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MAXD > SEC Filings for MAXD > Form 10-Q on 14-Aug-2014All Recent SEC Filings

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Form 10-Q for MAX SOUND CORP


14-Aug-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; physical inventory and office equipment; design and retail ready concepts; brand value; records; publishing catalog; and web assets.

The Company's music business partners have not fulfilled the opportunities they had committed to deliver to the Company, however other opportunities have recently developed. For example, Akyumen Technologies Corp. and LOOKHU are contracting with the Company to white label its music business in their mobile devices and social media platform respectively. The Company is also in negotiations with additional OEMs to expand this segment of the business. Additionally, the Company has taken recent steps to decrease its cash requirements to operate this segment of its business while negotiating better terms for its music distribution platform.

In May 2014 the Company expanded its business, future offerings and logo to include additional technologies.

Effective May 29, 2014, the Company entered into a license agreement with VSL Communications ("VSL"), pursuant to which the Company received a perpetual, exclusive, worldwide right to use certain optimized data transmission technology owned by VSL. The agreement also entitles the Company to act as VSL's exclusive agent to negotiate potential opportunities concerning the technology, including sublicenses of the technology to third parties, and to sue certain pre-approved violators of VSL's intellectual property rights relating to the technology. Proceeds of any such opportunities, including settlement of legal disputes, will be split equally between VSL and the Company.

As consideration for the above-referenced representation and license rights, the Company agreed to pay VSL (i) an aggregate of $1,500,000 in cash, initially to be paid in monthly installments following a $500,000 down payment, or from a percentage of proceeds of any future financings conducted by the Company; and
(ii) 10,000,000 restricted shares of Company common stock, to be paid within two weeks of closing.

VSL's technology process can reduce the size of multi-media content and data files. This technology is currently being used in the delivery of streaming audio, video, and digital data transmission.

Licensing and Distribution Developments

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

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

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

As consideration for the above-referenced license rights, LOOKHU agreed to pay the Company royalties of $2.25 per month per paid subscription to the technology, to be payable on a monthly basis. Additionally, LOOKHU agreed to pay the Company 4% of the net advertising revenue derived from advertising that utilizes the technology, to be payable on a quarterly basis.

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

LOOKHU can be used on any Android device, Akuymen device, Xbox®, Apple TV®, Nintendo Wii® or Sony Playstation®.LOOKHU is different from other content providers because of its exclusive content, and available HD audio platform, built and powered by MAX-D.

The Company is in negotiations with several additional 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. Video Link of CES 2014 booth: http://vimeo.com/77764981 Snapdragon Interview Link with MAXD CEO John Blaisure: http://youtu.be/hMOiieiIYIw

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                             For the
                                                 Three Months Ended,                  Six Months Ended
                                             June 30,          June 30,          June 30,          June 30,
                                               2014              2013              2014              2013
Revenue                                    $         152     $         732     $       1,388     $       1,720

Operating Expenses
General and administrative                       916,940           492,879         1,680,606         1,440,696
Endorsement fees                                       -                 -                 -           480,000
Consulting                                       140,894           143,211           274,706           270,287
Professional fees                                128,858           110,630           406,332           603,388
Website development                                    -                 -                 -                 -
Compensation                                     246,800           411,340           503,200           681,699
Total Operating Expenses                       1,433,492         1,158,060         2,864,844         3,476,070

Loss from Operations                          (1,433,340 )      (1,157,328 )      (2,863,456 )      (3,474,350 )

Other Income / (Expense)
Interest income                                        -                 -                 -                 -
Other income                                      37,500                 -            37,500                 -
Gain on sale of intellectual property                  -                 -                 -                 -
Gain (Loss) on extinguishment of debt                  -                 -           (18,596 )               -
Interest expense                                 (80,612 )         (32,453 )        (197,195 )         (62,109 )
Derivative Expense                               (47,506 )         (71,752 )         (47,506 )         (95,877 )
Amortization of debt offering costs              (18,053 )         (72,418 )         (97,036 )        (121,655 )
Loss on conversions                              (48,398 )               -           (90,483 )         (46,093 )
Amortization of debt discount                   (772,139 )        (660,334 )      (1,558,294 )      (1,082,097 )
Change in fair value of embedded
derivative liability                           2,407,587            47,534           690,323           236,026
Total Other Income / (Expense)                 1,478,379          (789,423 )      (1,281,287 )      (1,171,805 )

Provision for Income Taxes                             -                 -                 -                 -

Net Income (Loss)                          $      45,039     $  (1,946,751 )   $  (4,144,743 )   $  (4,646,155 )

Net Loss Per Share - Basic and Diluted     $        0.00     $       (0.01 )   $       (0.01 )   $       (0.02 )

Weighted average number of shares
outstanding during the year Basic and
Diluted                                      333,384,831       295,880,176       323,325,126       293,158,844

For the three months ended June 30, 2014 and 2013

Revenue. Revenues for the three months ended June 30, 2014 and 2013 were $152 and $732, respectively.

General and Administrative Expenses: Our general and administrative expenses were $916,940 for the three months ended June 30, 2014 and $492,879 for the three months ended June 30, 2013, representing an increase of $424,061, or approximately 86%, as a result of an increase in the amortization of intangibles, increased stock based compensation, and the increase in the general operation of the Company. Our expenses on the general operation of the Company included the ancillary expenses for added personnel, product development, and marketing of our Max Sound Technology.

Consulting Fees: Our consulting fees were $140,894 for the three months ended June 30, 2014 and $143,211 for the three months ended June 30, 2013, representing a decrease of $2,317 or approximately 2%. The expense has remained relatively consistent.

Professional Fees: Our professional fees were $128,858 for the three months ended June 30, 2014 and $110,630 for the three months ended June 30, 2013, representing an increase of $18,228, or approximately 16%, as a result of increased legal fees related to our product development and increased accounting fees associated with the preparation of our financial statements and regulatory requirements required for publicly traded companies.

Compensation: Our compensation expenses were $246,800 for the three months ended June 30, 2014 and $411,340 for the three months ended June 30, 2013, representing a decrease of $164,540, or approximately 40%, as a result of the change in classification of stock based compensation, which was included in the compensation amount for 2013, but was included in general and administrative expense for 2014.

Net Loss: Our net income (loss) for the three months ended June 30, 2014 and 2013, was $45,039, compared to $(1,946,751) for the three months ended June 30, 2013. The overall amount of our net loss substantially decreased as a result of a $2,407,587 positive change in the fair value of embedded derivative liability associated with the convertible debt.

For the six months ended June 30, 2014 and 2013

Revenue. Revenues for the six months ended June 30, 2014 and 2013 were $1,388 and $1,720, respectively.

General and Administrative Expenses: Our general and administrative expenses were $1,680,606 for the six months ended June 30, 2014 and $1,440,696 for the six months ended June 30, 2013, representing an increase of $239,910, or approximately 17%, as a result of increased amortization of intangibles, decreased stock based compensation, and the increase in the general operation of the business. Our expenses on the general operation of the Company included the ancillary expenses for added personnel, product development and marketing of our Max Sound Technology.

Endorsement Fees: Our endorsement fees were $0 for the six months ended June 30, 2014 and $480,000 for the six months ended June 30, 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 $274,706 for the six months ended June 30, 2014 and $270,287 for the six months ended June 30, 2013, representing an increase of $4,419, or approximately 2%. The expense has remained relatively consistent.

Professional Fees: Our professional fees were $406,332 for the six months ended June 30, 2014 and $603,888 for the six months ended June 30, 2013, representing a decrease of $197,056, or approximately 33%, as a result of reduced legal fees.

Compensation: Our compensation expenses were $503,200 for the six months ended June 30, 2014 and $681,699 for the six months ended June 30, 2013, representing a decrease of $178,499, or approximately 26%, as a result of the change in classification of stock based compensation, which was included in the compensation amount for 2013, but was included in general and administrative expense for 2014.

Net Loss: Our net loss for the six months ended June 30, 2014 and 2013, was $4,144,743, compared to $4,646,155 for the six months ended June 30, 2013. The overall amount of our net loss decreased as a result of a decreased professional fees and a positive change in the fair value of embedded derivative liability associated with the convertible debt and reduced compensation.

Liquidity and Capital Resources

We have an accumulated deficit of $31,417,796 for the period from December 9, 2005 (inception) to June 30, 2014, and have negative cash flow from operations of $8,661,383 from inception.

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 June 30, 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 June 30, 2014, our primary source of funds has been the proceeds of private offerings of our common stock, private financing, and loans from stockholders. Our need to obtain capital from outside investors is expected to continue until we are able to achieve profitable operations, if ever. There is no assurance that management will be successful in fulfilling all or any elements of its plans.

Private Financings

Below is a summary of our capital-raising activities for the three months ended June 30, 2014:

On April 17, 2014, the Company entered into an agreement with KBM Worldwide to issue up to $78,500 in a convertible note. The note matures on January 21, 2015, and bears an interest rate of 8%. The conversion price equals the "Variable Conversion Price", which is 65% of the "Market Price", which is the average the 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 $78,500 in proceeds, less the $3,500 finder's fee pursuant to the terms of this convertible note, on April 22, 2014. As of June 30, 2014, the convertible note balance and accrued interest is $79,777.

On May 1, 2014, the Company entered into an agreement with LG Capital Funding, LLC to issue up to $210,000 in two convertible notes. Each note matures on May 1, 2015 and bears an interest rate of 8%. The Company received $105,000 proceeds, less the $5,000 original issue discount pursuant to the terms of the first note, on May 8, 2014 and finder's fees of $5,000. The Company is due to receive a secured note in the amount of $105,000 from the investor as consideration for the second note. Both convertible notes are convertible at a "Variable Conversion Price", which is 65% of the "Market Price", which is the lowest closing bid price for the common stock during the ten (10) trading day period prior to the conversion. The holder of each note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date; provided, however, that the second note is not convertible until it has been fully paid for in cash. The Company has a right to redeem each note as follows: (i) during the first 90 days after issuance, by paying an amount equal to 130% of the unpaid principal plus accrued unpaid interest; (ii) from the 90th to 180th day after issuance, by paying an amount equal to 140% of the unpaid principal plus accrued unpaid interest; and (iii) at any time upon a transfer of all or substantially all of the Company's assets, a reclassification of the Company's stock, a consolidation, merger or other reorganizational event, by paying an amount equal to 150% of the unpaid principal plus accrued unpaid interest. As of June 30, 2014, the convertible note balance and accrued interest on the first note is $106,395.

Also on May 12, 2014, the Company entered into an agreement with ADAR Bays, LLC to issue up to $210,000 in two convertible notes. Each note matures on May 12, 2015 and bears an interest rate of 8%. The Company received $105,000 proceeds, less the $5,000 original issue discount pursuant to the terms of the first note, on May 16, 2014 and finder's fees of $5,000. The Company received a secured note in the amount of $105,000 from the investor as consideration for the second note, payable by December 30, 2014, and secured by the pledge of the second note. Both convertible notes are convertible at a "Variable Conversion Price", which is 65% of the "Market Price", which is the lowest closing bid price for the common stock during the ten (10) trading day period prior to the conversion. The holder of each note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date; provided, however, that the second note is not convertible until it has been fully paid for in cash. The Company has a right to redeem each note as follows: (i) during the first 90 days after issuance, by paying an amount equal to 130% of the unpaid principal plus accrued unpaid interest; (ii) from the 90th to 180th day after issuance, by paying an amount equal to 140% of the unpaid principal plus accrued unpaid interest; and (iii) at any time upon a transfer of all or substantially all of the Company's assets, a reclassification of the Company's stock, a consolidation, merger or other reorganizational event, by paying an amount equal to 150% of the unpaid principal plus accrued unpaid interest. As of June 30, 2014, the convertible note balance and accrued interest on the first note is $106,395.

On May 14, 2014, the Company entered into an agreement with Venture Champion Asia Limitedto issue up to $200,000 in a convertible note. The note matures on May 14, 2016, and bears an interest rate of 2.50%. The initial conversion price equals $0.07/share. After six month from the date of this note, conversion price shall equal the lower of $0.07/share or the "variable conversion price", which is 75% of the average three (3) lowest closing prices during the ten (10) trading day prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date. The Company received $200,000 proceeds on May 19, 2014. As of June 30, 2014, the convertible note balance and accrued interest is $200,780.

On May 21, 2014, the Company entered into an agreement with Venture Champion Asia Limited to issue up to $550,000 in a convertible note. The note matures on May 21, 2016, and bears an interest rate of 2.50%. The initial conversion price equals $0.07/share. After six month from the date of this note, conversion price shall equal the lower of $0.07/share or the "variable conversion price", which is 75% of the average three (3) lowest closing prices during the ten (10) trading day prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months. The Company received $550,000 proceeds on May 21, 2014. As of June 30, 2014, the convertible note balance and accrued interest is $551,828.

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

On May 23, 2014, the Company received $25,000 in proceeds in connection with a drawdown on an existing convertible note with Vista Capital Investments, LLC with total principal amount of up to $333,000. The note matures on May 22, 2014 and bears an interest rate of 10%. The conversion price equals the "Variable Conversion Price", which is 70% of the "Market Price", which is the average of the closing bids for the lowest three (3) trading prices of the common stock during the twenty (20) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding and unpaid principal amount into shares of common stock at any time after issuance. As of June 30, 2014, the convertible note balance and accrued interest relating to this drawdown is $30,525.

On June 11, 2014, the Company entered into an agreement with Iliad Research and Trading, LP to issue up to $282,778 in a convertible note. The note matures on June 10, 2015 and bears an interest rate of 4%. The note is immediately convertible at a "Variable Conversion Price", which is 75% of the "Market Price", which is the average the three (3) lowest closing bid prices for the common stock during the ten (10) trading day period prior to the conversion. The Company received $282,778 proceeds, less the $27,778 original issue discount pursuant to the terms of this convertible note, on June 12, 2014 and finder's fees of $5,000. As of June 30, 2014, the convertible note balance and accrued interest is $283,367. In connection with this raise, the Company also issued 250,000 three-year warrants exercisable at $0.40/share.

On July 25, 2014, the Company amended the terms of its February 6, 2013 convertible note with Vista Capital Investments, LLC, pursuant to which the total principal amount of the note was increased from up to $333,000 to up to $444,000. All other terms of and conditions of the note remain in full force and effect. As of June 30, 2014, the convertible note balance and accrued interest is $90,000 and $22,100, respectively. On July 28, 2014, the Company received $50,000 in proceeds, increasing the current principal amount under the note to $140,000 and leaving available $304,000 to be drawn down under the note.

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

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