Max Sound Corp - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________

FORM 10-Q

_______________

(Mark One)

For the quarterly period ended September 30, 2014

or

For the transition period from ______to______.

MAX SOUND CORPORATION

 (Exact name of registrant as specified in charter)

2902A Colorado Avenue

Santa Monica, CA 90404

(Address of principal executive offices)

_______________

310-264-0230

(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.

 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 November 11, 2014, there were 363,904,570 shares, par value $0.0001 per share, of common stock issued and outstanding.

MAX SOUND CORPORATION

FORM 10-Q

for the period ended September 30, 2014

INDEX 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be

achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

CERTAIN TERMS USED IN THIS REPORT

When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Max Sound Corporation, and “SEC” refers to the Securities and Exchange Commission.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MAX SOUND CORPORATION

CONTENTS

See accompanying notes to condensed unaudited financial statements.

See accompanying notes to condensed unaudited financial statements.

See accompanying notes to condensed unaudited financial statements.

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.

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in The United States of America and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information necessary for a comprehensive presentation of financial position and results of operations.

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 statements presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.

(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 September 30, 2014 and December 31, 2013, 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. 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 September 30, 2014 and December 31, 2013.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

(G) Revenue Recognition

The Company recognized revenue on arrangements in accordance with FASB Codification Topic 605, “Revenue Recognition” (“ASC Topic 605”). Under ASC Topic 605, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. We had revenues of $1,103 and $2,491 for the three and nine months ended September 30, 2014 and revenues of $487 and $2,207 for the three and nine months ended September 30, 2013, respectively.

(H) Advertising Costs

Advertising costs are expensed as incurred and include the costs of public relations activities. These costs are included in consulting and general and administrative expenses and totaled $2,630 and $4,630 for the three and nine months ended September 30, 2014 and advertising costs of $31,002 and $51,799 for the three and nine months ended September 30, 2013, respectively.

 (I) Identifiable Intangible Assets

As of September 30, 2014 and December 31, 2013, $7,500,275 of costs related to registering a trademark and acquiring technology rights have been capitalized. It has been determined that the trademark and technology rights have an indefinite useful life and are not subject to amortization. However, the trademark and technology rights will be reviewed for impairment annually or more frequently if impairment indicators arise.

On November 15, 2012, the Company acquired the rights to assets and audio technology known as Liquid Spins, Inc. through a share exchange, whereby the Company issued 24,752,475 shares of common stock for their rights in Liquid Spins technology (See Note 8 (H)). As of September 30, 2014 and December 31, 2013, $8,579,510 and $9,303,679, respectively, of costs related to this intangible remain capitalized. The technology was placed in service on August 23, 2013 with a useful life of 10 years. However, the technology will be reviewed for impairment annually or more frequently if impairment indicators arise.

On May 19, 2014, the Company entered into an agreement to acquire the rights to intellectual property titled “Optimized Data Transmission System and Method” (“ODT”) through a cash payment of $500,000 in addition to a share issuance, whereby the Company issued 10,000,000 shares of common stock, valued at $1,000,000 ($0.10/share). In exchange, the Company received a perpetual, exclusive, worldwide license to the ODT technology for all fields of use. In addition, the Company issued 1,000,000 shares of common stock, valued at $120,000 ($0.12/share), as compensation for the introduction and identification of a seller based on the agreement dated April 10, 2014.

As of September 30, 2014, $1,620,000 of costs related to the “ODT” intangible asset remains capitalized. The technology will be reviewed for impairment annually or more frequently if impairment indicators arise. In connection with this agreement, the Company is obligated to make an additional five (5) payments totaling $1,000,000 to be made every 30 days, with the thirty (30) day periods to be waived if fund raising occurs on an anticipated faster time line. The payments of additional cash are contingent on the following funding criteria:

In connection with funds raised through September 30, 2014, the Company recorded a liability and expensed $189,456 as royalty cost, related to the 20% fee, as of September 30, 2014, $30,000 has been paid . The remaining liability as of September 30, 2014, is $159,456 and is included in accounts payable.

The Company shall act as the exclusive agent to facilitate and negotiate any opportunities on behalf of ODT to Companies, Organizations and other qualified entities. Upon any closing, ODT shall receive 50% of gross dollars and the Company shall receive the other 50% at the time of a completion of any transaction opportunity, including legal settlements after subtracting applicable contingent legal fees. The term of the agreement is for the life of the acquired intellectual property.

On May 22, 2014, the Company entered into a five (5) year agreement to acquire the rights to intellectual property titled “Engineered Architecture” (“EA Technology”) through a cash payment of $50,000 in addition to a share issuance, whereby the Company issued 4,000,000 shares of common stock, valued at $394,000 ($0.0985/share). In exchange, the Company received for the term of the agreement, the exclusive worldwide right to use the EA Technology. As of September 30, 2014, $444,000 of costs related to this intangible remains capitalized. The technology will be reviewed for impairment annually or more frequently if impairment indicators arise. In connection with this agreement, the Company is obligated to make an additional five (5) payments totaling $500,000 to be made every 30 days, with the thirty (30) day periods to be waived if fund raising occurs on an anticipated faster time line. The payments of additional cash are contingent on the following funding criteria:

.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

In connection with funds raised through September 30, 2014, the Company recorded a liability and expensed $94,728 as royalty cost, related to the 10% fee, as of September 30, 2014, $25,000 has been paid . The remaining liability as of September 30, 2014, is $69,728 and is included in accounts payable.

The Company shall act as the exclusive agent to facilitate and negotiate any opportunities on behalf of EA Technology to Companies, Organizations and other qualified entities. Upon any closing, EA shall receive 50% of gross dollars and the Company shall receive the

other 50% at the time of a completion of any transaction opportunity, including legal settlements after subtracting applicable contingent legal fees. In the event the Company sublicenses EA to other entities, profits shall be split 50/50.

On August 11, 2014, the Company and VSL simultaneously filed trade secret and patent infringement actions against Google, Inc. and its subsidiaries, YouTube, LLC and On2 Technologies, Inc., relating to proprietary and patented technology owned by Vedanti Systems Limited, a subsidiary of VSL.  The patent infringement complaint was brought in U.S. District Court for the District of Delaware and the trade secret suit was filed in Superior Court of California, County of Santa Clara.  The lawsuits contend that, in 2010, while Google was in discussions with Vedanti about the possibility of acquiring Vedanti's patented digital video streaming techniques and other proprietary methods, Google gained access to and received technical guidance regarding Vedanti’s proprietary codec, a computer program capable of encoding and decoding a digital data stream or signal.  The complaints allege that soon after the two companies initiated negotiations, Google began implementing Vedanti's technology into its own WebM/VP8 video codec without informing Vedanti, and without compensating Vedanti for its use.  Plaintiffs are seeking a permanent injunction against Google, compensatory damages, as well as treble damages. As exclusive agent to VSL to enforce all rights with respect to the subject technology, the Company has hired Grant & Eisenhofer, PA to represent the Company and VSL in the suits. These cases will be vigorously prosecuted and the Company believes it has a good likelihood of success. 

(J) Impairment of Long-Lived Assets

The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets, such as technology rights, be reviewed for impairment annually, or whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value. No impairments were recorded for the nine months ended September 30, 2014 and 2013, respectively.

(K) Loss Per Share

In accordance with accounting guidance now codified as FASB ASC Topic 260, “Earnings per Share,” Basic earnings per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive. Because of the Company’s net losses, the effects of stock warrants and stock options would be anti-dilutive and accordingly, is excluded from the computation of earnings per share.

The computation of basic and diluted loss per share for the nine months ended September 30, 2014 and 2013, excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:

(L) 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.

(M) Business Segments

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

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

(N) Recent Accounting Pronouncements

On June 10, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation ("ASUE 2014-10"). The guidance is intended to reduce the overall cost and complexity associated with financial reporting for development stage entities without reducing the availability of relevant information. The Board also believes the changes will simplify the consolidation accounting guidance by removing the differential accounting requirements for development stage entities. As a result of these changes, there no longer will be any accounting or reporting differences in GAAP between development stage entities and other operating entities. For organizations defined as public business entities the presentation and disclosure requirements in Topic 915 will no longer be required starting with the first annual period beginning after December 15, 2014, including interim periods therein. Early application is permitted for any annual reporting period or interim period for which the entity's financial statements have not yet been issued (public business entities) or made available for issuance (other entities). The Company has elected to adopt this guidance as of September 30, 2014.

In June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-12, “Compensation – Stock Compensation (Topic 718 ); Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The amendments in this ASU apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. For all entities, the amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this ASU either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.  We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

In August 2014, the FASB issued Accounting Standards Update “ASU” 2014-15 on “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this Update provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

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

(O) Fair Value of Financial Instruments

The carrying amounts on the Company’s financial instruments including prepaid expenses, accounts payable, accrued expenses, derivative liability, convertible note payable, and loan payable-related party, approximate fair value due to the relatively short period to maturity for these instruments.

(P) Stock-Based Compensation

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

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

(Q) 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.

(R) 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. 

(S) 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.

(T) 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.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

(U) Licensing & Distribution

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

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

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

As consideration for the above-referenced license rights, LOOKHU agreed to pay the Company royalties of $0.25 per month per paid subscription to the technology, to be payable on a monthly basis.  Additionally, LOOKHU agreed to pay the Company 4% of the net advertising revenue derived from advertising that utilizes the technology, to be payable on a quarterly basis.

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

NOTE 2           GOING CONCERN 

As reflected in the accompanying unaudited interim financial statements, the Company had a net loss of $7,132,076 for the nine months ended September 30, 2014, a working capital deficit of $4,198,717, and has negative cash flow from operations of $2,188,716 as of September 30, 2014.

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 September 30, 2014 was not sufficient to meet the cash requirements to fund planned operations through December 31, 2014 without additional sources of cash. This raises substantial doubt about the Company’s ability to continue as a going concern.  The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

NOTE 3           DEBT

Debt consists of the following:

Line of credit with the principal stockholder consisted of the following activity and terms:

MAX SOUND CORPORATION

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

During the nine months ended September 30, 2014 and the year ended December 31, 2013, the Company issued convertible notes totaling $2,794,834 and $3,843,221, respectively. The Convertible notes issued in the nine months ended September 30, 2014 and the year-ended December 31, 2013, consist of the following terms:

The debt holders are entitled, at their option, to convert all or part of the principal and accrued interest into shares of the Company’s common stock at conversion prices and terms discussed above.    The Company classifies embedded conversion features in these notes as a derivative liability due to management’s assessment that the Company may not have sufficient authorized number of shares of common stock required to net-share settle or due to the existence of a ratchet due to an anti-dilution provision. See Note 4 regarding accounting for derivative liabilities.

During the nine months ended September 30, 2014, the Company converted debt and accrued interest, totaling $2,756,852 into 36,120,574 shares of common stock.    Conversions of debt to equity occurring after the maturity date and penalties incurred resulted in a loss on settlement of $151,357.

During the year ended December 31, 2013, the Company converted debt and accrued interest, totaling $ 2,736,376 into 19,146,156 shares of common stock.

Convertible debt consisted of the following activity and terms:

On December 11, 2012, the Company entered into an agreement whereby the Company will issue up to $120,000 in a convertible note.    The note matured on December 11, 2013 and bears an interest rate of 8%. As of December 31, 2013 and 2012, the Company balance of the convertible note and accrued interest is $128,810 and 120,526, respectively.      The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months.    The conversion price equals to $0.50 per share.    For the year ended December 31, 2013, the Company issued 24,000 shares of common stock for accrued interest having a fair value of $5,368 ($0.21 - $0.25/share).

As of December 31, 2013, the note was outstanding and was in default.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

During the three months ended March 31, 2014, the Company negotiated modifications to the December 11, 2012 convertible debt.  For the modification, the Company compared the value of both the old and new convertible debt.    The Company determined that the present value of the cash flows associated with the new convertible debt exceeded the present value of the old convertible debt by more than 10%, which resulted in the application of extinguishment accounting.

The modification of the note included extension of terms through July 31, 2014, decrease in the conversion price to $0.10 per share and an increase in the interest rate to 10%.  The Company also negotiated to convert $30,000 in accounts payable owed to the debt holder to be included in the convertible debt increasing the principal balance to $150,000.  In accordance with ASC 470-20-25-13, the convertible debt instrument was issued at a substantial premium which represented additional paid in capital.  In connection with the extinguishment, the Company recorded a loss on extinguishment of $18,596 with the offset recorded to additional paid in capital.

During the three months ended June 30, 2014, the Company negotiated a further extension of the note through December 31, 2014. During the nine months ended September 30, 2014, the Company repaid $28,340 and reclassified $13,540 of accounts payable owed to the note holder to be included in the principal balance of the note. As of September 30, 2014, the principal balance of the note including accrued interest totaled $145,149 of which the principal balance of $135,200 is included as a component of convertible debt.

During the nine months ended September 30, 2014, the Company paid debt issue costs totaling $100,500.

During the nine months ended September 30, 2013, the Company paid debt issue costs totaling $149,388.

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

During the nine months ended September 30, 2014 and 2013, the Company amortized $133,353 and $157,616 of debt issue costs, respectively.

During the nine months ended September 30, 2014 and 2013, the Company recorded debt discounts totaling $2,437,128 and $2,250,967, respectively.

The debt discount recorded in 2014 and 2013 pertains to convertible debt that contains embedded conversion options that are required to bifurcated and reported at fair value and original issue discounts.

The Company amortized $2,307,966 and $1,876,881 during the nine months ended September 30, 2014 and 2013, respectively, to amortization of debt discount expense.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

NOTE 4           DERIVATIVE LIABILITIES

The Company identified conversion features embedded within convertible debt issued in 2014 and 2013 and warrants issued in 2014 and 2013. 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:

The Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining value of the derivative as it exceeded the gross proceeds of the note.  The Company also recorded the value of the warrants issued for services as derivative expense for the nine months ended September 30, 2014.  The Company recorded a derivative expense for the nine months ended September 30, 2014 and 2013 of $210,725 and $196,467, 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 September 30, 2014:

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, 2013:

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

NOTE 5           PROPERTY AND EQUIPMENT

At September 30, 2014, and December 31, 2013, respectively, property and equipment is as follows:

Depreciation/amortization expense for the three and nine months ended September 30, 2014 totaled $10,041 and $63,490, respectively.

Depreciation/amortization expense for the three and nine months ended September 30, 2013 totaled $16,870 and $57,626, respectively.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

NOTE 6          STOCKHOLDERS’ EQUITY

(A) Common Stock 

During the nine months ended September 30, 2014, the Company issued the following common stock:

The following is a detailed description of transactions noted above:

1. Conversion of convertible debt and accrued interest

During the nine months ended September 30, 2014, the Company converted debt and accrued interest, totaling $2,756,852 into 36,120,574 shares of common stock.    Conversions of debt to equity occurring after the maturity date and penalties incurred resulted in a loss on settlement of $151,357.

2. Services Rendered

During the nine months ended September 30, 2014, the Company issued 1,250,000 shares of common stock valued at $386,250 in connection with employment agreements entered into (See Note 9 (A).

On January 15, 2013, the Company entered into an agreement for legal services, pursuant to which the Company will pay $2,000 and issue 50,000 shares of fully vested common stock for the preparation, filing costs and fees of each provisional and regular patent application.  Through September 30, 2014, a total of 44 applications have been filed.  In connection with this agreement:

On March 17, 2014, the Company entered into an advisory board agreement for a period of three years. In consideration for these services, during the nine months ended September 30, 2014, the Consultant was granted 100,000 shares of fully vested common stock valued at $9,300 ($0.09/share). (See note 7(B)).

On April 4, 2014, the Company entered into consulting services agreement. In consideration for these services, during the nine months ended September 30, 2014, the Consultant was granted 200,000 shares of fully vested common stock valued at $21,980 ($0.11/share). (See note 7(B)).

During the nine months ended September 30, 2014, the Company entered into a consulting services agreement related to marketing and the creation of Company awareness. In connection with this agreement, the consultant shall be paid $20,000 and was issued 200,000 fully vested shares of common stock valued at $31,000 ($0.16/share). (See note 7(B)).

On August 6, 2014, the Company entered into an advisory board agreement for a period of three years. In consideration for these services, during the nine months ended September 30, 2014, the Consultant was granted 100,000 fully vested shares of common stock valued at $16,500 ($0.17/share). (See note 7(B)).

On September 23, 2014, the Company entered into service agreement for a period of two years with the Company’s transfer agent. In consideration for these services, during the nine months ended September 30, 2014, 300,000 shares of fully vested common stock valued at $49,500 ($0.17/share) were granted and expensed.

On September 10, 2014, the Company entered into an advisory board agreement. In consideration for these services, during the nine months ended September 30, 2014, the Consultant was granted 100,000 shares of fully vested common stock valued at $16,000 ($0.16/share). (See note 7(B)).

On July 29, 2014, the Company entered into an investor relations agreement. In connection with this agreement, the Company is to issue 100,000 shares of common stock monthly and $5,500 in monthly fees. As of September 30, 2014, the agreement was terminated. In total, the consultant was issued 100,000 shares of fully vested common stock valued at $16,000 ($0.16/share) and was paid $5,500. (See note 7(B)).

3. Acquisition of intangibles

During the nine months ended September 30, 2014, the Company issued 15,000,000 common shares in connection with license agreements entered into and intangibles acquired. See Note 1(I)

4. Return of Shares

On August 3, 2012, the Company entered into an endorsement agreement with an unrelated third party for a period from August 3, 2012 through August 3, 2015.    In exchange for the services provided, the Company issued 3,000,000 shares of common stock having a fair value of $960,000 ($0.30/share) based upon fair value on the date of grant. As of January 2014, the August 3, 2012 agreement has been terminated and 3,000,000 shares have been returned to the Company (See note 7(B)).

In July of 2013, the Company entered into a financial advisor agreement for a period of six months with the advisor providing various assistance including introductions to potential investors. The Agreement calls for a fee of $25,000 with an additional $7,500 due and payable on the 1st day of the subsequent five months. On July 8, 2013, the Company issued 1,500,000 common shares as consideration for these services valued at $315,000. On April 15, 2014, the parties entered into a mutual termination agreement, as a result, 1,250,000 shares were returned to the Company.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

During the year ended December 31, 2013, the Company issued the following common stock:

The following is a more detailed description of select transactions noted above:

1. Conversion of convertible debt and accrued interest

During the year ended December 31, 2013, the Company converted debt and accrued interest, totaling $ 2,736,376 into 19,146,156 shares of common stock.

2. Services Rendered

During the year ended December 31, 2013, the Company issued 2,350,000 shares of common stock valued at $623,500 in connection with employment agreements entered into (See Note 7 (A).

In July of 2013, the Company entered into a financial advisor agreement for a period of six months with the advisor providing various assistance including introductions to potential investors. The Agreement calls for a fee of $25,000 with an additional $7,500 due and payable on the 1st day of the subsequent five months. On July 8, 2013, the Company issued 1,500,000 common shares as consideration for these services valued at $315,000.

On February 1, 2013, the Company entered into a professional services agreement related to research and outreach media. In connection with this agreement, the Company issued 500,000 shares of common stock valued at $120,000 during the year ended December 31, 2013.

On January 15, 2013, the Company entered into an agreement for legal services, pursuant to which the Company will pay $2,000 and issue 50,000 shares of common stock for the preparation, filing costs and fees of each provisional and regular patent application.  Through September 30, 2014, a total of 44 applications have been filed.  In connection with this agreement:

On January 21, 2013, the Company entered into a professional services agreement related conference presentations. In connection with this agreement, the Company issued 120,000 shares of common stock valued at $32,400 during the year ended December 31, 2013.

During the year ended December 31, 2013, the Company entered into a professional services agreements. In connection with these agreements, the Company issued 275,029 shares of common stock valued at $66,813 during the year ended December 31, 2013.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

3. Cash and warrants

On January 31, 2013 an individual exercised 430,800 of stock warrants at an exercise price of $0.10 per share for proceeds of $43,080.

On December 26, 2013, the Company issued 110,101 shares of common stock in connection with a cashless exercise of warrants.  The number of warrants received was based on 190,000 warrants exercised using an average of five previous closing prices.

4. Return of shares

On February 6, 2012, the Company filed a suit for declaratory judgment and rescission of contract associated with a former consultant for failure to perform contractual requirements.  It seeks clarification that the former consultant is not owed 750,000 shares of restricted common stock.  The defendants have been served.  This case will be vigorously prosecuted and has a good likelihood of a favorable outcome. The case seeks in excess of the jurisdictional amount, which is $50,000 dollars.  On March 5, 2013, the suit was settled in favor of Max Sound Corporation and 750,000 shares issued to the former consultant were returned to the treasury.

5. Finders Fees

During the year ended December 31, 2013, in connection with debt raised of $833,333, the Company issued 94,964 common shares of the Company’s common stock valued at $20,555 issued to the finder.

6. Repurchased shares

During the year ended December 31, 2013, the Company entered into a settlement agreement with the seller of the software to reverse the original transaction which included the issuance of 3,000,000 shares of common stock in exchange for the software.    The Company received back 3,000,000 shares of common stock which was recorded as treasury stock in exchange of returning the software to the seller.    Upon the return of the shares, the Company recognized a gain of $220,000 based on the quoted trading price of the Company’s common stock, which was the best evidence of fair value.

 (B) Stock Warrants

On January 1, 2013, the Company issued 500,000 warrants under consulting agreements. The Company recognized an expense of $84,028 for the year ended December 31, 2013.    The Company recorded the fair value of the warrants    based on the fair value of each warrant grant estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2013, dividend yield of zero, expected volatility of 140.30%; risk-free interest rates of 0.37%, expected life of three years. The warrants vested immediately.      The warrants expire in three years from the date of issuance and have an exercise price of $0.45 per share (See Note 7(B)).

On August 7, 2013, the Company issued 100,000 warrants for services rendered. The Company recognized compensation expense of $43,809 on the date of issuance with the offset being recorded to derivative liabilities since the Company applied the provisions of ASC No. 815, pertaining to the potential settlement in a variable amount of shares given the company’s shares are tainted.    The Company recorded the fair value of the warrants    based on the fair value of each warrant grant estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions, dividend yield of zero, expected volatility of 297%; risk-free interest rates of 0.61%, expected life of three years. The warrants vested immediately.  The warrants expire in three years from the date of issuance and have an exercise price of $0.40 per share (See Note 9(B)).

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

During the year ended December 31, 2013, the Company issued 2,000,000 warrants in connection with the entry into certain convertible debenture agreements. Each warrant vests immediately and expire April 26, 2016 – December 29, 2016 with an exercise price of $0.40.

During the nine months ended September 30, 2014, the Company issued 750,000 warrants in connection with the entry into certain convertible debenture agreements. Each warrant vests immediately and expire February 26, 2017 – August 12, 2017 with an exercise price of $0.40.

The following tables summarize all warrant grants as of September 30, 2014, and the related changes during these periods are presented below:

 A summary of all outstanding and exercisable warrants as of September 30, 2014 is as follows:

(C) Stock Options

On January 1, 2013, the Company issued 700,000 options to buy common shares of the Company's stock at $0.50 per share, good for three years, to the Chief Technical Officer pursuant to an amended employment agreement dated December 31, 2012. The Company recognized an expense of $115,288 for the year ended December 31, 2013. The Company recorded the fair value of the options based on the fair value of each option grant estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2013:

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

On July 7, 2014, as a benefit for the unsecured loans granted to the Company by the Company's Chief Financial Officer ("CFO"), the Company issued 2,866,520 options to buy common shares of the Company's stock at $0.10 per share, good for three years to the CFO. The Company recognized an expense of $190,656 for the nine months ended September 30, 2014. The Company recorded the fair value of the options based on the fair value of each option grant estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

The following tables summarize all option grants as of September 30, 2014, and the related changes during these periods are presented below:

(D) Share Exchange

On May 11, 2010, the Company acquired the rights to an audio technology known as Max Audio Technology (Max) through a share exchange, whereby the Company issued 30,000,000 shares of common stock to two individuals in exchange for their rights in Max having a value of $7,500,000 based upon recent market value ($0.25/share) (See Note 8(B)).

On January 17, 2011, the Company acquired the rights to software technology known as Blog Software, Social Media Vault, Social Media Bar and Trending Topix (BSST) through a share exchange, whereby the Company issued 3,000,000 shares of common stock to two individuals in exchange for their rights to BSST having a value of $300,000 based upon recent market value ($0.10/share).

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

On November 15, 2012, the Company acquired the rights to an audio technology known as Liquid Spins, Inc. through a share exchange, whereby the Company issued 24,752,475 shares of common stock for their rights in Liquid Spins technology and other assets having a value of $10,000,000 based upon recent market value ($0.404/share).    The following assets were acquired in the transaction:

During the year ended December 31, 2013, the Company received an additional $8,011 related to the acquisition which reduced the carrying value of the goodwill as of December 31, 2013.  For the year ended December 31, 2013, the Company recorded $343,898 of amortization expense.

For the nine months ended September 30, 2014 and 2013, the Company recorded $724,169 and $0, respectively, of amortization

expense.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

NOTE 7         COMMITMENTS

(A) Employment Agreement

On January 17, 2011, the Company executed an employment agreement with an executive to be the President and CEO for five years.    As compensation for services, the executive will receive a monthly compensation of $8,000 beginning after the completion of at least one million dollars of new funding to the Corporation or can be paid as commissions from sales brought to the Company, whichever comes first. In addition to the base salary, the employee is entitled to receive a 20% commission of all sales the executive is directly responsible for bringing to the Company.    The agreement also calls for the executive to receive, upon execution of the agreement, three million shares of Rule 144 common stock and twelve million options, which are good for three years, to buy shares of Rule 144 common stock at $0.12/share.    As a supplement to the agreement, on February 4, 2011, the executive received an additional twenty million common shares directly from the Chairman of the Company.    On August 25, 2011, the agreement was updated to increase the monthly compensation to $12,000 per month beginning September 1, 2011, terminate the initial 20% commission on sales and to add a commission on sales equal to 10% of gross quarterly profits.    On December 31, 2012, the agreement was updated to eliminate his previous annual bonus entitlement, which was previously 10% of revenues. In exchange for this consideration, the Company agreed that his bonus will be decreased to 7% of net profits which may be received in cash or Rule 144 stock or any combination. The agreement also called for the employee to receive health benefits.    In May of 2013, the Company amended the agreement for the President and CEO to receive monthly compensation of $18,000 beginning May 1, 2013.

On October 1, 2011, the Company executed an employment agreement with its Chief Technical Officer (“CTO”).   The term of the agreement is for five years.   As compensation for services, the CTO will receive a monthly compensation of $10,000, monthly commission equal to 5% of all profits derived from the sales of all products and services related to Max Sound, and an annual bonus of 5% of all profits derived from the sales of all products and services related to Max Sound that is over one million dollars.   In addition to the base salary, the employee is entitled to receive health benefits.  Effective January 1, 2012, the Company increased the monthly compensation to $12,000.   On December 31, 2012 the Company amended the agreement that effective January 1, 2013 the CTO will receive 300,000 shares of common stock and 700,000 three year options at 50 cents per share. On December 31, 2012, the agreement was also updated to eliminate his previous commission and annual bonus entitlement. Executive shall now be entitled to a commission on all sales of the Company equal to 6% of net profits. For the year ended December 31, 2013, the Company issued 300,000 common shares valued at $90,000.

On January 9, 2013, the Company executed an employment agreement with its Director of New Business Development. The term of the agreement is for three years.   As compensation for services, the Director will receive a monthly compensation of $10,000.   Upon the first million dollars in gross sales the salary will increase to $12,000 per month.  In addition, the Director will receive up to 1,000,000 shares of common stock payable in lots of 125,000 per quarter beginning on January 1, 2013.    Also, employee for the first eight quarters of employment has a right to earn 125,000 additional 3 year stock options with a strike price of $0.50 per share as follows:

For the nine months ended September 30, 2014 and year ended December 31, 2013, the employee received 375,000 and 500,000 shares with a fair value of $95,625 and $127,500, respectively.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

On October 1, 2013, the Company executed an employment agreement with its Senior Audio Engineer.   The term of the agreement is for three years.   As compensation for services, the Engineer will receive a monthly compensation of $6,000 beginning October 1, 2013.  In addition to the base salary, the employee is entitled to receive health benefits, and the employee received 50,000 shares of common stock during the year ended December 31, 2013 valued at $13,500 ($0.27/share).

On November 26, 2012, the Company executed an employment agreement with its VP of Music Entertainment. The term of the agreement is for two years.   As compensation for services, the VP will receive a monthly compensation of $8,000.   In addition, the employee will receive up to 1,000,000 shares of common stock payable in lots of 125,000 per quarter beginning on December 1, 2012.   In addition, the employee is entitled to a monthly commission equal to 5% of all profits from any sales of music from Liquid Spins that employee is directly responsible for bringing to the Company.   For the three months ended March 31, 2014 and year ended December 31, 2013, the employee received 125,000 and 500,000 shares with a fair value of $45,625 and $133,750, respectively. As of February 3, 2014, the employee was terminated with no additional compensation owed.

On November 26, 2012, the Company executed an employment agreement with its VP of Music Distribution. The term of the agreement is for two years.   As compensation for services, the VP will receive a monthly compensation of $7,000.    In addition, the employee will

receive up to 1,000,000 shares of common stock payable in lots of 125,000 per quarter beginning on December 1, 2012.    In addition, the employee is entitled to a monthly commission equal to 5% of all profits from any sales of music from Liquid Spins that employee is directly responsible for bringing to the Company.   For the nine months ended September 30, 2014 and year ended December 31, 2013, the employee received 500,000 and 500,000 shares with a fair value of $182,500 and $133,750, respectively.

On June 11, 2012, the Company executed an employment agreement with its Senior Audio Engineer.   The term of the agreement is for five years.   As compensation for services, the Engineer will receive a monthly compensation of $6,000 beginning July 1, 2012.  In addition to the base salary, the employee is entitled to receive health benefits, and the employee will receive 1,000,000 shares of common stock payable in 125,000 increments per quarter beginning on July 1, 2012.   For the nine months ended September 30, 2014 and year ended December 31, 2013, the employee received 250,000 and 500,000 shares with a fair value of $62,500 and $125,000, respectively.

On May 17, 2011, the Company executed an employment agreement with its Chief Internet Officer (“CIO”).    The term of the agreement is for five years.    As compensation for services, the CIO will receive a monthly compensation of $9,000 beginning at the completion of at least one million dollars of new funding.    In addition to the base salary, the employee is entitled to receive health benefits.    The agreement also calls for the CIO to receive two million shares of Rule 144 common stock upon the execution of the agreement.    On August 25, 2011, the agreement was updated to increase the monthly compensation to $12,000 per month beginning October 1, 2011. 

(B) Consulting Agreement

On June 10, 2011, the Company entered into a five year advisory board consulting agreement with three persons to provide for consulting and business services.    In exchange for the services provided, the consultants received 100,000 shares of common stock each. 

In September 2011, the Company entered into a five year advisory board consulting agreement with three persons to provide for consulting and business services.    In exchange for the services provided, the consultants received 100,000 shares of Company stock at $0.23 - 0.39 per share.    The terms of the agreements are for five years..

During the three months ended December 31, 2011, the Company entered into a five year advisory board consulting agreement with five persons to provide for consulting and business services.    In exchange for the services provided, the consultants received 100,000 shares of Company stock at $0.47 - 0.88 per share.  The terms of the agreements are for five years.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

On August 3, 2012, the Company entered into an endorsement agreement with an unrelated third party for a period from August 3, 2012 through August 3, 2015.    In exchange for the services provided, the Company issued 3,000,000 shares of common stock having a fair value of $960,000 ($0.30/share) based upon fair value on the date of grant (See Note 8(B)). The delivery of the shares will be made in four 750,000 tranches to coincide with each of the four points listed below:

As December 31, 2012, the first two of the four points listed above have been completed and the Company recorded $480,000 as deferred compensation and $480,000 in endorsement expense.    As of March 31, 2013, the second two of the four points listed above have been completed and the Company recognized $480,000 in endorsement expense (See Note 8(B)). The Company and the third party have completed the video endorsement and the mobile application and launched both in August 2013. In September 2013, the parties decided that they would not be effective working together due to a change in marketing goals. The parties reached an agreement whereby the Company will not promote the endorsement or the mobile application and the third party will return all shares received to the Company who in turn will return them to the Company treasury.    As of January 2014, the August 3, 2012 agreement has been terminated and 3,000,000 shares have been returned to the Company.

On August 22, 2012, the Company entered into a consulting agreement with an unrelated third party for a period from September 1, 2012 through August 31, 2013.    In exchange for the services provided, the Company issued 500,000 shares of common stock having a fair value of $150,000 ($0.30/share) based upon fair value on the date of grant.

On September 14, 2012, the Company entered into a licensing agreement with an unrelated third party for a period from September 14, 2012 through September 14, 2013.    The agreement will automatically extend on a year to year basis unless terminated by either party.    Upon the execution of the agreement, the Company paid a non-refundable $15,000 upfront fee for the use of the license.    Any additional technical support will be provided on as needed basis at an hourly rate of $250/hour.

On December 1, 2012, the Company entered into a consulting agreement with an unrelated third party for a period from December 1, 2012 through November 30, 2013.    In exchange for the services provided, the Company will pay a monthly consulting fee of $10,000.    A bonus may be provided for $26,000 after one year of service in the sole discretion of the Company.    In addition, the Company will grant 500,000 three year warrants with an exercise price of $0.45 per share.    Within 10 days of executing the consulting agreement the consultant will loan the Company $120,000 in convertible note converted at 50 cents per share.

In July 2013, the Company entered into a financial advisor agreement for a period of six months with the advisor providing various assistance including introductions to potential investors. The Agreement calls for a fee of $25,000 with an additional $7,500 due and payable on the 1st day of the subsequent five months. On July 8, 2013, the Company issued 1,500,000 common shares as consideration for these services valued at $315,000.

In July 2013, the Company entered into a digital content distribution agreement for a period of 1 year.    The agreement calls for an advance of $25,000, the fees are recorded as prepaid expenses, earned based on downloaded content for a minimum of $120,000 per year.    The agreement also calls for a onetime fee of $50,000 for synchronization services of which $25,000 has been paid and has been recorded as a prepaid expense.    As of December 31, 2013, the Company paid a total of $50,000 in connection with this agreement which has been recorded as prepaid expenses.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

On March 17, 2014, the Company entered into an advisory board agreement for a period of three years. In consideration for these services, during the nine months ended September 30, 2014, the Consultant was granted 100,000 shares of fully vested common stock valued at $9,300 ($0.09/share). Two additional blocks of 100,000 common shares shall be granted shall certain benchmarks be accomplished during the first year.

On April 24, 2014, the Company entered into consulting services agreement. In consideration for these services, during the nine months ended September 30, 2014, the Consultant was granted 200,000 shares of fully vested common stock valued at $21,980 ($0.11/share).

During the nine months ended September 30, 2014, the Company entered into a consulting services agreement related to marketing and the creation of Company awareness. In connection with this agreement, the consultant shall be paid $20,000 and was issued 200,000 shares of fully vested common stock valued at $31,000 ($0.16/share).

On August 6, 2014, the Company entered into an advisory board agreement for a period of three years. In consideration for these services, during the nine months ended September 30, 2014, the Consultant was granted 100,000 shares of fully vested common stock valued at $16,500 ($0.17/share).

On September 23, 2014, the Company entered into service agreement for a period of two years with the Company’s transfer agent. In consideration for these services, during the nine months ended September 30, 2014, 300,000 shares of fully vested common stock valued at $49,500 ($0.17/share) were granted.

On September 10, 2014, the Company entered into an advisory board agreement. In consideration for these services, during the nine months ended September 30, 2014, the Consultant was granted 100,000 shares of fully vested common stock valued at $16,000 ($0.16/share).

On July 29, 2014, the Company entered into an investor relations agreement. In connection with this agreement, the Company is to issue 100,000 shares of fully vested common stock monthly and $5,500 in monthly fees. As of September 30, 2014, the agreement was terminated. The consultant was issued 100,000 shares of common stock valued at $16,000 ($0.16/share) and was paid $5,500.

(C) Operating Lease Agreements

On September 20, 2012, the Company took over a month to month operating lease upon completing the asset purchase agreement with Liquid Spins. The lease began on October 1, 2012 at a monthly rate of $1,585. The Company gave notice to end this month to month lease, with a final end date of February 28, 2014.

On September 1, 2010, the Company executed a three-year non-cancelable operating lease for its new corporate office space. The lease began on October 1, 2010 and expires on September 30, 2013. Total base rent due during the term of the lease is $134,880. At the current time the Company is continuing on with the existing office space on a month to month basis based on the previous terms and conditions of the recently expired lease.

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

NOTE 8       LITIGATION

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business.

On February 21, 2012, the Company filed a suit for breach of contract, intentional misrepresentation, negligent misrepresentation, fraud, false advertising, and unfair competition with a former consultant.   It seeks damages due to their alleged failure to meet the contractual requirements regarding promotions.   The defendant has been served.   In September of 2014, the Company received a Default Judgment against the Defendant.    The Company is vigorously pursuing collection on this judgment.

On August 14, 2012, the Company, along with two shareholders of the Company, were named as a defendant in an action filed in the Superior Court for the State of California and the County of San Diego. The plaintiff alleges he was terminated by his former employer “Acoustics Control Sciences, LLC” (which is a company that is not affiliated with Max Sound Corporation) in August 2008 without receiving wages and other compensation allegedly due him. The plaintiff further claims that two of the members or “shareholders” of Acoustics Control Sciences, LLC, wrongfully transferred a patent owned by his former employer and this transfer prevented his former employer from paying the wages alleged due. According to the plaintiff, when the assets of his former employer were sold to the Company, Max Sound Corporation became a successor-in-interest to the plaintiff’s former employer. Plaintiff thus seeks unpaid wages and other compensation from each alleged successor-in-interest named in his complaint. This case will be vigorously prosecuted and has a good likelihood of success.

On August 23, 2012, Koss Corporation filed a lawsuit against the Company in the United States District Court for the Eastern District of Wisconsin alleging trademark infringement. Based upon its federally registered trademark “Hearing is Believing” for stereo headphones, Koss Corporation contends that the Company’s use of “Hearing in Believing” in advertisements for mobile phone software and the Company’s related trademark application for mobile phone software constitutes trademark infringement and unfair competition. The Company denies these allegations, and contends that the goods and services of the two companies are not related and are, in fact, sold or distributed in different channels. On October 26, 2012, the Company filed a motion to dismiss the lawsuit pending in the Eastern District of Wisconsin, and the lawsuit was dismissed for lack of personal jurisdiction. On June 7, 2013, Koss Corp. re-filed its lawsuit in the U.S. District Court for the Central District of California. About the same time, the U.S. Patent and Trademark Office published in the Official Gazette “Hearing is Believing” as a trademark for the Company. Koss Corp. responded by filing an opposition to registration of that mark by Max Sound Corporation. Koss opposition to registration, pending before the Trademark Trial and Appeal Board (“TTAB”), repeats the same allegations that appear in Koss’ federal complaint. Max Sound Corporation denied the allegations of the TTAB opposition and the federal complaint. The parties are in the final stage of settlement at this time. Due to a lack of interest to use the trademark by the Company and its partners, the Company abandoned the mark and entered into a final settlement with the plaintiff in December 2013.

On August 11, 2014, the Company and VSL simultaneously filed trade secret and patent infringement actions against Google, Inc. and its subsidiaries, YouTube, LLC and On2 Technologies, Inc., relating to proprietary and patented technology owned by Vedanti Systems Limited, a subsidiary of VSL.  The patent infringement complaint was brought in U.S. District Court for the District of Delaware and the trade secret suit was filed in Superior Court of California, County of Santa Clara.  The lawsuits contend that, in 2010, while Google was in discussions with Vedanti about the possibility of acquiring Vedanti's patented digital video streaming techniques and other proprietary methods, Google gained access to and received technical guidance regarding Vedanti’s proprietary codec, a computer program capable of encoding and decoding a digital data stream or signal.  The complaints allege that soon after the two companies initiated negotiations, Google began implementing Vedanti's technology into its own WebM/VP8 video codec without informing Vedanti, and without compensating Vedanti for its use.  Plaintiffs are seeking a permanent injunction against Google, compensatory damages, as well as treble damages. As exclusive agent to VSL to enforce all rights with respect to the subject technology, the Company has hired Grant & Eisenhofer, PA to represent the Company and VSL in the suits. These cases will be vigorously prosecuted and the Company believes it has a good likelihood of success. 

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

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

NOTE 9        INTANGIBLE ASSETS

As of September 30, 2014 and December 31, 2013, the Company owns certain trademarks and technology rights.    See Note 1 (I).

Intangible assets were comprised of the following at September 30, 2014 and December 31, 2013:

For the nine months ended September 30, 2014 and 2013, amortization expense related to the intangibles with finite lives totaled $724,169 and $0, respectively, and was included in general and administrative expenses in the statement of operations.   

At September 30, 2014, future amortization of intangible assets is as follows:

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2014

(UNAUDITED)

NOTE 10        SUBSEQUENT EVENTS

For the period from October 1, 2014 through November 11, 2014, the Company converted a total of $296,025 in convertible debt comprised of principal and accrued interest into 4,340,298 common shares.

On November 10, 2014, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors filed with the State of Delaware an Amended Certificate of Incorporation increasing the authorized shares of common stock by 50,000,000 shares of common stock, with a par value of $.0001 per share

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Corporate History and Structure

Max Sound Corporation (the “Company”) was incorporated in the State of Delaware as of December 9, 2005 as 43010, Inc. to engage in any lawful corporate undertaking, including, but not limited to, locating and negotiating with a business entity for combination in the form of a merger, stock-for-stock exchange or stock-for-assets exchange. On October 7, 2008, pursuant to the terms of a stock purchase agreement, Mr. Greg Halpern purchased a total of 100,000 shares of our common stock from Michael Raleigh for an aggregate of $30,000 in cash. The total of 100,000 shares represented 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 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 worldwide rights to all fields of use for Max Sound HD Audio technology. In November of 2010, we opened our post-production facility for Max Sound HD Audio in Santa Monica, California. In February of 2011, after several successful demonstrations to multi-media industry company executives, we decided to shift the focus of the Company to the marketing of the Max Sound HD Audio technology and commenced the name change from So Act Network, Inc. to Max Sound Corporation and the symbol from SOAN to MAXD.

On December 3, 2012, the Company completed the purchase of the assets of Liquid Spins, Inc., a Colorado corporation (“LSI”) (the “Asset Purchase Agreement”).  Pursuant to the Asset Purchase Agreement, the assets of LSI were exchanged for 24,752,475 shares of common stock of the Company (the “Shares”), equal to $10,000,000 and a purchase price of $0.404 per share.  The assets of LSI purchased included: record label distribution agreements; Liquid Spins technology inventory; independent arts programs; retail contracts for music distribution; physical inventory and office equipment; design and retail ready concepts; brand value; records; publishing catalog; and web assets.

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

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

Effective May 29, 2014, the Company entered into a license agreement with VSL Communications (“VSL”), pursuant to which the Company received the worldwide right to use certain optimized data transmission

technology owned by VSL. The agreement also entitles the Company to act as VSL’s exclusive agent to negotiate potential opportunities concerning the technology, and to sue certain pre-approved violators of VSL’s intellectual property rights relating to the technology. Proceeds of any such opportunities, including settlement of legal disputes, will be split equally between VSL and the Company after paying any contingent legal fees.

As consideration for the above-referenced representation and license rights, the Company agreed to pay VSL (i) an aggregate of $1,500,000 in cash, with a $500,000 down payment, and the balance to be paid in monthly installments from a percentage of proceeds of future funding’s received by the Company subject to the terms and conditions of the agreement; and (ii) 10,000,000 restricted shares of Company common stock, to be paid within two weeks of closing.

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

Licensing and Distribution Developments

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

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

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

As consideration for the above-referenced license rights, LOOKHU agreed to pay the Company royalties of $0.25 per month per paid subscription to the technology, to be payable on a monthly basis.  Additionally, LOOKHU agreed to pay the Company 4% of the net advertising revenue derived from advertising that utilizes the technology, to be payable on a quarterly basis.

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

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

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

Videos and news relating to the Company is available on the company website at http://www.maxsound.com. The

MAX-D Technology Highlights Video summarizes the HD Audio™ process and shows the need for high definition (HD) Audio in several key vertical markets. The video explains MAX-D as what we believe to be the only dynamic HD Audio™ that is being offered to various markets. Video Link of CES 2014 booth: http://vimeo.com/77764981 
Snapdragon Interview Link with MAXD CEO John Blaisure: http://youtube/hMOiieiIYIw

Plan of Operation

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

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

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

Results of Operations

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