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, 2019
| ☐ 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.) | |
3525 Del Mar Heights Rd #802 San Diego, CA |
92130 | |
| (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 13, 2019, the registrant had 6,577,102,823 shares, par value $0.00001 per share, of common stock issued and outstanding.
INDEX
| PART I-- FINANCIAL INFORMATION | ||||||
| Item 1. | Financial Statements | 3 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | ||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 28 | ||||
| Item 4. | Controls and Procedures | 28 | ||||
| PART II-- OTHER INFORMATION | ||||||
| Item 1. | Legal Proceedings | 29 | ||||
| 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. Considering 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 | F - 2 | CONDENSED BALANCE SHEETS AS OF JUNE 30, 2019 (UNAUDITED) AND DECEMBER 31, 2018 (AUDITED). |
| PAGE | F - 3 | CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018 (UNAUDITED) |
| PAGE | F - 5 | CONDENSED STATEMENTS OF CHANGES IN SOCKHOLERDERS’ DFICIT FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018 (UNAUDITED). |
| PAGE | F - 4 | CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018 (UNAUDITED). |
| PAGES | F - 6 | NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED). |
Max Sound Corporation
Condensed Balance Sheets
ASSETS
| ASSETS | ||||||||
| June 30, 2019 | December 31, 2018 | |||||||
| (UNAUDITED) | ||||||||
| Current Assets | ||||||||
| Cash | $ | 742 | $ | 449 | ||||
| Total Assets | $ | 742 | $ | 449 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 701,312 | $ | 675,295 | ||||
| Accrued expenses | 1,498,981 | 1,245,600 | ||||||
| Accrued expenses - related party | 892,066 | 404,429 | ||||||
| Judgement payable | 819,626 | 819,626 | ||||||
| Line of credit - related party | 376,466 | 306,575 | ||||||
| Derivative liability | 17,504,541 | 13,849,591 | ||||||
| Convertible note payable, net of debt discount of $0 and $169,377, and related debt issue costs of $0 and $3,525, respectively | 6,160,429 | 5,987,527 | ||||||
| Total Current Liabilities | 27,953,421 | 23,288,643 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders' Deficit | ||||||||
| Preferred stock, $0.0001 par value; 10,000,000 shares authorized, | ||||||||
| No shares issued and outstanding | — | — | ||||||
| Series, A Convertible Preferred stock, $0.00001 par value; 10,000,000 shares authorized, | ||||||||
| 10,000,000 and 5,000,000 shares issued and outstanding, respectively | 100 | 100 | �� | |||||
| Common stock, $0.00001 par value; 10,000,000,000 shares authorized, | ||||||||
| 6,573,852,824 and 6,573,852,824 shares issued and outstanding, respectively | 65,867 | 65,864 | ||||||
| Additional paid-in capital | 70,776,084 | 70,776,084 | ||||||
| Treasury stock | (534,575 | ) | (534,575 | ) | ||||
| Accumulated deficit | (98,260,155 | ) | (93,595,670 | ) | ||||
| Total Stockholders' Deficit | (27,952,679 | ) | (23,288,194 | ) | ||||
| Total Liabilities and Stockholders' Deficit | $ | 742 | $ | 449 |
| Max Sound Corporation | ||||||||||||||||
| Condensed Statements of Operations | ||||||||||||||||
| (UNAUDITED) | ||||||||||||||||
| For the Three Months Ended, | For the Six Months Ended, | |||||||||||||||
| June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | |||||||||||||
| Revenue | $ | — | $ | — | $ | — | $ | — | ||||||||
| Operating Expenses | ||||||||||||||||
| General and administrative | 27,595 | 78,787 | 71,597 | 203,665 | ||||||||||||
| Consulting | 6,000 | 34,652 | 17,800 | 76,352 | ||||||||||||
| Professional fees | 6,361 | 15,710 | 25,754 | 78,162 | ||||||||||||
| Website development | — | — | 5,250 | — | ||||||||||||
| Compensation | 126,000 | 180,000 | 252,000 | 342,000 | ||||||||||||
| Judgment expense | — | — | — | — | ||||||||||||
| Total Operating Expenses | 165,956 | 309,149 | 372,401 | 700,179 | ||||||||||||
| Loss from Operations | (165,956 | ) | (309,149 | ) | (372,401 | ) | (700,179 | ) | ||||||||
| Other Income / (Expense) | ||||||||||||||||
| Interest expense | (111,084 | ) | (111,534 | ) | (228,592 | ) | (230,925 | ) | ||||||||
| Interest expense - related party | (118,614 | ) | (136,346 | ) | (235,636 | ) | (185,027 | ) | ||||||||
| Derivative Expense | — | (277,446 | ) | — | (375,302 | ) | ||||||||||
| Amortization of debt offering costs | (1,865 | ) | (14,064 | ) | (3,525 | ) | (33,390 | ) | ||||||||
| Loss on debt settlement | — | — | — | — | ||||||||||||
| Amortization of debt discount | (46,513 | ) | (353,798 | ) | (169,379 | ) | (878,817 | ) | ||||||||
| Change in fair value of embedded derivative liability | (3,036,282 | ) | 3,978,311 | (3,654,951 | ) | (2,355,202 | ) | |||||||||
| Total Other Income / (Expense) | (3,314,358 | ) | 3,085,123 | (4,292,083 | ) | (4,058,663 | ) | |||||||||
| Provision for Income Taxes | — | — | — | — | ||||||||||||
| Net Loss | $ | (3,480,314 | ) | $ | 2,775,974 | $ | (4,664,484 | ) | $ | (4,758,842 | ) | |||||
| Net Loss Per Share - Basic and Diluted | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | (0.00 | ) | |||||
| Weighted average number of shares outstanding | ||||||||||||||||
| during the year Basic and Diluted | 6,573,852,824 | 4,907,315,044 | 6,573,852,824 | 4,093,607,565 | ||||||||||||
See accompanying notes to condensed unaudited financial statements.
| Max Sound Corporation | ||||||||||||||||||||||||||||||||||||||||
| Condensed Statement of Changes in Stockholders' Deficit | ||||||||||||||||||||||||||||||||||||||||
| For the six months ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
| (UNAUDITED) | ||||||||||||||||||||||||||||||||||||||||
| Series A | ||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred stock | Common stock | Additional | Total | ||||||||||||||||||||||||||||||||||||
| paid-in | Accumulated | Treasury | Stockholder's | |||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 10,000,000 | $ | 100 | — | $ | — | 6,573,852,824 | $ | 65,867 | $ | 70,776,084 | $ | (93,595,670 | ) | $ | (534,575 | ) | $ | (23,288,194 | ) | ||||||||||||||||||||
| Net loss for the three months ended March 31, 2019 | — | — | — | — | — | — | — | (1,184,171 | ) | — | (1,184,171 | ) | ||||||||||||||||||||||||||||
| Balance, March 31, 2019 | 10,000,000 | $ | 100 | — | $ | — | 6,573,852,824 | $ | 65,867 | $ | 70,776,084 | $ | (94,779,841 | ) | $ | (534,575 | ) | $ | (24,472,365 | ) | ||||||||||||||||||||
| Net loss for the three months ended June 30, 2019 | — | — | — | — | — | — | — | (3,480,314 | ) | — | (3,480,314 | ) | ||||||||||||||||||||||||||||
| Balance, June 30, 2019 | 10,000,000 | $ | 100 | — | $ | — | 6,573,852,824 | $ | 65,867 | $ | 70,776,084 | $ | (98,260,155 | ) | $ | (534,575 | ) | $ | (27,952,679 | ) | ||||||||||||||||||||
See accompanying notes to condensed unaudited financial statements.
| Max Sound Corporation | ||||||||||||||||||||||||||||||||||||||||
| Condensed Statement of Changes in Stockholders' Deficit | ||||||||||||||||||||||||||||||||||||||||
| For the six months ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
| (UNAUDITED) | ||||||||||||||||||||||||||||||||||||||||
| Series A | ||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred stock | Common stock | Additional | Total | ||||||||||||||||||||||||||||||||||||
| paid-in | Accumulated | Treasury | Stockholder's | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | capital | Deficit | Stock | Equity(Deficit) | |||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | 10,000,000 | $ | 100 | — | $ | — | 2,158,961,690 | $ | 21,718 | $ | 68,564,307 | $ | (81,442,422 | ) | $ | (534,575 | ) | $ | (13,390,872 | ) | ||||||||||||||||||||
| Convertible debt, accrued interest and penalty conversion into common stock | — | — | — | — | 2,078,813,141 | 20,788 | 425,736 | — | — | 446,524 | ||||||||||||||||||||||||||||||
| Common stock issued for services ($0.008/sh) | — | — | — | — | 30,000,000 | 300 | 44,700 | — | — | 45,000 | ||||||||||||||||||||||||||||||
| Reclassification of derivative liability associated with convertible debt | — | — | — | — | — | — | 773,325 | — | — | 773,325 | ||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2018 | — | — | — | — | — | — | — | (7,534,812 | ) | — | (7,534,812 | ) | ||||||||||||||||||||||||||||
| Balance, March 31, 2018 | 10,000,000 | $ | 100 | — | $ | — | 4,267,774,831 | $ | 42,806 | $ | 69,808,068 | $ | (88,977,234 | ) | $ | (534,575 | ) | $ | (19,660,835 | ) | ||||||||||||||||||||
| Convertible debt, accrued interest and penalty conversion into common stock | — | — | — | — | 1,702,532,757 | 17,025 | 360,827 | — | — | 377,852 | ||||||||||||||||||||||||||||||
| Common stock issued for services ($0.008/sh) | — | — | — | — | 11,878,571 | 119 | 4,142 | — | — | 4,261 | ||||||||||||||||||||||||||||||
| Reclassification of derivative liability associated with convertible debt | — | — | — | — | — | — | 458,206 | — | — | 458,206 | ||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2018 | — | — | — | — | — | — | — | 2,775,974 | — | 2,775,974 | ||||||||||||||||||||||||||||||
| Balance, June 30, 2018 | 10,000,000 | $ | 100 | — | $ | — | 5,982,186,159 | $ | 59,950 | $ | 70,631,243 | $ | (86,201,260 | ) | $ | (534,575 | ) | $ | (16,044,542 | ) | ||||||||||||||||||||
See accompanying notes to condensed unaudited financial statements.
Max Sound Corporation
Condensed Statements of Cash Flows
(UNAUDITED)
| For the Six Months Ended, | ||||||||
| June 30, 2019 | June 30, 2018 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net Loss | $ | (4,664,484) | $ | (4,758,842) | ||||
| Adjustments to reconcile net loss to net cash used in operations | ||||||||
| Depreciation/Amortization | - | 8,275 | ||||||
| Stock and stock options issued for services | - | 46,500 | ||||||
Stock issued in exchange of warrant forgiveness
| 2,760 | |||||||
| Amortization of debt offering costs | 3,525 | 33,390 | ||||||
| Amortization of debt discount | 169,379 | 878,817 | ||||||
| Change in fair value of derivative liability | 3,654,950 | 2,355,202 | ||||||
| Derivative Expense | - | 375,302 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease in prepaid expenses | - | 49,730 | ||||||
| Increase/ (Decrease)accounts payable | 26,021 | (44,540) | ||||||
| Increase in accrued expenses | 253,381 | 255,617 | ||||||
| Increase/(Decrease) in accrued expenses – related party | 487,630 | (13,000) | ||||||
| Net Cash Used In Operating Activities | (69,598) | (810,789) | ||||||
| Cash Flows From Investing Activities: | ||||||||
| Net Cash Used In Investing Activities | - | - | ||||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from stockholder loans / lines of credit | 69,891 | 268,698 | ||||||
| Repayment from stockholder loans / lines of credit | - | (284,954) | ||||||
| Proceeds from issuance of convertible note, less offering costs and OID costs paid | - | 827,200 | ||||||
| Net Cash Provided by Financing Activities | 69,891 | 810,944 | ||||||
| Net Increase (Decrease) in Cash | 293 | 155 | ||||||
| Cash at Beginning of Year | 449 | 745 | ||||||
| Cash at End of Year | $ | 742 | $ | 900 | ||||
| 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 | $ | - | $ | 824,379 | ||||
Reclassification to additional paid in capital for financial instruments that ceased to be a derivative liability
| $ | - | $ | 1,234,531 |
See accompanying notes to condensed unaudited financial statements
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.
On August 9, 2016, the Company moved a level down from OTCQB to OTC Pink Current Information where it is within the continued standards and pricing requirements as found in Section 2 of the OTCQB Eligibility Standards. The Company’s services may re-apply at any time after a price increase to meet all the OTCQB Eligibility Standards to be moved back to the higher OTCQB marketplace.
It is management's opinion, however, that all material adjustments (consisting of normal and recurring adjustments) have been made which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.
These unaudited interim financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 29, 2019.
(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, 2019, and December 31, 2018, 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, 2019 and December 31, 2018.
(G) Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists;(2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.
(H) Loss Per Share
In accordance with accounting guidance now codified as FASB ASC Topic 260, “Earnings per Share,” Basic earnings (loss) 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 years ended June 30, 2019 and 2018, excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:
| June 30, 2019 | June 30, 2018 | |||||||
| Stock Warrants (Exercise price - $0.25 - $.52/share) | — | 19,220,690 | ||||||
| Stock Options (Exercise price - $0.00250/share) | 95,332,500 | 95,332,500 | ||||||
| Convertible Debt (Exercise price - $0.0001 - $.000150/share) | 114,402,012,842 | 24,043,223,934 | ||||||
| Series A Convertible Preferred Shares ($0.01/share) | 250,000,000 | 250,000,000 | ||||||
| Total | 114,747,345,342 | 24,407,777,124 | ||||||
The Company’s obligations to issue shares upon conversion of its outstanding convertible notes, the exercise of stock options and warrants and conversion of its preferred stock (the “Convertible Instruments”) at current market prices for its common stock exceeds by the 111,321,198,165 authorized but unissued shares of Common Stock as of the date of this report (the “Potentially Issuable Shares”). While it is uncertain whether the Company would receive requests to issue all of the Potentially Issuable Shares and the number of such shares fluctuates based on the market price of the Company’s common stock, the Company may increase the number of its authorized shares of common stock or effectuate a recapitalization, or a combination of both, in order to make available additional shares of its Common Stock for the Potentially Issuable Shares. Such action would require shareholder approval. Until such time as the Company has a sufficient number of shares of its Common Stock for issuance to cover the Potentially Issuable Shares, the Company could be subject to penalties and damages to the holders of the Convertible Instruments in the event it does not deliver the Potentially Issuable Shares upon request by a holder of the Convertible Instruments. Furthermore, the lack of available shares of common stock may be deemed a default under one or more of the Convertible Instruments.
(I) 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.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the transition tax, deferred tax re-measurements, and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118.
(J) Business Segments
The Company operates in one segment and therefore segment information is not presented.
(K) Recent Accounting Pronouncements
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. We are evaluating the impact of adopting this guidance on our Financial Statements.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This
standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. We are evaluating the impact of adopting this guidance on our Financial Statements.
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. We are evaluating the impact of adopting this guidance on our Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early
adoption is permitted. We are evaluating the impact of adopting this guidance on our Financial Statements.
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact of adopting this guidance on our Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. We are evaluating the impact of adopting this guidance on our Financial Statements.
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have
down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception.
Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently reviewing the impact of adoption of ASU 2017-11on its financial statements.
All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable
(L) Fair Value of Financial Instruments
The carrying amounts on the Company’s financial instruments including accounts payable, derivative liability, convertible note payable, and note payable, 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, 2019 and December 31, 2018, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
| June 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||
| Fair Value Measurement Using | Fair Value Measurement Using | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Derivative Liabilities | — | 17,504,541 | — | 17,504,541 | — | 13,849,591 | — | 13,849,591 | ||||||||||||||||||||||||
(M) 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 based on 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 grant as defined in the FASB Accounting Standards Codification.
(N) 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.
(O) 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.
(P) 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.
(Q) 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.
NOTE 2 GOING CONCERN
As reflected in the accompanying condensed unaudited financial statements, the Company had a net loss of $4,664,484 for the six months ended June 30, 2019, has an accumulated deficit of $98,260,155 as of June 30, 2019, and has negative cash flow from operations of $69,598 for the six months ended June 30, 2019.
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, 2018 was not sufficient to meet the cash requirements to fund planned operations through December 31, 2019 without additional sources of cash. The Company continues to explore various financing alternatives, including debt and equity financings and strategic partnerships, as well as trying to generate revenue. However, at this time, the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all. If the Company is unable to obtain additional funding and improve its operations, the Company’s financial condition and results of operations may be materially adversely affected, and the Company may not be able to continue operations. This raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty.
NOTE 3 DEBT AND ACCOUNTS PAYABLE
Debt consists of the following:
| AS of June 30, 2019 | As of December 31, 2018 | |||||||
| Line of credit– related party | $ | 376,466 | $ | 306,575 | ||||
| Accrued interest – related party | 469,121 | 233,484 | ||||||
| Accrued expenses – related party | 422,945 | 170,945 | ||||||
| Convertible debt | $ | 6,160,429 | 6,160,429 | |||||
| Less: debt discount | — | (169,377 | ) | |||||
| Less: debt issue costs | — | (3,525 | ) | |||||
| Convertible debt - net | 6,160,429 | 5,987,527 | ||||||
| Total current debt | 7,428,961 | $ | 6,698,531 |
(A) Line of credit – related party
Line of credit with the principal stockholder consisted of the following activity and terms:
| Principal | Interest Rate | |||||||
| Balance - December 31, 2018 | $ | 310,290 | ||||||
| Borrowings during the six months ended June 30, 2019 | 69,892 | |||||||
| Interest accrual | 7,131 | |||||||
| Balance –June 30, 2019 | $ | 387,313 | ||||||
Accounts payable consists of the following:
| As of June 30, 2018 | As of December 31, 2018 | |||||||
| Accounts Payable | $ | 701,312 | $ | 675,295 | ||||
| Total accounts payable | $ | 701,312 | $ | 675,295 | ||||
(B) Convertible Debt
During the six months ended June 30, 2019 and year ending December 31, 2018, the Company issued convertible notes totaling $0, less the original issue discount and debt issue costs of $0, for net proceeds of $0 and $827,200, respectively.
The convertible notes issued for three months ended June 30, 2019 and year ended December 31, 2018, consist of the following terms:
| Six months ended June 30, 2019 Amount of Principal Raised | Year ended December 31, 2018 Amount of Principal Raised | |||||||||||
| Interest Rate | 0% - 12% | 0% - 12% | ||||||||||
| Default interest rate | 14% - 22% | 14% - 22% | ||||||||||
| Maturity | November 4, 2015 –May 22, 2019 | November 4, 2015 –December 7, 2018 | ||||||||||
| 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 ten (10) trading day period prior to the conversion. | 3,691,578 | 3,691,578 | |||||||
| Conversion terms 2 | 65% of the “Market Price”, which is the one lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion. | 1,131,560 | 1,131,560 |
| Conversion terms 3 | 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. | paid on conversion | paid on conversion | |||||||
| Conversion terms 4 | 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. | 765,000 | 765,000 | |||||||
| Conversion terms 5 | 60% of the “Market Price”, which is the lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion. | paid on conversion | paid on conversion | |||||||
| Conversion terms 6 | Conversion at $0.10 per share | Paid on conversion | Paid on conversion | |||||||
| Conversion terms 7 | 60% 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. | 50,000 | 50,000 | |||||||
| Conversion terms 8 | 65% of the “Market Price”, which is the two lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion. | 265,050 | 265,050 | |||||||
Conversion terms 9 | 65% of the “Market Price”, which is the two lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion. | 204,579 | 204,579 | |||||||
| Conversion terms 10 | 65% of the “Market Price”, which is the one lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion. | paid on conversion | paid on conversion | |||||||
| Conversion terms 11 | 60% of the “Market Price”, which is the two lowest trading prices for the common stock during the twelve (12) trading day period prior to the conversion. | paid on conversion | paid on conversion | |||||||
| Conversion terms 12 | 61% of the “Market Price”, which is the average of the three lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion. | 52,662 | 52,662 | |||||||
| Convertible Debt | 6,160,429 | 6,160,429 | ||||||||
| Less: Debt Discount | -3 | (169,377 | ) | |||||||
| Less: Debt Issue Costs | (3,525 | ) | ||||||||
| Convertible Debt - net | 6,160,429 | 5,987,527 | ||||||||
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 and warrants as a derivative liability due to management’s assessment that the Company may not have sufficient authorized number of shares of common stock required to net-share settle or due to the existence of a ratchet due to an anti-dilution provision. See Note 4 regarding accounting for derivative liabilities.
During the year ended December 31, 2018, the Company converted debt and accrued interest, totaling $878,214 into 4,289,679,230 shares of common stock.
Convertible debt consisted of the following activity and terms:
| Convertible Debt Balance as of December 31, 2018 | 6,160,429 | 4% - 12% | ||||||||
| Borrowings | — | |||||||||
| Conversions | — | |||||||||
| Convertible Debt Balance as of June 30, 2019 | 6,160,429 | |||||||||
(B) Debt Issue Costs
During the years ended December 31, 2018, the Company paid debt issue costs totaling $20,500
The following is a summary of the Company’s debt issue costs:
| Six months ended June 30, 2019 | Year Ended December 31, 2018 | |||||||
| Debt issue costs | $ | 362,423 | 362,423 | |||||
| Accumulated amortization of debt issue costs | (362,423 | ) | (358,898 | ) | ||||
| Debt issue costs – net | $ | — | 3,525 | |||||
During the six months ended June 30, 2019 and 2018 the Company amortized $3,525 and $33,390 of debt issue costs, respectively.
(C) Debt Discount & Original Issue Discount
During the six months ended June 30, 2019 and year ended December 31, 2018, the Company recorded debt discounts totaling $0 and $813,386, respectively.
The debt discount and the original issue discount recorded in 2019 and 2018 pertains to convertible debt that contains embedded conversion options that are required to be bifurcated and reported at fair value and original issue discounts.
The Company amortized $169,379 and $878,817 during the six months ended June 30, 2019 and 2018, respectively, to amortization of debt discount expense.
| Six months ended June 30, 2019 | Year Ended December 31, 2018 | |||||||
| Debt discount | $ | 13,221,839 | 13,221,839 | |||||
| Accumulated amortization of debt discount | (13,221,839 | ) | (13,052,462 | ) | ||||
| Debt discount - Net | $ | — | 169,377 | |||||
(D) Line of Credit – Related Party
During the six months ended June 30, 2019, the principal stockholder has advanced $69,892 and accrued $7,131 in interest. During the year ended December 31, 2018, the principal stockholder has advanced $557,299 accrued $3,792 in interest and was repaid $284,957 under the terms of the line of credit. The line of credit balance and accrued interest as of June 30, 2019 is $387,313.
NOTE 4 DERIVATIVE LIABILITIES
The Company identified conversion features embedded within convertible debt issued in 2018 and 2017. 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, 2018 | $ | 13,849,591 | ||
| Change in fair value of embedded derivative liability for warrants issued | (893 | ) | ||
| Change in fair value of embedded derivative liability for convertible instruments | 3,655,843 | |||
| Derivative Liability –June 30, 2019 | $ | 17,504,541 | ||
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 recorded a derivative expense for six months ended June 30, 2019 and 2018 of $0 and $375,302 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, 2019:
| Commitment Date | Re-measurement Date | |||||||
| Expected dividends: | — | — | ||||||
| Expected volatility: | — | 350.50%-502.98% | ||||||
| Expected term: | — | 0.09–1.00 Years | ||||||
| Risk free interest rate: | — | 1.10% - 2.63% |
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, 2018:
| Commitment Date | Re-measurement Date | |||||||
| Expected dividends: | — | — | ||||||
| Expected volatility: | 133% - 262% | 296.54%-579.57% | ||||||
| Expected term: | 0.08 - 3 Years | 0.11–1.01 Years | ||||||
| Risk free interest rate: | 0.06% - 2.31% | 2.23% - 2.63% |
NOTE 5 PROPERTY AND EQUIPMENT
At June 30, 2019 and December 31, 2018, respectively, property and equipment are as follows:
| June 30, 2019 | December 31, 2018 | |||||||
| Website Development | $ | — | $ | 294,795 | ||||
| Furniture and Equipment | — | 143,071 | ||||||
| Leasehold Improvements | — | 6,708 | ||||||
| Software | — | 54,598 | ||||||
| Music Equipment | — | 2,578 | ||||||
| Office Equipment | — | 80,710 | ||||||
| Domain Name | — | 1,500 | ||||||
| Sign | — | 628 | ||||||
| Total | — | 584,588 | ||||||
| Less: impairment of assets | — | (28,211 | ) | |||||
| Less: accumulated depreciation and amortization | — | (556,377 | ) | |||||
| Property and Equipment, Net | $ | — | $ | — | ||||
Depreciation expense for the six months ended June 30, 2019 and 2018 totaled $0 and $8,275, respectively.
During the year ended December 31, 2018, the Company recorded an asset impairment of $28,211 consisting of office furniture and equipment. The assets are fully impaired, and the remaining carrying value is $0 for the year ended December 31, 2018.
NOTE 6 STOCKHOLDERS’ DEFICIT
On February 1, 2018, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors filed with the Securities and Exchange Commission a Schedule 14C and with the State of Delaware an Amended Certificate of Incorporation increasing the authorized shares of common stock by 5,750,000,000 shares of common stock from 4,250,000,000 shares of common stock to 10,000,000,000 shares of common stock.
(A) Common Stock
During the years ended December 31, 2018, the Company issued the following common stock:
| Transaction Type | Quantity | Valuation | Range of Value per share | |||||||||
| Conversion of convertible debt and accrued interest | 4,373,012,563 | $ | 878,214 | $0.0006 to- $0.00065 | ||||||||
| Services - rendered | 32,678,571 | 46,200 | $ | 0.0026 | ||||||||
| Shares issued in exchange for warrant forgiveness | 9,200,000 | 2,760 | $ | 0.0003 | ||||||||
| Total shares issued | 4,414,891,134 | $ | 927,474 | |||||||||
The Company maintains on its books and within the above financials, debt to Venture Champion Asia Limited and ICG USA LLC or its designee(s) which is currently in default and has not been converted due to ICG’s settled administrative proceeding with the SEC, where the Company awaits any rightful exemption or regulatory no-action that would render any forward moving action compliant by all the parties.
The Company announced that it entered into an Agreement with Vedanti Systems Limited and Vedanti Licensing Limited (VLL) that resolves their dispute over the international Optimized Data Transmission
(ODT) patent portfolio previously owned by Vedanti. The Agreement further provides that VLL and the Company will become co-owners of the pioneering portfolio. In consideration of the patent portfolio purchase, the Company issued 80,000,000 shares of its common stock to VLL. This patent portfolio consists of patents in the following countries: The United States, Australia, Austria, Cyprus, Denmark, Spain, Finland, France, Ireland, Italy, Luxembourg, Monaco, Portugal, Sweden, Turkey, Belgium, Switzerland/ Liechtenstein, United Kingdom, Greece, Netherlands and Germany. The Company continues to pursue its litigations against Google.
Return of Shares and Issuance of Preferred shares
On October 2, 2017, the Company, in exchange for Greg Halpern's consideration issuing the Company a line of credit of $100,000 on July 6, 2017 and another line of credit of $200,000 on October 2, 2017 and for Mr. Halpern's forgiveness of $960,000 of interest owed to Mr. Halpern for his Preferred Shares accrued dividend rate of 8% per annum of his already owned 5 million Series A Convertible Preferred Shares, the Board deemed it proper to grant Mr. Halpern an additional 800,000,000 shares of the Company's common stock, which at Mr. Halpern's election he may convert into 5,000,000 additional Series A Convertible Preferred Shares with the same voting rights and percentages as his previously granted and owned 5,000,000 Series A Convertible Preferred Shares.
On November 8, 2017, the Company, at Greg Halpern's election, converted 800,000,000 shares of Common Stock into 5,000,000 Series A Convertible Preferred Shares representing 33.4% of the Company’s voting rights and control adding to Halpern’s existing 33.4% holdings, equaling 66.8% of the Company’s total voting rights and control.
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. These 5,000,000 Series A Convertible Preferred Shares represent 33.4% of the Company’s voting rights and control and 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, 2019 and 2018, respectively, the Company has not declared dividends.
(B) Stock Warrants
The following tables summarize all warrant grants as of June 30, 2019, and the related changes during these periods are presented below:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in Years) | ||||||||||||
| Balance, December 31, 2018 | 11,620,690 | $ | 0.01 | 1.2 | ||||||||||
| Granted | — | |||||||||||||
| Exercised | — | |||||||||||||
| Cancelled/Forfeited | (11,620,690 | ) | ||||||||||||
| Balance, June 30, 2019 | - | $ | - | - | ||||||||||
On May 7, 2018, the Company issued 9,200,000 shares of Company’s common stock to consultant in exchange for forgiveness of Warrant Agreement with the Company with a fair value of $2,760 ($0.0003/Share).
A summary of all outstanding and exercisable warrants as of December 31, 2018 is as follows:
| Weighted Average | Aggregate Intrinsic | |||||||||||||||||
| Exercise | Warrants | Warrants | Remaining | Value | ||||||||||||||
| Price | Outstanding | Exercisable | Contractual Life | |||||||||||||||
| $ | 0.01 | 2,000,000 | 2,000,000 | 0.16 | $ | — | ||||||||||||
| $ | 0.005 | 1,000,000 | 1,000,000 | 0.40 | $ | — | ||||||||||||
| $ | 0.0029 | 8,620,690 | 8,620,690 | 0.25 | $ | — | ||||||||||||
| 11,620,690 | 11,620,690 | 0.25 | $ | — | ||||||||||||||
(C) Stock Options
The following tables summarize all option grants as of December 31, 2018, and the related changes during these periods are presented below:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in Years) | ||||||||||||||
| Outstanding – December 31, 2018 | 95,332,500 | $ | — | — | ||||||||||||
| Exercised | — | $ | — | — | ||||||||||||
| Forfeited or Canceled | — | $ | — | — | ||||||||||||
| Outstanding – June 30, 2019 | 95,332,500 | $ | 0.0025- | 1.00- | ||||||||||||
| Exercisable – June 30, 2019 | 95,332,500 | |||||||||||||||
NOTE 7 COMMITMENTS
(A) Consulting Agreement
None
NOTE 8 LITIGATION
From time to time, the Company has 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 August 11, 2014, the Company and VSL simultaneously filed trade secret and patent infringement actions against Google, Inc., and its subsidiaries YouTube, LLC, and On2 Technologies, Inc., relating to proprietary and patented technology owned by Vedanti Systems Limited (“Vedanti”), a subsidiary of VSL. The patent infringement complaint was originally filed in the U.S. District Court for the District of Delaware; the trade secret suit was filed in Superior Court of California, County of Santa Clara. On September 30, 2014, the Company filed notices of voluntary dismissal without prejudice as to both lawsuits. On October 1, 2014, the Company amended the patent complaint and filed it in the U.S. District Court for the Northern District of California. In this patent lawsuit, the Company contends that, in 2010, while Google was in discussions with Vedanti about the possibility of acquiring Vedanti's patented digital video streaming techniques and other proprietary methods, Google gained access to and received technical guidance regarding Vedanti’s proprietary codec, a computer program capable of encoding and decoding a digital data stream or signal. The lawsuit further alleges that soon after Google and Vedanti initiated negotiations, Google willfully infringed Vedanti's patent by incorporating Vedanti's patented technology into Google's own VP8, VP9, WebM, YouTube, Google Adsense, Google Play, Google TV, Chromebook, Google Drive, Google Chromecast, Google Play-per-view, Google Glasses, Google+, Google’s Simplify, Google Maps, and Google Earth, without compensating Vedanti for such use. 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. However, on November 24, 2015, the court granted a second motion to dismiss for lack of subject matter jurisdiction based on the defendants’ argument that the agreements between the Company and VSL/Vedanti did not clearly give the Company standing to enforce the patent rights. The Company appealed that decision on February 22, 2016. One January 18, 2017 the Company received a notice from the Federal Circuit Court of Appeals that affirmed the order of the District Court dismissing MAXD's patent infringement lawsuit against Google for lack of standing. The Court did not issue a written decision explaining its reasoning or that the Company's arguments were not correct; however, The Company believes that their decision was predicated on the fact that as now co-owners of the patents with Vedanti, the Company can simply re-file together against Google. The Court also issued an order denying Google's motion arguing that the Company's appeal should be dismissed as moot. On September 25, 2017, the Court issued an order that the Company should reimburse defendants for its attorneys’ fees in the amount of $820,321.41. The Company believes that the Order for fees is without merit and has appealed. For the years ended December 31, 2018 and 2017, respectively, the Company recorded judgement payable on the balance sheet for $819,626, respectively. The Company was informed by counsel that the Order for fees was without merit and appealed but was told at the hearing that Google would lose the appeal if the Company had not committed Waiver. After an excessively long delay by the Federal Appeals Court to hear the case so it could be combined with another case (Vedanti Licensing Limited vs Google) using the same Tribunal with the sole intention to harm the Company, and continue to allow Google to steal and destroy the ODT Patent while profiting from it as a key component of its business, the Appeal was finally heard and the Company lost with no reasonable explanation with the corrupt Tribunal simply rubber stamping both cases Affirmed See Fed Rule 36, which means “we won’t even look at the facts because then we would have no choice but to reverse the case.” The Company is exploring additional rights it may have in both cases with its ongoing battle against Judicial Corruption. The Company is taking recourse by planning to file a petition for rehearing en banc, where all judges of the appellate court will hear the case. This petition is based on a precedent case similar to Max Sound’s case with the same defense lawyer for the opposing side, the same judges who heard the case and a similar chain of events. Max Sound had until April 11, 2019 to file the petition. Max Sound filed the petitions for rehearing and rehearing en banc and on May 7, 2019, the Court invited Google to respond to the petitions. Google has until May 21, 2019 to submit their response.
On December 5, 2014, the Company, along with renowned architect Eli Attia, filed a lawsuit in the Superior Court of California, County of Santa Clara, against Google, its co-founders Sergey Brin and Larry Page, Google’s spinoff company Flux Factory, and senior executives of Flux. Plaintiffs’ allege misappropriation of trade secrets, breach of contract and other contract-related claims, breach of confidence, slander of title, violation of California’s Unfair Competition Law (California Business and Professionals Code §§ 17200 et seq.), and fraud, and a claim for declaratory relief. The lawsuit contends that Google and the other Defendants stole Mr. Attia’s trade secrets, proprietary information, and know-how regarding a revolutionary architecture design and building process that he alone had invented, known as Engineered Architecture. Defendants are alleged to have engaged Mr. Attia in 2010 and 2011 to translate his architectural technology into software for a proof of concept, with the goal of determining at that point whether to continue with full-scale development with Mr. Attia. Instead, the lawsuit claims that once Mr. Attia had disclosed the trade secrets and proprietary information Defendants needed to bring the technology to market, they severed ties with Mr. Attia, and continued to use his technology without a license and without compensation, in order to bring the technology to market themselves. Plaintiffs seek a permanent injunction against Google, damages (including punitive damages), and restitution. As exclusive agent to Eli Attia to enforce all rights with respect to the subject technology, the Company has retained Buether Joe & Carpenter LLC to represent the Company in the suit, on a contingency fee basis. The case will be vigorously prosecuted, and the Company believes it has a good likelihood of success. Defendants have filed multiple demurrers to the complaint, and the Court has issued orders allowing the case to proceed. Defendants filed another demurrer on March 17, 2016, which was denied by the Court on August 12, 2016. On October 4, 2017, the Court granted Mr. Attia leave to amend the complaint to add causes of action against defendants for civil violations of the federal Racketeer Influenced and Corrupt Organizations Act (commonly known as RICO). Subsequently, on October 23, 2017, the defendants removed the lawsuit from California state court to the federal district court in the Northern District of California, San Jose Division.The parties continue to file motions and are expected to begin the discovery phase of the litigation. The Trade Secret Theft and Misappropriation case was remanded to the Santa Clara County Superior Court on March 19, 2019. A Case Management Conference was recently held for the case and following determinations were made with reference to the trial – Essential parties have been served or appeared. This case is At-Issue. Parties, including fictitious ones, who have been served or who have not appeared, are severed and ordered off the Civil Active List. Jury demanded by TBD. Jury waived by TBD. Trial estimate is TBD days. Further Case Management Conference set for October 18, 2019 at 10:00 a.m. in Department 19. Mandatory Settlement Conference set for August 26, 2020 at 9:00 a.m. in Department 19. Jury Trial set for September 8, 2020 at 9:00 a.m. in Department 19.
On June 1, 2016, the Company was named as a defendant in an action filed in the Superior Court of the State of California, County of Los Angeles – Central District, captioned Adli Law Group, PC v. Max Sound Corporation (Case No. BC621886). Plaintiff alleges two causes of action for Breach of Contract and a cause of action for Common Counts, all arising out of the Company’s alleged failure to pay for Plaintiff’s legal services. Even though the Company was never served with the Complaint, default was entered against the Company. The Default has been set aside and the Company has responded to the Complaint with an Answer and Cross-Complaint for Breach of Contract, Professional Negligence, Breach of Fiduciary Duty, Conversion, and Fraud, due to the fact, that among other things, Adli Law reassigned the Company's primary patent to itself. The parties have begun the discovery phase of the litigation and the Judge had set a status hearing for January 19, 2018.On June 1, 2018, Adli filed a motion for summary judgment on numerous issues. One issue raised by Adli (at the very end of their motion and in only a single paragraph) was that Max Sound was a forfeited corporation and thus, “is foreclosed from prosecuting any action in California courts.” Adli did not raise this issue before filing its papers. Max Sound’s counsel, SML Avvocati, P.C. had since learned that the California Franchise Tax Board contended that Max Sound owed back taxes, hence the forfeiture. Max Sound hired a CPA tax specialist to assist with paying its outstanding taxes and to obtain a revivor to cure its forfeited status and thus be able to regain its ability to both defend itself in this action and prosecute its counterclaims. However, despite working diligently with the hope of resolving this issue before the summary judgment motion hearing set for September 6, 2018, Max Sound had not resolved its issues with the state of California and had not yet obtained a revivor. As a result, Max Sound respectfully requested that the court grant a stay in the proceedings until Max Sound was able to obtain a revivor or, in the alternative, a continuance of all proceedings. A stay or continuance was necessary because Max Sound’s counsel would not be able to respond to the pending summary judgment motion (or any other substantive proceeding), and Max Sound would be unable to defend itself against this action or prosecute its cross-complaint until Max Sound’s forfeited status was cured. The court provided a summary default judgment in favor of Adli. After entry of the adverse judgment subject to appeal, Appellant Max Sound requested that the SML Avvocati, P.C. firm file a notice of appeal on its behalf. The SML Avvocati, P.C. firm agreed to file the notice of appeal and to represent Appellant, Max Sound, in connection with the appeal. On November 21, 2018, the SML Avvocati, P.C. firm filed a notice of appeal on Appellant’s behalf before the Superior Court, which was followed on December 4, 2018, by a notice designating record on appeal. On December 17, 2018, the SML Avvocati, P.C. firm filed a Civil Case Information Statement before the Court on Appellant’s behalf. SML Avvocati, P.C. was scheduled to file an opening brief on February 12, 2019. In the week of March 18, 2019, the SML Avvocati, P.C. firm informed Appellant for the first time that it would not file any brief on Appellant’s behalf or take any further action in the appeal unless Appellant immediately paid them an exorbitant sum of allegedly unpaid attorney’s fees. SML Avvocati, P.C. did not file a motion to withdraw as counsel with the Court, nor did SML Avvocati, P.C. take any steps before the Court to protect Appellant’s interest, such as filing a request for an extension of time to file Appellant’s Opening Brief so that Appellant could locate new counsel. Instead, the SML Avvocati, P.C. firm improperly sought to use the imminent deadline for filing the Appellant’s Opening Brief to extort the unwarranted payment from Appellant of disputed attorney’s fees. Appellant refused to give in to SML Avvocati, P.C.’s improper attempt at extortion. A notice of default was issued by the Court on March 8, 2019, such that the 15-day default period expired on March 25, 2019. Despite substantial efforts, however, Appellant was unable to locate new appellate counsel until March 26, 2019. Max Sound’s new counsel, Klapach & Klapach, P.C. filed an application for a 30-day extension to file the opening brief. The extension was granted, and the opening brief was filed April 26, 2019.Adli responded with a Respondent Brief, Appendix and Motion to Augment. Max Sound’s counsel will file a reply brief by August 16, 2019.
In November 2016, the Company entered into an agreement with Vedanti Licensing Limited ("VLL") and Vedanti Systems Limited ("Vedanti") under (the "VLL/Max Sound Agreement") granting the Company co-ownership of U.S. Patent No. 7,974,339 (the "`339 Patent") along with the other patents owned by Vedanti Systems Limited. Thus, the Company is now a co-owner with VLL of the `339 Patent and ODT Patent portfolio, pursuant to the VLL/Max Sound Agreement, the Company and VLL intend to file new lawsuit against Google and others for infringement as co-owners.
No assurance can be given as to the ultimate outcome of these actions or their effect on the Company.
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 several 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
Max Sound Corporation (“we,” “us,” “our,” or the “Company”) 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 November 29, 2016, MAXD entered into an agreement with Vedanti Systems Limited and Vedanti Licensing Limited (VLL) that resolves their dispute over the international Optimized Data Transmission (ODT) patent portfolio previously owned by Vedanti. The agreement further provides that VLL and MAXD will become co-owners of the pioneering portfolio. This patent portfolio consists of patents in the following countries: The United States, Australia, Austria, Cyprus, Denmark, Spain, Finland, France, Ireland, Italy, Luxembourg, Monaco, Portugal, Sweden, Turkey, Belgium, Switzerland/ Liechtenstein, United Kingdom, Greece, Netherlands and Germany. The Company continues to pursue its litigations against Google.
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 www.maxd.audio. 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, 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 and in 2014 the Company began litigations against Google and others for infringement of its technologies and associated legal rights to the various proprietary technologies.
The Company believes that Max Sound HD Audio Technology is a game changer for several vertical markets whose demand will create revenue opportunities in 2019.
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 to provide the necessary funds.
Results of Operations
For the three months ended June 30, 2019 and 2018.
General and Administrative Expenses: Our general and administrative expenses were $27,595 for the three months ended June 30, 2019 and $78,787 for the three months ended June 30, 2018, representing a decrease of $51,192 or approximately 65%, as a result of a decrease in the general operation of the Company.
Consulting Fees: Our consulting fees were $6,000 for the three months ended June 30, 2019 and $34,652 for the three months ended June 30, 2018, representing a decrease of $28,652 or approximately 83%. The Company has decreased the use of consultants to assist the Company.
Professional Fees: Our professional fees were $6,361 for the three months ended June 30, 2019 and $15,710 for the three months ended June 30, 2018, representing a decrease of $9,349or approximately 60%, as a result of normal business operations.
Compensation: Our compensation expenses were $126,000 for the three months ended June 30, 2019 and $180,000 for the three months ended June 30, 2018, representing change of $54,000, or approximately 30%, as a result of our expensing of monthly compensation to our management and employees.
Net Loss: Our net loss for the three months ended June 30, 2019 was $3,480,314. 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 decreased 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, 2019 and 2018.
General and Administrative Expenses: Our general and administrative expenses were $71,597 for the six months ended June 30, 2019 and $203,665 for the six months ended June 30, 2018, representing a decrease of $132,068 or approximately 65%, as a result of a decrease in the general operation of the Company.
Consulting Fees: Our consulting fees were $17,800 for the six months ended June 30, 2019 and $76,352 for the six months ended June 30, 2018, representing a decrease of $58,552 or approximately 77%. The Company has decreased the use of consultants to assist the Company.
Professional Fees: Our professional fees were $25,754 for the six months ended June 30, 2019 and $78,162 for the six months ended June 30, 2018, representing a decrease of $52,402 or approximately 67%, as a result of normal business operations.
Compensation: Our compensation expenses were $252,000 for the six months ended June 30, 2019 and $342,000 for the six months ended June 30, 2018, representing change of $90,000, or approximately 26%, as a result of our expensing of monthly compensation to our management and employees.
Net Loss: Our net loss for the six months ended June 30, 2019 was $4,664,484. 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 decreased 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, 2019 and 2018, were $0 and $0, respectively. We have an accumulated deficit of $98,260,155 for the period from December 9, 2005 (inception) to June 30, 2019, and have negative cash flow from operations of $69,598 for the six months ended June 30, 2019.
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, 2019, 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 can 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 six months ended June 30, 2019:
| Six months ended June 30, 2019 Amount of Principal Raised | Year ended December 31, 2018 Amount of Principal Raised | ||||||||||||
| Interest Rate | 0% - 12% | 0% - 12% | |||||||||||
| Default interest rate | 14% - 22% | 14% - 22% | |||||||||||
| Maturity | November 4, 2015 –May 22, 2019 | November 4, 2015 –December 7, 2018 | |||||||||||
| 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 ten (10) trading day period prior to the conversion. | 3,691,578 | 3,691,578 | |||||||
| Conversion terms 2 | 65% of the “Market Price”, which is the one lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion. | 1,131,560 | 1,131,560 | |||||||
| Conversion terms 3 | 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. | paid on conversion | paid on conversion | |||||||
| Conversion terms 4 | 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. | 765,000 | 765,000 | |||||||
| Conversion terms 5 | 60% of the “Market Price”, which is the lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion. | paid on conversion | paid on conversion | |||||||
| Conversion terms 6 | Conversion at $0.10 per share | Paid on conversion | Paid on conversion |
| Conversion terms 7 | 60% 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. | 50,000 | 50,000 | |||||||
| Conversion terms 8 | 65% of the “Market Price”, which is the two lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion. | 265,050 | 265,050 |
| Conversion terms 9 | 65% of the “Market Price”, which is the two lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion. | 204,579 | 204,579 | |||||||
| Conversion terms 10 | 65% of the “Market Price”, which is the one lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion. | paid on conversion | paid on conversion | |||||||
| Conversion terms 11 | 60% of the “Market Price”, which is the two lowest trading prices for the common stock during the twelve (12) trading day period prior to the conversion. | paid on conversion | paid on conversion | |||||||
| Conversion terms 12 | 61% of the “Market Price”, which is the average of the three lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion. | 52,662 | 52,662 | |||||||
| Convertible Debt | 6,160,429 | 6,160,429 | ||||||||
| Less: Debt Discount | - | (169,377 | ) | |||||||
| Less: Debt Issue Costs | (3,525 | ) | ||||||||
| Convertible Debt - net | 6,160,429 | 5,987,527 |
During the six months ended June 30, 2019 and year ending December 31, 2018, the Company issued convertible notes totaling $0, less the original issue discount and debt issue costs of $0, for net proceeds of $0 and $827,200, respectively.
Loans and Advances
On July 6, 2017, the Company entered into a two-year line of credit agreement with the principal stockholder in the amount of $100,000. Subsequently, on October 2, 2017, the Company entered into a two-year line of credit agreement with the principal stockholder in the amount of $200,000. The line of credit carries an interest rate of 4%.
On October 2, 2017, the Company, in exchange for Greg Halpern's consideration issuing the Company a line of credit of $100,000 on July 6, 2017 and another line of credit of $200,000 on October 2, 2017 and for Mr. Halpern's forgiveness of $960,000 of interest owed to Mr. Halpern for his Preferred Shares accrued dividend rate of 8% per annum of his already owned 5 million Series A Convertible Preferred Shares, the Board deemed it proper to grant Mr. Halpern an additional 800,000,000 shares of the Company's common stock, which at Mr. Halpern's election he may convert into 5,000,000 additional Series A Convertible Preferred Shares with the same voting rights and percentages as his previously granted and owned 5,000,000 Series A Convertible Preferred Shares.
During the six months ended June 30, 2019, the principal stockholder has advanced $69,892 and accrued $7,131 in interest. . During the year ended December 31, 2018, the principal stockholder has advanced $557,299accrued $3,792 in interest and was repaid $284,957 under the terms of the line of credit. The line of credit balance and accrued interest as of June 30, 2019 is $387,313.
Recent Accounting Pronouncements
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new
guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. We are evaluating the impact of adopting this guidance on our Financial Statements.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. We are evaluating the impact of adopting this guidance on our Financial Statements.
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. We are evaluating the impact of adopting this guidance on our Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. We are evaluating the impact of adopting this guidance on our Financial Statements.
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact of adopting this guidance on our Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. We are evaluating the impact of adopting this guidance on our Financial Statements.
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features.
When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception.
Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently reviewing the impact of adoption of ASU 2017-11on its financial statements.
All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable
Critical Accounting Policies and Estimates
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Use of Estimates:
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.
Revenue Recognition:
Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each
performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists;(2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.
We had $0 and $0 in revenue for the ended June 30, 2019 and 2018, 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 based on 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 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.
During the year ended December 31, 2018, the Company recorded an asset impairment of $28,211 consisting of office furniture and equipment. The assets are fully impaired, and the remaining carrying value is $0 for the year ended December 31, 2018.
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 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.
See NOTE 8 titled LITIGATION for information on Legal Proceedings.
| Item 1A. | Risk Factors. |
Not required for smaller reporting companies.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
| 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 | |||
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.
Date: August 14, 2019.
| MAX SOUND CORPORATION |
| (Registrant) | ||
| 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) | ||