading period 1 day prior to conversion.             25,000
             70% of the lower of the average of the three
Conversion   (3) lowest trading prices for the twenty (20)
terms 31     day trading period 1 day prior to conversion.             25,000
             65% of the "Market Price", which is the average
             of the lowest three (3) trading prices for the
Conversion   common stock during the ten (10) trading day

terms 32 period prior to the conversion. 103,500

$ 486,278 $ 3,843,222

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 6 regarding accounting for derivative liabilities.


During the year ended December 31, 2013, the Company received $290,000 from Greg Halpern, the Company's Chief Financial Officer and principal stockholder (referred to herein as the "principal stockholder"), and the Company repaid $150,213 in principal and accrued interest. Pursuant to the terms of the loan, the loan bears an annual interest rate of 4% and is due on or before September 26, 2015 (See Note 10). During the three months ended March 31, 2014, the principal stockholder loaned an additional $50,000. As of March 31, 2014, the line of credit balance including accrued interest totaled $192,110.

On April 28, 2014, the principal stockholder loaned an additional $85,000 to the Company under the September 26, 2013 line of credit.

In the event that we are unable to obtain additional financing and/or funding or our principal stockholder 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 . . .

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