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 second 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 June 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 June 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 six months ended June 30, 2020 and 2019, excludes the common stock equivalents of the following potentially dilutive
securities because their inclusion would be anti-dilutive:
|
|
June 30,
|
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June 30,
|
|
|
2020
|
|
2019
|
Stock Options (Exercise price - $0.00250/share)
|
|
|
95,332,500
|
|
|
|
95,332,500
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|
Convertible Debt (Exercise price - $0.0001 - $.000061/share)
|
|
|
117,980,324,264
|
|
|
|
114,402,012,842
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|
Series A Convertible Preferred Shares ($0.01/share)
|
|
|
250,000,000
|
|
|
|
250,000,000
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Total
|
|
|
|
|
|
|
|
|
|
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118,325,656,764
|
|
|
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114,747,345,342
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|
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 114,909,509,587
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 June 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):
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June
30, 2020
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December
31, 2019
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Fair
Value Measurement Using
|
Fair
Value Measurement Using
|
|
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|
Level
1
|
|
|
|
Level
2
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Level
3
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Total
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|
|
Level
1
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|
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|
Level
2
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|
|
Level
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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|
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 June 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 $82,265,486, stockholders’ deficit of $11,946,010
and working capital deficit of $11,946,010. 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
Debt consists of the following:
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As of June
|
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As of December
|
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30, 2020
|
|
31, 2019
|
Line of credit– related party
|
|
|
397,089
|
|
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$
|
384,000
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Accrued interest – related party
|
|
|
946,463
|
|
|
|
709,039
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Accrued expenses – related party
|
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818,945
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|
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620,945
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Convertible debt - net
|
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6,160,429
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6,160,429
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Total current debt
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8,322,926
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$
|
7,874,413
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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
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Balance - December 31, 2019
|
|
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402,472
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|
|
|
—
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Borrowings during the six months ended June 30, 2020 Interest accrual
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82,455
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|
|
—
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Interest accrual
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7,657
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|
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—
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Repayments
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(69,367
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)
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—
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Balance – June 30, 2020
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|
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423,217
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|
|
—
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Accounts payable consists of the following:
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As of June 30,
2020
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As of December 31,
2019
|
|
|
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Accounts Payable
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788,192
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$
|
735,845
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Total accounts payable
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788,192
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$
|
735,845
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(A) Convertible Debt
The convertible notes in the amount of $6,160,429 outstanding
as of June 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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Convertible Debt Balance as of December 31, 2019
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6,160,429
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4%
|
-
|
12%
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Borrowings
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|
|
—
|
|
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|
Conversions
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|
—
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Convertible Debt Balance as of June 30, 2020
|
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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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Six Months Ended
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Six Months Ended
|
|
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June 30, 2020
|
|
June 30, 2019
|
Debt issue costs
|
|
$
|
362,423
|
|
|
|
362,423
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Accumulated amortization of debt issue costs
|
|
|
(362,423
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)
|
|
|
(360,558
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)
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Debt issue costs – net
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|
$
|
—
|
|
|
|
1,865
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|
During the six months ended June 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 six months ended June 30, 2020 and 2019, respectively, to amortization of debt discount expense.
|
|
Six
Months Ended June
30, 2020
|
|
Year
Ended December
31, 2019
|
Debt discount
|
|
$
|
13,221,839
|
|
|
|
13,221,839
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Accumulated
amortization of debt discount
|
|
|
(13,221,839
|
)
|
|
|
(13,221,839
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)
|
Debt
discount - Net
|
|
$
|
—
|
|
|
|
—
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|
(D) Line of Credit – Related Party
During the six months ended June 30, 2020,
the principal stockholder has advanced $82,455 and accrued $7,657 in interest and was repaid $69,367. The line of credit balance
and accrued interest as of June 30, 2020 is $423,217.
NOTE 4 STOCKHOLDERS’ DEFICIT
Stock Options
The following tables summarize all option grants as of June 30, 2020,
and the related changes during these periods are presented below:
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|
Number of Options
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Life (In
Years)
|
Outstanding – December 31, 2019
|
|
|
95,332,500
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or Canceled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding – June 30, 2020
|
|
|
95,332,500
|
|
|
|
0.0025
|
|
|
|
0.01
|
|
Exercisable – June 30, 2020
|
|
|
95,332,500
|
|
|
|
|
|
|
|
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|
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 EVENT
Subsequent to June 30, 2020 the principal stockholder has advanced
$1,000 under the terms of the line of credit.