News Column

MAX SOUND CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 14, 2014

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



Corporate History and Structure

Max Sound Corporation (the "Company") was incorporated in the State of Delaware as of December 9, 2005 as 43010, Inc. to engage in any lawful corporate undertaking, including, but not limited to, locating and negotiating with a business entity for combination in the form of a merger, stock-for-stock exchange or stock-for-assets exchange. On October 7, 2008, pursuant to the terms of a stock purchase agreement, Mr. Greg Halpern purchased a total of 100,000 shares of our common stock from Michael Raleigh for an aggregate of $30,000 in cash. The total of 100,000 shares represents 100% of our issued and outstanding common stock at the time of the transfer. As a result, Mr. Halpern became our sole shareholder. As part of the acquisition, and pursuant to the Stock Purchase Agreement, Michael Raleigh, our then President, CEO, CFO, and Chairman resigned from all the positions he held in the company, and Mr. Halpern was appointed as our President, CEO, CFO and Chairman. The current business model was developed by Mr. Halpern in September of 2008 and began when he joined the company on October 7, 2008. In October 2008, we became a development stage company focused on creating an Internet search engine and networking web site. In May of 2010, we acquired the world-wide rights to all fields of use for Max Sound HD Audio technology. In November of 2010, we opened our post-production facility for Max Sound HD Audio in Santa Monica, California. In February of 2011, after several successful demonstrations to multi-media industry company executives, we decided to shift the focus of the Company to the marketing of the Max Sound HD Audio technology and commenced the name change from So Act Network, Inc. to Max Sound Corporation and the symbol from SOAN to MAXD. On December 3, 2012, the Company completed the purchase of the assets of Liquid Spins, Inc., a Colorado corporation ("LSI") (the "Asset Purchase Agreement"). Pursuant to the Asset Purchase Agreement, the assets of LSI were exchanged for 24,752,475 shares of common stock of the Company (the "Shares"), equal to $10,000,000 and a purchase price of $0.404 per share. The assets of LSI purchased included: record label distribution agreements; Liquid Spins technology inventory; independent arts programs; retail contracts for music distribution; physical inventory and office equipment; design and retail ready concepts; brand value; records; publishing catalog; and web assets. The Company's music business partners have not fulfilled the opportunities they had committed to deliver to the Company, however other opportunities have recently developed. For example, Akyumen Technologies Corp. and LOOKHU are contracting with the Company to white label its music business in their mobile devices and social media platform respectively. The Company is also in negotiations with additional OEMs to expand this segment of the business. Additionally, the Company has taken recent steps to decrease its cash requirements to operate this segment of its business while negotiating better terms for its music distribution platform. 53



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

Effective May 29, 2014, the Company entered into a license agreement with VSL Communications ("VSL"), pursuant to which the Company received a perpetual, exclusive, worldwide right to use certain optimized data transmission technology owned by VSL. The agreement also entitles the Company to act as VSL's exclusive agent to negotiate potential opportunities concerning the technology, including sublicenses of the technology to third parties, and to sue certain pre-approved violators of VSL's intellectual property rights relating to the technology. Proceeds of any such opportunities, including settlement of legal disputes, will be split equally between VSL and the Company. As consideration for the above-referenced representation and license rights, the Company agreed to pay VSL (i) an aggregate of $1,500,000 in cash, initially to be paid in monthly installments following a $500,000 down payment, or from a percentage of proceeds of any future financings conducted by the Company; and (ii) 10,000,000 restricted shares of Company common stock, to be paid within two weeks of closing.



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

Licensing and Distribution Developments

On May 28, 2014, the Company entered into a license agreement with Akyumen Technologies Corp. ("Akyumen"), an original equipment manufacturer of mobile devices, for the non-exclusive, non-transferable, indivisible worldwide license rights to the use of Company's API technology in Akyumen's mobile devices. The license is for five years and is renewable, with the Company's approval, at Akyumen's request. As consideration for the above-referenced license rights, Akyumen agreed to pay the Company royalties of $2.50 per Akyumen device that utilizes the API technology, to be payable on a monthly basis within 15 days after the close of the calendar month. Akyumen also agreed to pay, within three months of first sale, 50% of non-recurring engineering costs to port the Technology onto the operating systems of the Akyumen devices, inclusive of any local fees, taxes, or other charges. On June 16, 2014, MAXD entered into a license and revenue share agreement with LOOKHU, an online subscription service that delivers movies, music, television shows, apps and games. The agreement grants LOOKHU non-exclusive, non-transferable, indivisible worldwide license rights to the distribution and use of the Company's Application Programming Interface ("API") audio processor technology. The license is for five years and is renewable, with the Company's approval, at LOOKHU's request. 54

As consideration for the above-referenced license rights, LOOKHU agreed to pay the Company royalties of $2.25 per month per paid subscription to the technology, to be payable on a monthly basis. Additionally, LOOKHU agreed to pay the Company 4% of the net advertising revenue derived from advertising that utilizes the technology, to be payable on a quarterly basis. Additionally, for the term of the agreement, the parties agreed to split, on a 50/50 basis, net revenue derived from sales of digital music or songs played from a LOOKHU software player, to be payable on a monthly basis. LOOKHU can be used on any Android device, Akuymen device, Xbox®, Apple TV®, Nintendo Wii® or Sony Playstation®.LOOKHU is different from other content providers because of its exclusive content, and available HD audio platform, built and powered by MAX-D.



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

Videos and news relating to the Company is available on the company website at http://www.maxsound.com. The MAX-D Technology Highlights Video summarizes the HD Audio™ process and shows the need for high definition (HD) Audio in several key vertical markets. The video explains MAX-D as what we believe to be the only dynamic HD Audio™ that is being offered to various markets. Video Link of CES 2014 booth: http://vimeo.com/77764981 Snapdragon Interview Link with MAXD CEO John Blaisure: http://youtu.be/hMOiieiIYIw Plan of Operation We began our operations on October 8, 2008, when we purchased the Form 10 company from the previous owners. Since that date and through 2013, we have conducted financings to raise initial start-up money for the building of our internet search engine and social networking website and to start our operations. In 2011, the Company shifted the focus of its business operations from their social networking website to the marketing of the Max Sound HD Audio Technology.



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

We expect our financial requirements to increase with the additional expenses needed to market and promote the MAX-D Audio technology. We plan to fund these additional expenses through financings and through loans from our stockholders and/or officers based on existing lines of credit and we are also considering various private funding opportunities until such time that our revenue stream is adequate enough to provide the necessary funds. 55 Results of Operations

The following tables set forth key components of our results of operations for the periods indicated, in dollars, and key components of our revenue for the period indicated, in dollars. For the For the Three Months Ended, Six Months Ended June 30, June 30, June 30, June 30, 2014 2013 2014 2013

Revenue $ 152 $ 732 $ 1,388$ 1,720 Operating Expenses General and administrative 916,940 492,879 1,680,606 1,440,696 Endorsement fees - - - 480,000 Consulting 140,894 143,211 274,706 270,287 Professional fees 128,858 110,630 406,332 603,388 Website development - - - - Compensation 246,800 411,340 503,200 681,699 Total Operating Expenses 1,433,492 1,158,060

2,864,844 3,476,070 Loss from Operations (1,433,340 ) (1,157,328 ) (2,863,456 ) (3,474,350 )

Other Income / (Expense) Interest income - - - - Other income 37,500 - 37,500 -

Gain on sale of intellectual property - - - - Gain (Loss) on extinguishment of debt - -

(18,596 ) - Interest expense (80,612 ) (32,453 ) (197,195 ) (62,109 ) Derivative Expense (47,506 ) (71,752 ) (47,506 ) (95,877 )

Amortization of debt offering costs (18,053 ) (72,418 ) (97,036 ) (121,655 ) Loss on conversions (48,398 ) - (90,483 ) (46,093 ) Amortization of debt discount (772,139 ) (660,334 ) (1,558,294 ) (1,082,097 ) Change in fair value of embedded derivative liability 2,407,587 47,534 690,323 236,026 Total Other Income / (Expense) 1,478,379 (789,423



) (1,281,287 ) (1,171,805 )

Provision for Income Taxes - -

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



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

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



For the three months ended June 30, 2014 and 2013

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

General and Administrative Expenses: Our general and administrative expenses were $916,940 for the three months ended June 30, 2014 and $492,879 for the three months ended June 30, 2013, representing an increase of $424,061, or approximately 86%, as a result of an increase in the amortization of intangibles, increased stock based compensation, and the increase in the general operation of the Company. Our expenses on the general operation of the Company included the ancillary expenses for added personnel, product development, and marketing of our Max Sound Technology. 56 Consulting Fees: Our consulting fees were $140,894 for the three months ended June 30, 2014 and $143,211 for the three months ended June 30, 2013, representing a decrease of $2,317 or approximately 2%. The expense has remained relatively consistent.

Professional Fees: Our professional fees were $128,858 for the three months ended June 30, 2014 and $110,630 for the three months ended June 30, 2013, representing an increase of $18,228, or approximately 16%, as a result of increased legal fees related to our product development and increased accounting fees associated with the preparation of our financial statements and regulatory requirements required for publicly traded companies. Compensation: Our compensation expenses were $246,800 for the three months ended June 30, 2014 and $411,340 for the three months ended June 30, 2013, representing a decrease of $164,540, or approximately 40%, as a result of the change in classification of stock based compensation, which was included in the compensation amount for 2013, but was included in general and administrative expense for 2014. Net Loss: Our net income (loss) for the three months ended June 30, 2014 and 2013, was $45,039, compared to $(1,946,751) for the three months ended June 30, 2013. The overall amount of our net loss substantially decreased as a result of a $2,407,587 positive change in the fair value of embedded derivative liability associated with the convertible debt.



For the six months ended June 30, 2014 and 2013

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

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



Endorsement Fees: Our endorsement fees were $0 for the six months ended June 30, 2014 and $480,000 for the six months ended June 30, 2013, representing a decrease of $480,000, or approximately 100%, as a result of an endorsement agreement with Pitbull signed in 2013.

Consulting Fees: Our consulting fees were $274,706 for the six months ended June 30, 2014 and $270,287 for the six months ended June 30, 2013, representing an increase of $4,419, or approximately 2%. The expense has remained relatively consistent. Professional Fees: Our professional fees were $406,332 for the six months ended June 30, 2014 and $603,888 for the six months ended June 30, 2013, representing a decrease of $197,056, or approximately 33%, as a result of reduced legal

fees. 57 Compensation: Our compensation expenses were $503,200 for the six months ended June 30, 2014 and $681,699 for the six months ended June 30, 2013, representing a decrease of $178,499, or approximately 26%, as a result of the change in classification of stock based compensation, which was included in the compensation amount for 2013, but was included in general and administrative expense for 2014.

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



Liquidity and Capital Resources

We have an accumulated deficit of $31,417,796 for the period from December 9, 2005 (inception) to June 30, 2014, and have negative cash flow from operations of $8,661,383 from inception. As the Company continues to incur losses, transition to profitability is dependent upon the successful commercialization of its products and achieving a level of revenues adequate to support the Company's cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional cash. Management intends to fund future operations through additional private or public debt or equity offerings. Based on the Company's operating plan, existing working capital at June 30, 2014 was not sufficient to meet the cash requirements to fund planned operations through December 31, 2014 without additional sources of cash. This raises substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty. From our inception through June 30, 2014, our primary source of funds has been the proceeds of private offerings of our common stock, private financing, and loans from stockholders. Our need to obtain capital from outside investors is expected to continue until we are able to achieve profitable operations, if ever. There is no assurance that management will be successful in fulfilling all or any elements of its plans. Private Financings



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

On April 17, 2014, the Company entered into an agreement with KBM Worldwide to issue up to $78,500 in a convertible note. The note matures on January 21, 2015, and bears an interest rate of 8%. The conversion price equals the "Variable Conversion Price", which is 65% of the "Market Price", which is the average the closing bid prices for the lowest three (3) trading prices of the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months. The Company received $78,500 in proceeds, less the $3,500 finder's fee pursuant to the terms of this convertible note, on April 22, 2014. As of June 30, 2014, the convertible note balance and accrued interest is $79,777. 58 On May 1, 2014, the Company entered into an agreement with LG Capital Funding, LLC to issue up to $210,000 in two convertible notes. Each note matures on May 1, 2015 and bears an interest rate of 8%. The Company received $105,000 proceeds, less the $5,000 original issue discount pursuant to the terms of the first note, on May 8, 2014 and finder's fees of $5,000. The Company is due to receive a secured note in the amount of $105,000 from the investor as consideration for the second note. Both convertible notes are convertible at a "Variable Conversion Price", which is 65% of the "Market Price", which is the lowest closing bid price for the common stock during the ten (10) trading day period prior to the conversion. The holder of each note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date; provided, however, that the second note is not convertible until it has been fully paid for in cash. The Company has a right to redeem each note as follows: (i) during the first 90 days after issuance, by paying an amount equal to 130% of the unpaid principal plus accrued unpaid interest; (ii) from the 90th to 180th day after issuance, by paying an amount equal to 140% of the unpaid principal plus accrued unpaid interest; and (iii) at any time upon a transfer of all or substantially all of the Company's assets, a reclassification of the Company's stock, a consolidation, merger or other reorganizational event, by paying an amount equal to 150% of the unpaid principal plus accrued unpaid interest. As of June 30, 2014, the convertible note balance and accrued interest on the first note is $106,395.

Also on May 12, 2014, the Company entered into an agreement with ADAR Bays, LLC to issue up to $210,000 in two convertible notes. Each note matures on May 12, 2015 and bears an interest rate of 8%. The Company received $105,000 proceeds, less the $5,000 original issue discount pursuant to the terms of the first note, on May 16, 2014 and finder's fees of $5,000. The Company received a secured note in the amount of $105,000 from the investor as consideration for the second note, payable by December 30, 2014, and secured by the pledge of the second note. Both convertible notes are convertible at a "Variable Conversion Price", which is 65% of the "Market Price", which is the lowest closing bid price for the common stock during the ten (10) trading day period prior to the conversion. The holder of each note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date; provided, however, that the second note is not convertible until it has been fully paid for in cash. The Company has a right to redeem each note as follows: (i) during the first 90 days after issuance, by paying an amount equal to 130% of the unpaid principal plus accrued unpaid interest; (ii) from the 90th to 180th day after issuance, by paying an amount equal to 140% of the unpaid principal plus accrued unpaid interest; and (iii) at any time upon a transfer of all or substantially all of the Company's assets, a reclassification of the Company's stock, a consolidation, merger or other reorganizational event, by paying an amount equal to 150% of the unpaid principal plus accrued unpaid interest. As of June 30, 2014, the convertible note balance and accrued interest on the first note is $106,395. On May 14, 2014, the Company entered into an agreement with Venture Champion Asia Limitedto issue up to $200,000 in a convertible note. The note matures on May 14, 2016, and bears an interest rate of 2.50%. The initial conversion price equals $0.07/share. After six month from the date of this note, conversion price shall equal the lower of $0.07/share or the "variable conversion price", which is 75% of the average three (3) lowest closing prices during the ten (10) trading day prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date. The Company received $200,000 proceeds on May 19, 2014. As of June 30, 2014, the convertible note balance and accrued interest is $200,780. 59 On May 21, 2014, the Company entered into an agreement with Venture Champion Asia Limited to issue up to $550,000 in a convertible note. The note matures on May 21, 2016, and bears an interest rate of 2.50%. The initial conversion price equals $0.07/share. After six month from the date of this note, conversion price shall equal the lower of $0.07/share or the "variable conversion price", which is 75% of the average three (3) lowest closing prices during the ten (10) trading day prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock after six months. The Company received $550,000 proceeds on May 21, 2014. As of June 30, 2014, the convertible note balance and accrued interest is $551,828.

On May 22, 2014, the Company entered into an agreement with ICG USA, LLC to issue up to $15,000 in a convertible note. The note matures on May 22, 2016, and bears an interest rate of 2.50%. The conversion price equals $0.07/share. After six months from the date of this note, conversion price shall equal the lower of $0.07/share or the "variable conversion price", which is 75% of the average three (3) lowest closing prices during the ten (10) trading day prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding an unpaid principal amount into shares of common stock at any time on or before the maturity date. The Company received $15,000 proceeds on May 23, 2014. As of June 30, 2014, the convertible note balance and accrued interest is $15,051. On May 23, 2014, the Company received $25,000 in proceeds in connection with a drawdown on an existing convertible note with Vista Capital Investments, LLC with total principal amount of up to $333,000. The note matures on May 22, 2014 and bears an interest rate of 10%. The conversion price equals the "Variable Conversion Price", which is 70% of the "Market Price", which is the average of the closing bids for the lowest three (3) trading prices of the common stock during the twenty (20) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding and unpaid principal amount into shares of common stock at any time after issuance. As of June 30, 2014, the convertible note balance and accrued interest relating to this drawdown is $30,525.

On June 11, 2014, the Company entered into an agreement with Iliad Research and Trading, LP to issue up to $282,778 in a convertible note. The note matures on June 10, 2015 and bears an interest rate of 4%. The note is immediately convertible at a "Variable Conversion Price", which is 75% of the "Market Price", which is the average the three (3) lowest closing bid prices for the common stock during the ten (10) trading day period prior to the conversion. The Company received $282,778 proceeds, less the $27,778 original issue discount pursuant to the terms of this convertible note, on June 12, 2014 and finder's fees of $5,000. As of June 30, 2014, the convertible note balance and accrued interest is $283,367. In connection with this raise, the Company also issued 250,000 three-year warrants exercisable at $0.40/share. On July 25, 2014, the Company amended the terms of its February 6, 2013 convertible note with Vista Capital Investments, LLC, pursuant to which the total principal amount of the note was increased from up to $333,000 to up to $444,000. All other terms of and conditions of the note remain in full force and effect. As of June 30, 2014, the convertible note balance and accrued interest is $90,000 and $22,100, respectively. On July 28, 2014, the Company received $50,000 in proceeds, increasing the current principal amount under the note to $140,000 and leaving available $304,000 to be drawn down under the note. On August 1, 2014, the Company entered into an agreement with KBM Worldwide, Inc. to issue up to $253,500 in a convertible note. The note matures on May 5, 2015 and bears an interest charge of 8%. The conversion price equals the "Variable Conversion Price", which is 65% of the "Market Price", which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $250,000

proceeds on August 4, 2014. 60



During the six months ended June 30, 2014 and the year ended December 31, 2013, the Company issued convertible notes totaling $1,847,556 and $3,843,221, respectively. The convertible notes consist of the following terms:

Six months Year ended ended June 30, December 31, 2014 2013 Amount of Amount of Principal Principal Raised Raised Interest Rate 2.5% - 10% 4% - 10% Default interest rate 14% - 22% 14% - 22% Maturity October 24, September 2013 - 11, 2014 - December 29, May 22, 2016 2014



Conversion 70% of the "Market Price", which is terms 1 lower of the average closing bid

price for the common stock during the ten (10) trading day period $ -



$ 100,000 Conversion 70% of the "Market Price", which is terms 2 lower of the average closing bid

price for the common stock during the ten (10) trading day period -



83,333

Conversion 70% of the "Market Price", which is terms 3 the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. -



166,000

Conversion 70% of the "Market Price", which is terms 4 the average of the lowest three (3) trading prices for the common stock during the twenty (20) trading day period prior to the conversion. -



25,000

Conversion 70% of the "Market Price", which is terms 5 the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. -



111,000

Conversion 70% of the "Market Price", which is terms 6 the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. -



55,500

Conversion 65% of the "Market Price", which is terms 7 the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. -



62,500

Conversion 65% of the "Market Price", which is terms 8 the average of the lowest three (3) trading prices for the common stock during the fifteen (15) trading day period prior to the conversion. -



100,000

Conversion 75% of the three (3) lowest closing terms 9 prices of the common stock during

the ten (10) day trading period prior to the conversion date. -



277,777

Conversion 70% of the lower of the average of terms 10 the three (3) lowest trading prices

for the ten (10) day trading period prior to conversion. -



166,000

Conversion 65% of the lower of the average of terms 11 the three (3) lowest trading prices

for the ten (10) day trading period prior to conversion. -



103,500

Conversion 75% of the three (3) lowest closing terms 12 prices of the common stock during

the ten day trading period prior to the conversion date. -



833,333

Conversion 70% of the lower of the average of terms 13 the three (3) lowest trading prices

for the twenty (20) day trading period 1 day prior to conversion. -



25,000

Conversion 70% of the lower of the average of terms 14 the three (3) lowest trading prices

for the fifteen (15) day trading period 1 day prior to conversion. -



50,000

Conversion 75% of the three (3) lowest closing terms 15 prices of the common stock during

the ten day trading period prior to the conversion date. -



227,222

Conversion 70% of the "Market Price", which is terms 16 the average of the lowest three (3) trading prices for the common stock during the fifteen (15) trading day period prior to the conversion. -



50,000

Conversion 65% of the "Market Price", which is terms 17 the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. -



103,500

Conversion 70% of the lower of the average of terms 18 the three (3) lowest trading prices

for the twenty (20) day trading period 1 day prior to conversion. $ - $ 25,000 61



The Convertible notes consist of the following terms (continued):

Six months ended Year ended June 30, December 31, 2014 2013 Amount of Amount of Principal Principal Raised Raised Interest Rate 2.5% - 10% 4% - 10% Default interest rate 14% - 22% 14% - 22% Maturity October 24, September 2013 - 11, 2014 - December 29, May 22, 2016 2014



Conversion 75% of the three (3) lowest closing terms 19 prices of the common stock during

the ten (10) day trading period prior to the conversion date. -



110,000

Conversion 75% of the three (3) lowest closing terms 20 prices of the common stock during

the ten (10) day trading period prior to the conversion date. -



282,778

Conversion 70% of the lower of the average of terms 21 the three (3) lowest trading prices

for the twenty (20) day trading period 1 day prior to conversion. -



25,000

Conversion 65% of the "Market Price", which is terms 22 the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. -



78,500

Conversion 70% of the lower of the average of terms 23 the three (3) lowest trading prices

for the fifteen (15) day trading period 1 day prior to conversion. -



100,000

Conversion 65% of the "Market Price", which is terms 24 the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. -



153,500

Conversion 70% of the lower of the average of terms 25 the three (3) lowest trading prices

for the twenty (20) day trading period 1 day prior to conversion. -



25,000

Conversion 75% of the three (3) lowest closing terms 26 prices of the common stock during

the ten (10) day trading period prior to the conversion date. -



282,778

Conversion 75% of the three (3) lowest closing terms 27 prices of the common stock during

the ten (10) day trading period prior to the conversion date. -



221,000

Conversion 70% of the lower of the average of terms 28 the three (3) lowest trading prices for the fifteen (15) day trading period 1 day prior to conversion. 50,000 - Conversion 75% of the three (3) lowest closing terms 29 prices of the common stock during the ten (10) day trading period prior to the conversion date. 282,778 Conversion 70% of the lower of the average of terms 30 the three (3) lowest trading prices for the twenty (20) day trading period 1 day prior to conversion. 25,000 Conversion 70% of the lower of the average of terms 31 the three (3) lowest trading prices for the twenty (20) day trading period 1 day prior to conversion. 25,000 Conversion 65% of the "Market Price", which is terms 32 the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. 103,500 Conversion 65% of the "Market Price", which is terms 33 the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. 78,500 Conversion 65% of the "Market Price", which is terms 34 the lowest volume weighted average price for the common stock during the prior ten (10) trading day period including the day upon which a Notice of Conversion is received by the Company. 105,000 Conversion Convertible into $0.07/share. After terms 35 six month from the date of this note, conversion price shall equal the lower of $0.07/share or the variable conversion price - 75% of the average three (3) lowest closing priceds during the ten (10) trading day period. 550,000 Conversion 65% of the "Market Price", which is terms 36 the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. 282,778 Conversion 70% of the lower of the average of terms 37 the three (3) lowest trading prices for the twenty (20) day trading period 1 day prior to conversion. 25,000 Conversion 65% of the "Market Price", which is terms 38 the lowest volume weighted average price for the common stock during the prior ten (10) trading day period including the day upon which a Notice of Conversion is received by the Company. 105,000 Conversion Convertible into $0.07/share. After terms 39 six month from the date of this note, conversion price shall equal the lower of $0.07/share or the variable conversion price - 75% of the average three (3) lowest closing priceds during the ten (10) trading day period. 15,000 Conversion Convertible into $0.07/share. After terms 40 six month from the date of this note, conversion price shall equal the lower of $0.07/share or the variable conversion price - 75% of the average three (3) lowest closing priceds during the ten (10) trading day period. 200,000 $ 1,847,556$ 3,843,221 62 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 6 regarding accounting

for derivative liabilities.

During the year ended December 31, 2013, the Company received $290,000 from the principal stockholder under the terms of a two-year line of credit agreement dated September 26, 2013. The Company repaid $150,213 in principal and accrued interest in the month of October 2013 to the principal stockholder under the term of this line of credit. Pursuant to the terms of the loan, the loan is bearing an annual interest rate of 4% and is due on or before September 26, 2015. During the six months ended June 30, 2014, the principal stockholder loaned an additional $142,000. As of June 30, 2014, the line of credit balance including accrued interest totaled $286,652 (See Note 4). In the event that we are unable to obtain additional financing and/or funding or our principal stockholder either fails to extend us more financing, declines to loan additional cash, declines to fund the line of credit, or declines to defer his salary payments, we will no longer be able to continue to operate and will have to cease operations unless we begin to generate sufficient revenue to cover our costs.



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 is currently evaluating the impact of the adoption of ASU 2010-14 on its financial statements. The Company's management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted would have a material impact on the accompanying financial statements.



Critical Accounting Policies and Estimates

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial

statements. Use of Estimates: In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates. 63 Revenue Recognition: Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is assured. We had $732 and $1,720 in revenue for the six months ended June 30, 2014 and 2013, respectively. Stock-Based Compensation: In December 2004, the FASB issued FASB Accounting Standards Codification No. 718, Compensation - Stock Compensation. Under FASB Accounting Standards Codification No. 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. The Company applies this statement prospectively. Equity instruments ("instruments") issued to other than employees are recorded 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.



Derivative Financial Instruments

Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.

Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.



Impairment of Long-Lived Assets

The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, Accounting for the Impairment or Disposal of Long-Lived Assets." ASC Topic 360-10-05 requires that long-lived assets, such as technology rights, be reviewed for impairment annually, or whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including the eventual disposition. If the future net cash flows are less than the carrying value of an asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value or disposable value. For the year ended December 31, 2013, the Company completed an impairment analysis on its' long-lived assets, their technology rights, and determined that no impairment was necessary. 64 The Company believes that the accounting estimate related to asset impairment is a "critical accounting estimate" because the impairment methodology is highly susceptible to change from period to period, because it requires management to make assumptions about future cash flows, and because the impact of recognizing impairment could have a significant effect on operations. Management's assumptions about future cash flows require significant judgment because actual business operations of marketing the technology rights is in its infancy stages and managements expects that their future operating levels to fluctuate. The analysis included assumptions that are based on annual business plans and other forecasted results which are used to reflect market-based estimates of the risks associated with the projected cash flows, based on the best information available as of the date of the impairment test. There can be no assurance that the estimates and assumptions used in the impairment tests will prove to be accurate predictions of the future. If the future adversely differs from management's best estimate of key economic assumptions, and if associated future cash flows materially decrease, the Company may be required to record impairment charges related to its indefinite life intangible asset. Prior to February of 2011, the Company's business operations were related to the development and launching of a social networking website. However, since February of 2011, our business focus has been on the marketing of our Max Sound HD Audio Technology. Since 2011 was our initial year of marketing our technology, management considers past operational levels to be inconsistent with future operations mainly due to the shift in business focus. In our impairment testing, the Company made assumptions towards the income and expenses expected in the future including, but not limited to, determining the actual expenses incurred in the current year that were attributable to the new business focus in order to develop an annual cost benchmark, trends in the marketplace, feedback from current and past marketing activities, and assessments upon the useful

life of the technology rights. The Company's primary focus over the next three to five years will be centered around the marketing and implementation of their technology in order to take advantage of the current trends in the marketplace for users of their technology. In particular, the Company expects that expenses will increase significantly from year to year over the next five years, at which time in year six and beyond the year to year change will be a minimal increase. As part of the impairment test, the Company reviewed its initial useful life analysis, in reference to their technology, and updated this analysis with factors that existed at the time of the impairment testing and determined that nothing had occurred in the marketplace that would change their initial determination of the useful life of their technology. The analysis included researching known technological advances in the marketplace and determining if those advances which are similar to the Company's products would limit the useful life of the asset. The Company believes that the technological advances in the marketplace are geared to developing different playback devices and the implementation of technology that is similar to the Company's technology. Thus, the Company concluded that its technology rights continue to have an indefinite useful life. However, it is understood that technological advancements could happen in the future that would limit the useful life of its technology. If a technology was created in the future that would limit the useful life of the technology, the Company would be required to update its impairment testing to include a useful life determination of the technology and may be required to record impairment charges at some time in the future. 65



Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "special purpose entities".

Subsequent Events


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