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’s 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 condensed consolidated 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, 2019 filed with the SEC on May 4, 2020.
(B) Risks and Uncertainties
In December 2019, a novel strain of coronavirus
(COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak was largely concentrated in China and caused significant
disruptions to its economy, it has now spread to several other countries and infections have been reported globally fiscal first
quarter and potentially beyond.
Because COVID-19 infections have been
reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders,
proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives
may be issued in the future. As a result, all of our office locations have been closed effective April 1, 2020.
The ultimate impact of the COVID-19 pandemic
on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted
with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the
COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may
result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial
impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial
condition and results of operations.
The measures taken to date will impact the Company’s
business for the fiscal third quarter and potentially beyond. Management expects that all of its business segments, across all
of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s
business and the duration for which it may have an impact cannot be determined at this time.
(C) 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.
(D) 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, 2020 and December 31, 2019, the Company had no cash equivalents.
(E) 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.
(F) 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.
(G) Concentration of Credit Risk
The Company at times has had cash in banks in
excess of FDIC insurance limits. The Company had $0 in excess of FDIC insurance limits as of September 30, 2020 and December 31,
2019.
(H) 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.
(I) 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
three and nine months ended September 30, 2020 and 2019, excludes the common stock equivalents of the following potentially dilutive
securities because their inclusion would be anti-dilutive:
|
September 30,
|
|
September 30,
|
|
2020
|
|
2019
|
Stock Options (Exercise price - $0.00250/share)
|
|
—
|
|
|
|
95,332,500
|
|
Convertible Debt (Exercise price - $0.0001 - $.000061/share)
|
|
117,980,324,264
|
|
|
|
58,376,841,351
|
|
Series A Convertible Preferred Shares ($0.01/share)
|
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250,000,000
|
|
|
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250,000,000
|
|
|
|
|
|
|
|
|
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Total
|
|
118,230,324,264
|
|
|
|
58,722,173,851
|
|
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 114,814,177,087
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.
(J) 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.
(K) Business Segments
The Company operates in one segment and therefore no segment information
is not presented.
(L) Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities
on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters into a
lease, with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases. The core principle of Topic
842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement
of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right
to use the underlying asset for the lease term. For public companies, the amendments in this Update are effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. We adopted the new standard effective January
1, 2019. The adoption of this guidance did not have a material impact on our financial statements.
All other newly issued accounting pronouncements but not
yet effective have been deemed either immaterial or not applicable.
(M) 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 September 30, 2020 and December 31, 2019, using quoted prices in active markets
for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level
3):
|
|
September 30, 2020
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|
December 31, 2019
|
|
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Fair Value Measurement Using
|
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Fair Value Measurement Using
|
|
|
Level
|
|
Level
|
|
Level
|
|
|
|
Level
|
|
Level
|
|
Level
|
|
|
|
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1
|
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2
|
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3
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Total
|
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1
|
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2
|
|
3
|
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Total
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Derivative Liabilities
|
|
|
—
|
|
|
|
—
|
|
|
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—
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|
|
|
—
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—
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|
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—
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—
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|
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—
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|
On December 20, 2019, the Company removed the
variable component and penalties related to its convertible debt and made it a fixed price. Therefore, as of September 30, 2020
there is no longer an existing derivative liability.
(N) 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.
(O) 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.
(P) 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.
(Q) 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.
(R) 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 has an accumulated deficit of $82,617,542, stockholders’ deficit of $12,298,066 and working
capital deficit of $12,298,066. These matters raise substantial doubt about the Company’s ability to continue as a going
concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional
capital and implement its business plan.
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, 2019 was not sufficient to meet the cash requirements to fund planned operations through December 31, 2020 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. The COVID-19 pandemic may have an
adverse impact on the Company’s ability to raise capital or to continue as a going concern. 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
Line of credit – related party
Line of credit with the principal stockholder consisted of the following activity and terms:
|
|
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Principal
|
|
|
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Interest Rate
|
|
Balance - December 31, 2019
|
|
|
402,472
|
|
|
|
—
|
|
Borrowings during the nine months ended September 30, 2020 Interest accrual
|
|
|
87,655
|
|
|
|
—
|
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Interest accrual
|
|
|
11,667
|
|
|
|
—
|
|
Repayments
|
|
|
(71,453
|
)
|
|
|
—
|
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Balance – September 30, 2020
|
|
|
430,341
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Accounts payable consists of the following:
|
|
As of September 30, 2020
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
798,715
|
|
|
$
|
735,845
|
|
Total accounts payable
|
|
|
798,715
|
|
|
$
|
735,845
|
|
|
|
|
|
|
|
|
|
|
(A) Convertible Debt
The convertible notes in the amount of
$6,160,429 outstanding as of September 30, 2020 and year ended December 31, 2019, consist of the debt holders who 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
fixed conversion price.
Convertible debt consisted of the following activity and terms:
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|
|
|
|
|
|
|
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Convertible Debt Balance as of December 31, 2019
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|
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6,160,429
|
|
|
|
4%
|
- 12%
|
|
Borrowings
|
|
|
—
|
|
|
|
|
|
Conversions
|
|
|
—
|
|
|
|
|
|
Convertible Debt Balance as of September 30, 2020
|
|
|
6,160,429
|
|
|
|
|
|
|
|
|
|
|
|
|
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(B) Debt Issue Costs
The following is a summary of the Company’s debt issue costs:
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Nine Months Ended
|
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Nine Months Ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
Debit issue costs
|
|
$
|
362,423
|
|
|
|
362,423
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|
Accumulated amortization of debt issue costs
|
|
|
(362,423
|
)
|
|
|
(362,423
|
)
|
Deb issue costs - net
|
|
$
|
—
|
|
|
|
—
|
|
During the nine months ended September 30, 2020 and 2019 the Company
amortized $0 and $3,525 of debt issue costs, respectively.
(C) Debt Discount & Original Issue Discount
The Company amortized $0 and $169,379 during the nine months ended
September 30, 2020 and 2019, respectively, to amortization of debt discount expense.
|
|
Nine Months
|
|
Year Ended
|
|
|
Ended September 30,
|
|
December 31, 2019
|
|
|
|
|
|
Debt discount
|
|
|
13,221,839
|
|
|
|
13,221,839
|
|
Accumulated amortization of debt discount
|
|
|
(13,221,839
|
)
|
|
|
(13,221,839
|
)
|
Debt discount - Net
|
|
$
|
—
|
|
|
|
—
|
|
(D) Line of Credit – Related Party
During the nine months ended September 30, 2020,
the principal stockholder has advanced $87,655 and accrued $11,667 in interest and was repaid $71,453. The line of credit balance
and accrued interest as of September 30, 2020 is $430,341.
NOTE 4 STOCKHOLDERS’ DEFICIT
Stock Options
The following tables summarize all option grants as of September 30,
2020, and the related changes during these periods are presented below:
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|
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|
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Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
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Remaining
|
|
|
|
|
|
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Weighted Contractual Life
|
|
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Number of
|
|
Average
|
|
(In
|
|
|
Options
|
|
Exercise Price
|
|
Years)
|
Outstanding – December 31, 2019
|
|
|
95,332,500
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or Canceled
|
|
|
(95,332,500
|
)
|
|
|
—
|
|
|
|
|
|
Outstanding – September 30, 2020
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercisable – September 30, 2020
|
|
|
—
|
|
|
|
|
|
|
|
|
|
NOTE 5 LITIGATION
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 had 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 which the state
finally agreed were approximately $8,000 instead of the $340,000 the state had arbitrarily wrongly calculated and the Company sought
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 of this issue and glaring
mistakes by the Company’s Counsel SML Avvocati, Max Sound had to respectfully request 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 one day before Max Sound obtained a revivor.
In response, the Company hired Klapach
& Klapach, P.C. who filed an application for an extension to file an 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
filed a reply brief.
In the conclusion of the brief, Max Sound’s counsel Mr. Klapach
stated:
“The trial court committed error
in granting summary judgment in the Adli Firm’s favor. Based on the Adli Firm’s own evidence, there were triable issues
of fact regarding the Adli Firm’s claims for unpaid fees. With respect to the Steele Litigation, nearly all of the unpaid
invoices that the Adli Firm sought to recover were for legal services that were separately billed to Mr. Trammell for Mr. Trammell,
Mr. Wolff, and Audio Genesis’s defense. The record also reflects that Dr. Adli orally agreed to look solely to Mr. Trammell
and Mr. Wolff for payment of the Adli Firm’s fees. With respect to the patent prosecution representation, triable issues
of fact existed as to whether the Adli Firm’s admitted error in identifying itself – instead of Max Sound – as
the assignee of the MAXD patent was a material breach that excused Max Sound’s performance and/or entitled Max Sound to set
off. With respect to the Cross-Complaint, the trial court erred in concluding that Max Sound lacked the capacity to sue when Max
Sound had presented the court with a Certificate of Revivor prior to the summary judgment hearing. The trial court also erred in
refusing to grant Max Sound a short continuance so that it could pay its outstanding taxes and obtain a Certificate of Revivor.”
No assurance can be given as to the ultimate
outcome of these actions or their effect on the Company however the Company is confident it will receive a reversal in of the Summary
Judgment and ultimately succeed in its cross complaint against the Adli Firm.
NOTE 6 SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date these financials were made available for issuance.