NOTE
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A)
Organization and Basis of Presentation
Max
Sound Corporation (the "Company") was incorporated in Delaware on December 9, 2005, under the name 43010, Inc. The Company
business operations are focused primarily on developing and launching audio technology software.
Effective
March 1, 2011, the Company filed with the State of Delaware a Certificate of Amendment of Certificate of Incorporation changing
our name from So Act Network, Inc. to Max Sound Corporation.
On
August 9, 2016 the Company has 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,
which remain active and are paid current with OTC Markets through the end of 2016, may re-apply at any time after a price increase
to meet all of 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 statements presentation. The results for the interim period are not necessarily indicative
of the results to be expected for the year.
(B)
Use of Estimates
In
preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from
those estimates.
(C)
Cash and Cash Equivalents
For
purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of twelve months
or less at the time of purchase to be cash equivalents. As of December 31, 2017 and December 31, 2016, the Company had no cash
equivalents.
(D)
Property and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense
as incurred. Depreciation is provided using the straight-line method over the estimated useful life of three to five years.
(E)
Research and Development
The
Company has adopted the provisions of FASB Accounting Standards Codification No. 350,
Intangibles - Goodwill & Other
(“ASC
Topic 350”)
.
Costs incurred in the planning stage of a website are expensed as research and development while
costs incurred in the development stage are capitalized and amortized over the life of the asset, estimated to be three years.
Expenses subsequent to the launch have been expensed as website development expenses.
(F)
Concentration of Credit Risk
The
Company at times has cash in banks in excess of FDIC insurance limits. The Company had $0 in excess of FDIC insurance limits as
of December 31, 2017 and December 31, 2016.
(G)
Revenue Recognition
The
Company recognized revenue on arrangements in accordance with FASB Codification Topic 605, “Revenue Recognition” (“ASC
Topic 605”). Under ASC Topic 605, revenue is recognized only when the price is fixed and determinable, persuasive evidence
of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. The Company
has not yet commenced revenue generating activities.
(H)
Identifiable Intangible Assets
ASC
350 prescribes a two-step process for impairment testing of goodwill and intangibles with indefinite lives, which is performed
annually, as well as when an event triggering impairment may have occurred. ASC 350 also allows preparers to qualitatively assess
goodwill impairment through a screening process, which would permit companies to forgo Step 1 of their annual goodwill impairment
process. This qualitative screening process will hereinafter be referred to as "Step 0". Goodwill and intangible assets
deemed to have an indefinite life are tested for impairment on an annual basis, or earlier when events or changes in circumstances
suggest the carrying amount may not be fully recoverable. The Company has elected to perform its annual assessment on its
of intangible assets. For the year ended December 31, 2016 the balance of the intangible assets is $0. For the year ended December
31, 2017 and 2016, $0 and $1,008,035, respectively, impairment loss has been recorded due to a change in business model, this
being significantly impacted by the impairment of Liquid Spins assets, as digital music sales are no longer relevant in today’s
market for the following assets:
|
|
Cost,
net
|
|
Impairment
Loss
|
|
Amortization
for year ended December 31, 2016
|
|
Balance
as of December 31, 2016
|
Trademarks
|
|
$
|
7,500,000
|
|
|
$
|
(7,434,782
|
)
|
|
|
(65,219
|
)
|
|
|
—
|
|
Distribution
rights
|
|
|
7,372,561
|
|
|
|
(7,372,561
|
)
|
|
|
—
|
|
|
|
—
|
|
Licensing
Rights
|
|
|
1,923,401
|
|
|
|
(1,904,037
|
)
|
|
|
(19,364
|
)
|
|
|
—
|
|
Other
|
|
|
275
|
|
|
|
(272
|
)
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
$
|
16,796,237
|
|
|
|
(16,711,652
|
)
|
|
|
(84,585
|
)
|
|
|
—
|
|
As
of December 31, 2017 and December 31, 2016, $0 and $869,581, respectively, of costs related to registering a trademark and acquiring
technology rights [audio technology known as Max Audio Technology (MAXD)] have been capitalized. It has been determined that the
trademark and technology rights have an indefinite useful life and are not subject to amortization. However, the trademark and
technology rights will be reviewed for impairment annually or more frequently if impairment indicators arise. As a result of this
review, the Company recorded an impairment loss of $804,363 and $6,630,419 that is recorded as impairment loss on intangible asset
for the year ended December 31, 2016 and 2015, respectively.
On
November 15, 2012, the Company acquired the rights to assets and audio technology known as Liquid Spins, Inc. through a share
exchange, whereby the Company issued 24,752,475 shares of common stock for their rights in Liquid Spins technology. As of December
31, 2017 and December 31, 2016, $0 and $0, respectively, of costs related to this intangible remain capitalized. The technology
was placed in service on August 23, 2013 with a useful life of 10 years. During 2015, the Company reviewed the intangible asset
for impairment and determined that certain items had been impaired due to obsolescence. During 2015 fiscal year, a $7,372,562
impairment loss was recorded against certain Distribution Rights acquired during 2012 fiscal year.
On
May 19, 2014, the Company entered into an agreement with VSL Communications to acquire the rights to intellectual property titled
“Optimized Data Transmission System and Method” (“ODT”) through a cash payment of $500,000 in addition
to a share issuance, whereby the Company issued 10,000,000 shares of common stock, valued at $1,000,000 ($0.10/share). In exchange,
the Company received a perpetual, exclusive, worldwide license to the ODT technology for all fields of use. In addition, the Company
issued 1,000,000 shares of common stock, valued at $120,000 ($0.12/share), as compensation for the introduction and identification
of a seller based on the agreement dated April 10, 2014. As of December 31, 2017 and December 31, 2016, $0 and $187,830, respectively,
of costs related to the “ODT” intangible asset remains capitalized. The technology will be reviewed for impairment
annually or more frequently if impairment indicators arise. As a result of this review, the Company recorded an impairment loss
of $173,412 for the year ended December 31, 2016 and $1,432,170 that is recorded as impairment loss on intangible asset for the
year ended December 31, 2016 for total impairment loss of $1,620,000. In connection with this agreement, the Company is obligated
to make an additional five (5) payments totaling $1,000,000 to be made every 30 days, with the thirty (30) day periods to be waived
if fund raising occurs on an anticipated faster time line. The payments of additional cash are contingent on the following funding
criteria:
|
●
|
The
Company shall pay set increments of cash based on a percentage of gross funds received through funds raised.
|
|
●
|
The
Company shall pay 20% of such monies as soon as they are received.
|
In
connection with the acquisition agreements entered on May 19, 2014 to acquire “Optimized Data Transmission System and Method”
(“ODT”), we recorded a liability and expensed $1,096,501 royalty cost for funds raised through December 31, 2016
The
Company shall act as the exclusive agent to facilitate and negotiate any opportunities on behalf of ODT to Companies, Organizations
and other qualified entities. Upon any closing, ODT shall receive 50% of gross dollars and the Company shall receive the other
50% at the time of a completion of any transaction opportunity, including legal settlements after subtracting applicable contingent
legal fees. The term of the agreement is for the life of the acquired intellectual property. As a result of this review, the Company
recorded an impairment loss of $6,630,419 on intangible asset during the year ended December 31, 2016
On
August 11, 2014, the Company and VSL simultaneously filed trade secret and patent infringement actions against Google, Inc.
and its subsidiaries, YouTube, LLC and On2 Technologies, Inc., relating to proprietary and patented technology owned by
Vedanti Systems Limited, a subsidiary of VSL. The patent infringement complaint was brought in U.S. District Court for
the District of Delaware and the trade secret suit was filed in Superior Court of California, County of Santa Clara.
The lawsuits contend that, in 2010, while Google was in discussions with Vedanti about the possibility of acquiring Vedanti's
patented digital video streaming techniques and other proprietary methods, Google gained access to and received technical
guidance regarding Vedanti’s proprietary codec, a computer program capable of encoding and decoding a digital data
stream or signal. The complaints allege that soon after the two companies initiated negotiations, Google began
implementing Vedanti's technology into its own WebM/VP8 video codec without informing Vedanti, and without compensating
Vedanti for its use. Plaintiffs are seeking a permanent injunction against Google, compensatory damages, as well as
treble damages. As exclusive agent to VSL to enforce all rights with respect to the subject technology, the Company has hired
Grant & Eisenhofer, PA to represent the Company and VSL in the suits. On November 24, 2015 the District Court entered an
order granting the Google defendants’ motion to dismiss. The Company timely filed its notice of appeal with the appeals
court on February 22, 2016. The two issues on appeal are, (i) whether the district court erred by granting the Google
defendants’ motion to dismiss the Company’s lawsuit on the ground that the Company lacked standing to sue the
Google defendants for infringement of the 339 patent, and (ii) whether the district court erred by denying the
Company’s motion for leave to amend the complaint and add as a party VSL, a former licensee of the 339 patent to cure
any defect in prudential standing to the extent VSL is a necessary party. These cases will be vigorously prosecuted and the
Company believes it has a good likelihood of success.
On
May 22, 2014, the Company entered into a five (5) year agreement to acquire the rights to intellectual property titled “Engineered
Architecture” (“EA Technology”) through a cash payment of $50,000 in addition to a share issuance, whereby the
Company issued 4,000,000 shares of common stock, valued at $394,000 ($0.0985/share). In exchange, the Company received for the
term of the agreement, the exclusive worldwide right to use the EA Technology. As of December 31, 2017 and December 31, 2016,
$0 and $29,901, respectively of costs related to this intangible remains capitalized. The technology will be reviewed for impairment
annually or more frequently if impairment indicators arise. As a result of this review, the Company recorded an impairment loss
of $$29,901 and $268,223 on intangible asset for the year ended December 31, 2016 and 2015, respectively.
In
connection with this agreement, the Company is obligated to make an additional five (5) payments totaling $500,000 to be made
every 30 days, with the thirty (30) day periods to be waived if fund raising occurs on an anticipated faster time line. The payments
of additional cash are contingent on the following funding criteria:
|
●
|
The
Company shall pay set increments of cash based on a percentage of gross funds received through funds raised.
|
|
●
|
The
Company shall pay 10% of such monies as soon as they are received.
|
In
connection with funds raised through December 31, 2016, the Company recorded a liability and expensed $548,255 as royalty cost,
related to the 10% fee, as of December 31, 2016, $40,000 has been paid. The remaining liability as of December 31, 2016, is $528,423
and is included in accounts payable. During the year ended December 31, 2016 the Company write off $1,615,081 of accounts payable
related to royalty payable as other income.
What
the Company had been accruing for VSL and Attia litigation's has been released as the Attia's terminated their agreement and have
since signed a new agreement which eliminates all past amounts due, and the VSL agreement automatically terminated on 12.20.16
when VSL was dissolved by its owner therefore releasing any past amounts due.
The
Company shall act as the exclusive agent to facilitate and negotiate any opportunities on behalf of EA Technology to Companies,
Organizations and other qualified entities. Upon any closing, EA shall receive 50% of gross dollars and the Company shall receive
the other 50% at the time of a completion of any transaction opportunity, including legal settlements after subtracting applicable
contingent legal fees. In the event the Company sublicenses EA to other entities, profits shall be split evenly 50%/50%.
(I)
Impairment of Long-Lived Assets and Intangible Assets with Definite Life
The
Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal
of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets, such as technology rights, be reviewed for impairment
annually, or whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer
be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows
expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value
of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or
disposable value. The Company recorded $0 and $1,008,035 in impairment of the intangible asset for the year ended December 31,
2017 and the year ended December 31, 2016, respectively. As of December 31, 2016 the intangible assets were fully impaired.
(J)
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 twelve months ended December 31, 2017 and 2016 excludes the common stock
equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:
|
|
December
31, 2017
|
|
December
31, 2016
|
|
|
|
|
|
Stock
Warrants (Exercise price - $0.25 - $.52/share)
|
|
|
19,220,690
|
|
|
|
19,970,690
|
|
Stock
Options (Exercise price - $0.00250/share)
|
|
|
95,332,500
|
|
|
|
2,866,652
|
|
Convertible
Debt (Exercise price - $0.0006 - $.004810/share)
|
|
|
8,399,417,649
|
|
|
|
785,426,924
|
|
Series
A Convertible Preferred Shares ($0.0/share)
|
|
|
125,000,000
|
|
|
|
125,000,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,763,970,809
|
|
|
|
933,264,266
|
|
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 6,672,932,498 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.
On
December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law and the new legislation contains several
key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction
of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the
tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and
liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC
staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB
118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment
date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are
expected over the next 12 months, we consider the accounting of the transition tax, deferred tax re-measurements, and other items
to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect
to complete our analysis within the measurement period in accordance with SAB 118.
The
net deferred tax liability in the accompanying balance sheets includes the following amounts of deferred tax assets and liabilities:
|
|
2017
|
|
2016
|
|
|
|
|
|
Deferred
tax liability:
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
tax asset
|
|
|
|
|
|
|
|
|
Temporary
differences
|
|
|
|
|
|
|
|
|
Net
Operating Loss Carryforward
|
|
|
9,307,403
|
|
|
|
7,706,258
|
|
Valuation
allowance
|
|
|
(9,307,403)
|
|
|
|
(7,706,258)
|
|
Net
deferred tax asset
|
|
|
—
|
|
|
|
—
|
|
Net
deferred tax liability
|
|
$
|
—
|
|
|
$
|
—
|
|
The
provision for income taxes has been computed as follows:
|
|
2017
|
|
2016
|
Expected
income tax recovery (expense) at the statuary rate of 27.64%
|
|
$
|
(1,923,505)
|
|
|
$
|
(3,091,708)
|
|
Tax
effect of expenses that are not deductible for income tax purposes (net of other amounts deductible for tax purposes)
|
|
|
181,294
|
|
|
|
607,736
|
|
Tax
effect of differences in the timing of deductibility of items for income tax purposes:
|
|
|
141,066
|
|
|
|
915,809
|
|
Utilization
of non-capital tax losses to offset current taxable income
|
|
|
—
|
|
|
|
—
|
|
Change
in valuation allowance
|
|
|
1,601,145
|
|
|
|
1,568,163
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
The
valuation allowance was established to reduce the deferred tax asset to the amount that will more likely than not be realized. This
is necessary due to the Company’s continued operating losses and the uncertainty of the Company’s ability to offset
future taxable income through 2036.
The
net change in the valuation allowance for the year ended December 31, 2017 and 2016 was an increased/ (decreased) of
$1,601,145 and $1,568,145, respectively.
The
components of income tax expense related to continuing operations are as follows:
|
|
|
2017
|
|
|
|
2016
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
and Local
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company's federal income tax returns are no longer subject to examination by the IRS for the years prior to 2012, and the related
state income tax returns are no longer subject to examination by state authorities for the years prior to 2011.
(K)
Business Segments
The
Company operates in one segment and therefore segment information is not presented.
(L)
Recent Accounting Pronouncements
In
January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating
when a set of transferred assets and activities is a business. This guidance will be effective for us in the first quarter of
2018 on a prospective basis, and early adoption is permitted. The Company has not yet determined the potential effects of the
adoption of ASU 2016-15 on its Financial Statements.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment (ASU 2017-04), which eliminates step two from the goodwill impairment test. Under ASU 2017-04,
an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair
value up to the amount of goodwill allocated to that reporting unit. This guidance will be effective for us in the first quarter
of 2020 on a prospective basis, and early adoption is permitted. The Company has not yet determined the potential effects of the
adoption of ASU 2016-15 on its Financial Statements.
In
January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01,
which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current
guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation
and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance
assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new
standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should
apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period
in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for
financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income.
The Company is currently evaluating the impact of adopting this guidance.
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 are currently evaluating the impact of adopting ASU No. 2016-02 on our financial statements.
In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net) that clarifies how to apply revenue recognition guidance related to whether an entity is
a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or
services before they are transferred to the customer and provides additional guidance about how to apply the control principle
when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08
is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual reporting periods beginning after December
15, 2017, including interim periods within those years. The Company has not yet determined the impact of ASU 2016-08 on its financial
statements.
In
March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for
simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the
income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of
cash flows. For public entities, the amendments in this Update are effective for annual periods beginning after December 15,
2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. If an
entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the
fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the
same period. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding
requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of
a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments
related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet
the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess
tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be
applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the
statement of cash flows using either a prospective transition method or a retrospective transition method. We are currently
evaluating the impact of adopting ASU No. 2016-09 on our financial statements.
In
April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing, which provides further guidance on identifying performance obligations and improves the operability and understandability
of licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU 2014-09 as amended
by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those years.
In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements
and Practical Expedients,” which amends the guidance on transition, collectability, non-cash consideration, and the presentation
of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or
substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity
should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue
if an arrangement does not meet the standard’s contract criteria. The standard allows for both retrospective and modified
retrospective methods of adoption. The Company has not yet determined the impact of ASU 2016-10 on its financial statements.
In
June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Statements," which requires companies
to measure credit losses utilizing a methodology that reflects expected credit losses and requires consideration of a broader
range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for annual reporting
periods, and interim periods therein, beginning after December 15, 2019 (fiscal year 2021 for the Company). The Company has not
yet determined the potential effects of the adoption of ASU 2016-13 on its Financial Statements.
In
August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments," which aims to
eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of
cash flows under Topic 230, Statement of Cash Flows, and other Topics. ASU 2016-15 is effective for annual reporting periods,
and interim periods therein, beginning after December 15, 2017 (fiscal year 2019 for the Company). The Company has not yet determined
the potential effects of the adoption of ASU 2016-15 on its Financial Statements.
In
November 2016, the FASB issued ASU No. 2016-18, ("ASU 2016-18")
Statement of Cash Flows (Topic 230): Restricted
Cash.
This ASU is intended to provide guidance on the presentation of restricted cash or restricted cash equivalents
and reduce the diversity in practice. This ASU requires amounts generally described as restricted cash and restricted cash equivalents
to be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts on the statement
of cash flows. We elected as permitted by the standard, to early adopt ASU 2016-18 retrospectively as of January 1, 2017 and have
applied to all periods presented herein. The adoption of ASU 2016-18 did not have a material impact to our unaudited condensed
consolidated financial statements. The effect of the adoption of ASU 2016-18 on our condensed consolidated statements of cash
flows was to include restricted cash balances in the beginning and end of period balances of cash and cash equivalent and restricted
cash. The change in restricted cash was previously disclosed in operating activities and financing activities in the condensed
consolidated statements of cash flows.
In
January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other
(Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment
test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets
and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed
in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact of adopting this guidance on
our Consolidated Financial Statements.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition of a Business. The amendments
in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as
acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual
periods beginning after December 15, 2017, including interim periods within those periods. We are evaluating the impact of adopting
this guidance on our Consolidated Financial Statements.
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic
815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments
(or embedded features) with down round features. When determining whether certain financial instruments should be classified as
liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument
is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified
instruments.
As
a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as
a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified
financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize
the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available
to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are
now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with
Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize
the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a
scope exception.
Those
amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted
for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any
adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently
reviewing the impact of adoption of ASU 2017-11on its financial statements.
All
other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.
(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 December 31, 2017 and December
31, 2016, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level
2); and significant unobservable inputs (Level 3):
|
|
December
31, 2017
|
|
December
31, 2016
|
|
|
|
Fair
Value Measurement Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurement Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
|
Level
2
|
|
|
|
Level
3
|
|
|
|
Total
|
|
|
|
Level
1
|
|
|
|
Level
2
|
|
|
|
Level
3
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liabilities
|
|
|
—
|
|
|
|
5,909,121
|
|
|
|
—
|
|
|
|
5,909,121
|
|
|
|
—
|
|
|
|
5,906,940
|
|
|
|
—
|
|
|
|
5,906,940
|
|
(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 thedate 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.
(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.
(S)
Licensing & Distribution
On
June 20, 2015, the Company entered into a license agreement with Santok LTD of United Kingdom (“Santok). The term of
the agreement is three years. Santok will pay the Company a royalty fee of $1.50 for each licensed product. Santok guarantees
to the Company a minimum total of 150,000 cumulative licensed product installation with a minimum total guaranteed value of $225,000
over the three years of the agreement. If the total royalty paid is less than the guaranteed value, Santok will pay the difference.
On
July 13, 2015, the Company entered into a license agreement with Luna Mobile, Inc. of United States (“Luna). The term of
the agreement is three years. Luna will pay the Company a royalty fee of $1.50 for each licensed product manufactured and
sold. As of December 31, 2017 Luna Mobile continues to seek to distribute its products.
NOTE
2 GOING CONCERN
As
reflected in the accompanying financial statements, the Company had a net loss of $6,960,142 for the twelve months ended December
31, 2017, has an accumulated deficit of $81,442,422 as of December 31, 2017, and has negative cash flow from operations of $1,723,552
for the year ended December 31, 2017.
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, 2017 was not sufficient to meet the cash requirements to fund planned
operations through December 31, 2018 without additional sources of cash. The Company continues to explore various financing alternatives,
including debt and equity financings and strategic partnerships, as well as trying to generate revenue. However, at this time,
the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable
terms or at all. If the Company is unable to obtain additional funding and improve its operations, the Company’s financial
condition and results of operations may be materially adversely affected and the Company may not be able to continue operations.
This raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial
statements have been prepared assuming that the Company will continue as a going concern and do not include adjustments that might
result from the outcome of this uncertainty.
NOTE
3 DEBT AND ACCOUNTS PAYABLE
Debt
consists of the following:
|
|
As
of
|
|
As
of
|
|
|
December
31, 2017
|
|
December
31, 2016
|
|
|
|
|
|
Line
of credit - related party
|
|
|
34,156
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
6,112,938
|
|
|
|
5,597,598
|
|
Less:
debt discount
|
|
|
(610,686
|
)
|
|
|
(1,227,865
|
)
|
Less:
debt issue costs
|
|
|
(27,436
|
)
|
|
|
(42,499
|
)
|
Convertible
debt - net
|
|
|
5,474,816
|
|
|
|
4,327,234
|
|
Demand
note
|
|
|
—
|
|
|
|
20,000
|
|
Total
current debt
|
|
|
5,508,972
|
|
|
|
4,347,234
|
|
(A)
Line of credit – related party
Line
of credit with the principal stockholder consisted of the following activity and terms:
|
|
Principal
|
|
Interest
Rate
|
|
Maturity
|
Balance
- December 31, 2015
|
|
$
|
473
|
|
|
|
|
|
|
|
|
|
Borrowings
during the year ended December 31, 2016
|
|
|
—
|
|
|
|
4
|
%
|
|
|
26-Sep-16
|
|
Interest
accrual
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Repayments
|
|
|
473
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2016
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Borrowings
during the year ended December 31, 2017
|
|
|
48,850
|
|
|
|
4
|
%
|
|
|
July
2017
|
|
Interest
accrual
|
|
|
306
|
|
|
|
|
|
|
|
|
|
Repayments
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2017
|
|
$
|
34,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable consists of the following
:
|
|
As
of December 31, 2017
|
|
As
of December 31, 2016
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
399,761
|
|
|
$
|
238,594
|
|
Total
accounts payable
|
|
$
|
399,761
|
|
|
$
|
238,594
|
|
During
the year ended December 31, 2016, the company recorded a net $1,613,766 gain on extinguishment of debt related to royalty payable.
(B)
Loan Payable – Related Party
|
|
On
September 17, 2015, the Company received $170,000 from a related party. Pursuant to the terms of the note, the note is bearing
an original issuance discount in the amount of $10,000 and is due on or before October 31, 2015. As of December 31, 2016, the
balance of the note was repaid and remaining balance is $0.
(C)
Convertible Debt
December
31, 2017 and 2016, the Company issued convertible notes totaling $1,972,855, less the original issue discount and debt issue costs
of $173,604, for net proceeds of $1,753,411 and $3,392,813, respectively.
The
convertible notes issued for twelve months ended December 31, 2017 and year ended December 31, 2017, consist of the following
terms:
|
|
|
|
Twelve months ended December 31, 2017 Amount of Principal Raised
|
|
Year ended December 31, 2016 Amount of Principal Raised
|
Interest Rate
|
|
|
|
0% - 12%
|
|
|
0% - 10%
|
|
Default interest rate
|
|
|
|
14% - 22%
|
|
|
14% - 22%
|
|
Maturity
|
|
|
|
November 4, 2015 –December 7, 2018
|
|
|
November 4, 2015 –March 10, 2018
|
|
|
|
|
|
|
|
|
|
|
Conversion terms 1
|
|
65% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion.
|
|
3,495,100
|
|
|
3,412,400
|
|
Conversion terms 2
|
|
65% of the “Market Price”, which is the one lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion.
|
|
1,164,777
|
|
|
624,087
|
|
Conversion terms 3
|
|
70% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the fifteen (15) trading day period prior to the conversion.
|
|
paid on conversion
|
|
|
paid on conversion
|
|
Conversion terms 4
|
|
75% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion.
|
|
765,000
|
|
|
765,000
|
|
Conversion terms 5
|
|
60% of the “Market Price”, which is the lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion.
|
|
paid on conversion
|
|
|
paid on conversion
|
|
Conversion terms 6
|
|
Conversion at $0.10 per share
|
|
Paid on conversion
|
|
|
Paid on conversion
|
|
Conversion terms 7
|
|
60% of the “Market Price”, which is the lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion.
|
|
paid on conversion
|
|
|
127,000
|
|
Conversion terms 8
|
|
65% of the “Market Price”, which is the two lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion.
|
|
487,061
|
|
|
536,669
|
|
Conversion terms 9
|
|
65% of the “Market Price”, which is the two lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion.
|
|
paid on conversion
|
|
|
79,810
|
|
Conversion terms 10
|
|
65% of the “Market Price”, which is the one lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion.
|
|
paid on conversion
|
|
|
paid on conversion
|
|
|
|
|
|
|
|
|
|
|
Conversion terms 11
|
|
60% of the “Market Price”, which is the two lowest trading prices for the common stock during the twelve (12) trading day period prior to the conversion.
|
|
paid on conversion
|
|
|
52,632
|
|
Conversion terms 12
|
|
61% of the “Market Price”, which is the average of the three lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion.
|
|
201,000
|
|
|
—
|
|
Convertible
Debt
|
|
|
6,112,938
|
|
|
|
5,597,598
|
|
Less:
Debt Discount
|
|
|
(610,686
|
)
|
|
|
(1,227,865
|
)
|
Less:
Debt Issue Costs
|
|
|
(27,436
|
)
|
|
|
(42,499
|
)
|
Convertible
Debt - net
|
|
$
|
5,474,816
|
|
|
$
|
4,327,234
|
|
The
debt holders are entitled, at their option, to convert all or part of the principal and accrued interest into shares of the Company’s
common stock at conversion prices and terms discussed above. The Company classifies embedded conversion
features in these notes and warrants as a derivative liability due to management’s assessment that the Company may not have
sufficient authorized number of shares of common stock required to net-share settle or due to the existence of a ratchet due to
an anti-dilution provision. See Note 4 regarding accounting for derivative liabilities.
During
the year ended December 31, 2017, the Company converted debt and accrued interest, totaling $1,309,243 into 1,229,440,607 shares
of common stock
During
the year ended December 31, 2016, the Company converted debt and accrued interest, totaling $1,189,849 into 420,556,227 shares
of common stock
Convertible
debt consisted of the following activity and terms:
|
|
|
|
|
|
|
|
|
Convertible Debt Balance as of December 31, 2015
|
|
$
|
4,634,852
|
|
|
|
|
|
|
|
|
|
|
|
February 26, 2015 – November 23, 2017
|
|
Borrowings during the twelve months ended December 31, 2016
|
|
|
3,392,813
|
|
|
|
8-10
|
|
|
|
%
|
|
|
|
|
|
Non-Cash Reclassification of accrued interest converted
|
|
|
55,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments
|
|
|
(1,295,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debt to into 420,556,227 shares of common stock with a valuation of $1,189,849 ($0.00143 - $0.01056/share) including the accrued interest of $55,163
|
|
|
(1,189,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Debt Balance as of December 31, 2016
|
|
|
5,597,598
|
|
|
|
4-10
|
|
|
|
%
|
|
|
|
November 4, 2015- March 10, 2018
|
|
Borrowings during the twelve months ended December 31, 2017
|
|
|
1,972,868
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
Non-Cash Reclassification of accrued interest converted
|
|
|
85,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments
|
|
|
(233,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debt to into 1,229,440,607 shares of common stock with a valuation of $1,309,243 ($0.00045 - $0.00731/share) including the accrued interest of $85,459
|
|
|
(1,309,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Debt Balance as of December 31, 2017
|
|
|
6,112,938
|
|
|
|
4% - 10%
|
|
|
|
|
|
|
|
November 4, 2015 –December 7, 2018
|
|
During
the year ended December 31, 2017, the Company paid debt issue costs totaling $77,525
During
the year ended December 31, 2016, the Company paid debt issue costs totaling $76,202.
The
following is a summary of the Company’s debt issue costs:
|
|
Twelve
months ended December 31, 2017
|
|
Year
Ended December 31, 2016
|
|
|
|
|
|
Debt
issue costs
|
|
$
|
343,898
|
|
|
|
262,623
|
|
Accumulated
amortization of debt issue costs
|
|
|
(316,462
|
)
|
|
|
(220,124
|
)
|
|
|
|
|
|
|
|
|
|
Debt
issue costs - net
|
|
$
|
24,436
|
|
|
|
42,499
|
|
During
the years ended December 31, 2017 and 2016 the Company amortized $96,338 and $93,449 of debt issue costs, respectively.
(C)
Debt Discount & Original Issue Discount
During
the years ended December 31, 2017 and 2016, the Company recorded debt discounts totaling $2,030,179 and $3,313,472, respectively.
The
debt discount and the original issue discount recorded in 2017 and 2016 pertains to convertible debt that contains embedded conversion
options that are required to be bifurcated and reported at fair value and original issue discounts.
The
Company amortized $2,647,357 and $4,743,820 during the years ended December 31, 2017 and 2016, respectively, to amortization of
debt discount expense.
|
|
Twelve
months ended December 31, 2017
|
|
Year
Ended December 31, 2016
|
|
|
|
|
|
Debt
discount
|
|
$
|
12,386,574
|
|
|
|
10,356,394
|
|
Accumulated
amortization of debt discount
|
|
|
(11,775,888
|
)
|
|
|
(9,128,529
|
)
|
|
|
|
|
|
|
|
|
|
Debt
discount - Net
|
|
$
|
610,686
|
|
|
|
1,227,865
|
|
|
|
|
|
|
|
|
|
|
(D)
Line of Credit – Related Party
On
July 6, 2017, the Company entered into a two-year line of credit agreement with the principal stockholder in the amount of $100,000.
Subsequently, on October 2, 2017, the Company entered into a two year line of credit agreement with the principal stockholder
in the amount of $200,000. The line of credit carries an interest rate of 4%.
As
of December 31, 2017, the principal stockholder has advanced $47,450 to the Company and was repaid $15,000under the terms of this
line of credit agreement. As of December 31, 2017 $34,156 is owed under the line of credit including the accrued interest of $306.
NOTE
4 DERIVATIVE LIABILITIES
The
Company identified conversion features embedded within convertible debt issued in 2017 and 2016 and warrants issued in 2017 and
2016. The Company has determined that the features associated with the embedded conversion option should be accounted for at fair
value as a derivative liability.
As
a result of the application of ASC No. 815, the fair value of the conversion feature is summarized as follow:
Derivative
Liability -December 31, 2015
|
|
$
|
3,684,184
|
|
Fair
value at the commitment date for convertible instruments
|
|
|
7,026,286
|
|
Change
in fair value of embedded derivative liability for warrants issued
|
|
|
91,556
|
|
Change
in fair value of embedded derivative liability for warrants instruments
|
|
|
121,308
|
|
Change
in fair value of embedded derivative liability for convertible instruments
|
|
|
(1,614,234
|
)
|
Reclassification
to additional paid in capital for financial instruments that ceased to be a derivative liability
|
|
|
(1,371,516
|
)
|
Change
from repayments
|
|
|
(2,030,644
|
)
|
Derivative
Liability -December 31, 2016
|
|
$
|
5,906,940
|
|
Fair
value at the commitment date for convertible instruments
|
|
|
2,577,074
|
|
Change
in fair value of embedded derivative liability for warrants issued
|
|
|
(200,480
|
)
|
Change
in fair value of embedded derivative liability for convertible instruments
|
|
|
(668,281
|
)
|
Reclassification
to additional paid in capital for financial instruments that ceased to be a derivative liability
|
|
|
(1,319,638
|
)
|
Change
from repayments
|
|
|
(386,494
|
)
|
Derivative
Liability –December 31, 2017
|
|
$
|
5,909,121
|
|
The
Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining value of
the derivative as it exceeded the gross proceeds of the note. The Company recorded a derivative expense for the years ended
December 31, 2017 and 2016 of $639,224 and $3,833,224 respectively.
The
fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following
management assumptions as of December 31, 2017:
|
|
|
Commitment
Date
|
|
|
|
Re-measurement
Date
|
|
|
|
|
|
|
|
|
|
|
Expected
dividends:
|
|
|
—
|
|
|
|
—
|
|
Expected
volatility:
|
|
|
133%
- 262.28%
|
|
|
|
90.12%-297%
|
|
Expected
term:
|
|
|
0.08
- 3 Years
|
|
|
|
0.01–1.40
Years
|
|
Risk
free interest rate:
|
|
|
0.06%
- 1.65%
|
|
|
|
0.01%
- 1.83%
|
|
The
fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following
management assumptions as of December 31, 2016:
|
|
|
Commitment
Date
|
|
|
|
Re-measurement
Date
|
|
|
|
|
|
|
|
|
|
|
Expected
dividends:
|
|
|
—
|
|
|
|
—
|
|
Expected
volatility:
|
|
|
133%
- 262%
|
|
|
|
157%
-216%
|
|
Expected
term:
|
|
|
0.08
- 3 Years
|
|
|
|
0.01–2.40
Years
|
|
Risk
free interest rate:
|
|
|
0.06%-1.60%
|
|
|
|
0.12%-1.47%
|
|
NOTE
5 PROPERTY AND EQUIPMENT
At
December 31, 2017 and December 31, 2016, respectively, property and equipment is as follows:
|
|
December
31, 2017
|
|
December
31, 2016
|
|
|
|
|
|
Website
Development
|
|
$
|
294,795
|
|
|
$
|
294,795
|
|
Furniture
and Equipment
|
|
|
143,071
|
|
|
|
117,971
|
|
Leasehold
Improvements
|
|
|
6,708
|
|
|
|
6,708
|
|
Software
|
|
|
54,598
|
|
|
|
54,598
|
|
Music
Equipment
|
|
|
2,578
|
|
|
|
2,578
|
|
Office
Equipment
|
|
|
80,710
|
|
|
|
80,710
|
|
Domain
Name
|
|
|
1,500
|
|
|
|
1,500
|
|
Sign
|
|
|
628
|
|
|
|
628
|
|
Total
|
|
|
584,588
|
|
|
|
559,488
|
|
Less:
accumulated depreciation and amortization
|
|
|
(540,525
|
)
|
|
|
(498,065
|
)
|
Property
and Equipment, Net
|
|
$
|
44,063
|
|
|
$
|
61,423
|
|
Depreciation/amortization
expense year ended December 31, 2017 and 2016 totaled $35,868 and $76,726, respectively.
NOTE
6 STOCKHOLDERS’ DEFICIT
On
March 4, 2015, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors
created and authorized the issuance of Series A Convertible Preferred stock, with a par value of $0.00001 per share. The face
amount of state value of each Preferred Share of stock is $0.96 and the conversion price of $0.04 per share.
On
June 24, 2015, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors
filed with the State of Delaware an Amended Certificate of Incorporation increasing the authorized shares of common stock by 120,000,000
shares of common stock from 450,000,000 million shares of common stock to 570,000,000 shares of common stock.
On
September 24, 2015, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors
filed with the State of Delaware an Amended Certificate of Incorporation increasing the authorized shares of common stock by 120,000,000
shares of common stock from 450,000,000 million shares of common stock to 570,000,000 shares of common stock.
On
August 19, 2015, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors
filed with the State of Delaware an Amended Certificate of Incorporation increasing the authorized shares of common stock by 280,000,000
shares of common stock from 570,000,000 million shares of common stock to 850,000,000 shares of common stock.
On
January 13, 2016, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors
filed with the Securities and Exchange Commission a Schedule 14C and with the State of Delaware an Amended Certificate of Incorporation
increasing the authorized shares of common stock by 800,000,000 shares of common stock from 850,000,000 million shares of common
stock to 1,650,000,000 shares of common stock.
On
April 4, 2017, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors
filed with the Securities and Exchange Commission a Schedule 14C and with the State of Delaware an Amended Certificate of Incorporation
increasing the authorized shares of common stock by 600,000,000 shares of common stock from 1,650,000,000 shares of common stock
to 2,250,000,000 shares of common stock.
On
April 23, 2017, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors
filed with the Securities and Exchange Commission a Schedule 14C and with the State of Delaware an Amended Certificate of Incorporation
increasing the authorized shares of common stock by 1,000,000,000 shares of common stock from 2,250,000,000 shares of common stock
to 3,250,000,000 shares of common stock.
On
October 4, 2017, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors
filed with the Securities and Exchange Commission a Schedule 14C and with the State of Delaware an Amended Certificate of Incorporation
increasing the authorized shares of common stock by 1,000,000,000 shares of common stock from 3,250,000,000 shares of common stock
to 4,250,000,000 shares of common stock.
During
the year ended December 31, 2017, the Company issued the following common stock:
Transaction
Type
|
|
Quantity
|
|
Valuation
|
|
Range
of Value per share
|
|
|
|
|
|
|
|
Conversion
of convertible debt and accrued interest
|
|
|
1,229,440,607
|
|
|
$
|
1,309,243
|
|
|
|
$0.00045
to- $0.00731
|
|
Services
- rendered
|
|
|
6,000,000
|
|
|
|
54,600
|
|
|
|
$0.0011
- $0.0107
|
|
Shares
issued in exchange of interest – related party
|
|
|
800,000,000
|
|
|
|
960,000
|
|
|
$
|
0.00001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
repurchased
|
|
|
(13,000,000
|
)
|
|
|
(15,000
|
)
|
|
$
|
.0014
|
|
Total
shares issued
|
|
|
1,222,440,607
|
|
|
$
|
2,308,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the year ended December 31, 2016, the Company issued the following common stock:
Transaction
Type
|
|
Quantity
|
|
Valuation
|
|
Range
of Value per share
|
|
|
|
|
|
|
|
Conversion
of convertible debt and accrued interest
|
|
|
420,556,227
|
|
|
$
|
1,189,849
|
|
|
|
$0.00143
to- $0.01056
|
|
Services rendered
|
|
|
12,775,195
|
|
|
|
115,600
|
|
|
|
$0.09-$0.013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
80,000,000
|
|
|
|
1,600,000
|
|
|
$
|
0.02
|
|
Total
shares issued
|
|
|
513,331,422
|
|
|
$
|
2,905,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company maintains on its books and within the above financials, debt to Venture Champion Asia Limited and ICG USA LLC or its designee(s)
which is currently in default and has not been converted due to ICG’s settled administrative proceeding with the SEC, where
the Company awaits any rightful exemption or regulatory no-action that would render any forward moving action compliant by all
the parties.
The
Company announced that it entered into an Agreement with Vedanti Systems Limited and Vedanti Licensing Limited (VLL) that resolves
their dispute over the international Optimized Data Transmission (ODT) patent portfolio previously owned by Vedanti. The
Agreement further provides that VLL and the Company will become co-owners of the pioneering portfolio. In consideration of
the patent portfolio purchase, the Company issued 80,000,000 shares of its common stock to VLL. This patent portfolio consists
of patents in the following countries: The United States, Australia, Austria, Cyprus, Denmark, Spain, Finland, France, Ireland,
Italy, Luxembourg, Monaco, Portugal, Sweden, Turkey, Belgium, Switzerland/ Liechtenstein, United Kingdom, Greece, Netherlands
and Germany. The Company continues to pursue its litigations against Google.
Return
of Shares and Issuance of Preferred shares
On
October 2, 2017, the Company, in exchange for Greg Halpern's consideration issuing the Company a line of credit of $100,000 on
July 6, 2017 and another line of credit of $200,000 on October 2, 2017 and for Mr. Halpern's forgiveness of $960,000 of interest
owed to Mr. Halpern for his Preferred Shares accrued dividend rate of 8% per annum of his already owned 5 million Series A Convertible
Preferred Shares, the Board deemed it proper to grant Mr. Halpern an additional 800,000,000 shares of the Company's common stock,
which at Mr. Halpern's election he may convert into 5,000,000 additional Series A Convertible Preferred Shares with the same voting
rights and percentages as his previously granted and owned 5,000,000 Series A Convertible Preferred Shares.
On
November 8, 2017, the Company, at Greg Halpern's election, converted 800,000,000 shares of Common Stock into 5,000,000 Series
A Convertible Preferred Shares representing 33.4% of the Company’s voting rights and control adding to Halpern’s existing
33.4% holdings, equaling 66.8% of the Company’s total voting rights and control.
On
March 4, 2015 the Company filed a form 8K with the SEC associated with the Company entering into a Securities Exchange Agreement
and the Company filing with the Secretary of State Delaware a Certificate of Designations, Preferences and Rights whereby, among
other things, the Company for good and valuable consideration, agreed that in consideration of a large shareholder exchanging
120,000,000 shares of common stock back to the Company, the shareholder would receive 5,000,000 shares of Series A Convertible
Preferred Stock of the Company at a Stated Value of $0.96 per share and a Conversion Price of $0.04 per share. These 5,000,000
Series A Convertible Preferred Shares represent 33.4% of the Company’s voting rights and control and accrue dividends at
a rate of 8% per annum Stated Value, payable in cash or in kind at the election of the Board of Directors. For the twelve months
ended December 31, 2017 and for the year ended December 31, 2016, the Company has not declared dividends.
(B)
Stock Warrants
The
following tables summarize all warrant grants as of December 31, 2017, and the related changes during these periods are presented
below:
|
|
Number
of Warrants
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life (in Years)
|
|
Balance,
December 31, 2015
|
|
|
|
5,550,000
|
|
|
|
0.25
|
|
|
|
1.5
|
|
|
Granted
|
|
|
|
20,020,690
|
|
|
|
0.02
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Cancelled/Forfeited
|
|
|
|
(5,600,000
|
)
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
|
|
|
19,970,690
|
|
|
$
|
0.01
|
|
|
|
2.2
|
|
|
Granted
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
|
(750,000
|
)
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2017
|
|
|
|
19,220,690
|
|
|
|
|
|
|
|
1.2
|
|
A
summary of all outstanding and exercisable warrants as of December 31, 2017 is as follows:
|
|
|
|
|
|
Weighted
Average
|
|
Aggregate
Intrinsic
|
Exercise
|
|
Warrants
|
|
Warrants
|
|
Remaining
|
|
Value
|
Price
|
|
Outstanding
|
|
Exercisable
|
|
Contractual
Life
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
1.16
|
|
|
$
|
—
|
|
$
|
0.005
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1.40
|
|
|
$
|
—
|
|
$
|
0.0029
|
|
|
|
8,620,690
|
|
|
|
8,620,690
|
|
|
|
1.25
|
|
|
$
|
—
|
|
$
|
0.006
|
|
|
|
5,600,000
|
|
|
|
5,600,000
|
|
|
|
1.39
|
|
|
|
|
|
$
|
0.12
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
0.77
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,220,690
|
|
|
|
19,220,690
|
|
|
|
1.2
|
|
|
$
|
—
|
|
A
summary of all outstanding and exercisable warrants as of December 31, 2016 is as follows:
|
|
|
|
|
|
Weighted
Average
|
|
Aggregate
Intrinsic
|
Exercise
|
|
Warrants
|
|
Warrants
|
|
Remaining
|
|
Value
|
Price
|
|
Outstanding
|
|
Exercisable
|
|
Contractual
Life
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
1.41
|
|
|
$
|
—
|
|
$
|
0.005
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1.65
|
|
|
$
|
—
|
|
$
|
0.0029
|
|
|
|
8,620,690
|
|
|
|
8,620,690
|
|
|
|
1.49
|
|
|
$
|
—
|
|
$
|
0.006
|
|
|
|
5,600,000
|
|
|
|
5,600,000
|
|
|
|
1.64
|
|
|
|
|
|
$
|
0.12
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
1.01
|
|
|
$
|
—
|
|
$
|
0.40
|
|
|
|
750,000
|
|
|
|
750,000
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
19,970,690
|
|
|
|
19,970,690
|
|
|
|
2.2
|
|
|
$
|
—
|
|
(C)
Stock Options
On
July 6, 2017, Company's Chief Financial Officer ("CFO"), the Company issued 95,332,500 options to buy common
shares of the Company's stock at $0.00253 per share, good for three years to the CFO. The Company recognized an expense of
$191,361 for twelve months ended December 31, 2017. The Company recorded the fair value of the options based on the fair
value of each option grant estimated on the date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
Expected
dividends 0%
Expected
volatility 178.27%
Expected
term 3 Years
Risk
free interest rate 0.69%
The
following tables summarize all option grants as of December 31, 2017, and the related changes during these periods are presented
below:
|
|
Number
of Options
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life
(in Years)
|
Outstanding
– December 31, 2015
|
|
|
15,566,652
|
|
|
|
0.13
|
|
|
|
0.32
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
or Canceled
|
|
|
(12,700,000
|
)
|
|
|
—
|
|
|
|
—
|
|
Outstanding
– December 31, 2017
|
|
|
2,866,652
|
|
|
$
|
0.13
|
|
|
|
1.02
|
|
Granted
|
|
|
95,332,500
|
|
|
$
|
0.0025
|
|
|
|
3
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Forfeited
or Canceled
|
|
|
(2,866,652
|
)
|
|
$
|
—
|
|
|
|
—
|
|
Outstanding
– December 31
|
|
|
95.332,500
|
|
|
$
|
0.0025
|
|
|
|
2.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
7 COMMITMENTS
(A)
Employment Agreement
On
January 31, 2016 Mr. Lloyd Trammell submitted a notice of resignation ending employment on March 1, 2016.
On
January 8, 2016, the Company extended the employment agreement with its CEO, John Blaisure for an additional five years. The Company
issued 12,000,000 shares of Company’s common stock as part of the compensation with a fair value of $105,600 ($0.0088) based
on the stock-trading price.
(B)
Consulting Agreement
On
April 14, 2016, the Company entered into an agreement, for consulting services, for which the Company issued 1,000,000 warrants
at a strike price of ($0.005/share) per share.
On
March 6, 2016, the Company entered into a revised engagement with its corporate counsel, McMenamin Law Group, for corporate
legal services to be provided by legal counsel beginning July 28, 2015 through December 31, 2016, pursuant to which the
Company has agreed to issue a five (5) year warrant at an exercise price totaling $25,000 at a strike price of
($0.0029/share) per share of common stock of the Company, which share price was the closing price of the Company’s
stock on March 3, 2016. In addition the Company has agreed to pay McMenamin Law Group cash consideration totaling $15,000 on
or before March 31, 2016, or a funding of the Company, whichever occurs first. As of December 31, 2016, the payment was not
made. This new engagement shall replace and supersede any previous engagements or other agreements between the Company and
McMenamin Law Group.
On
October 12, 2017 the Company entered into a new engagement with its corporate counsel McMenamin Law Group, for corporate legal
services to be provided from January 1, 2018 through December 31, 2018. Specifically the Company agreed to pay a flat fee totaling
$32,500 in the following installment, (i) $10,000 on January 2, 2018, (ii) $7,500 on March 31, 2018, (iii) $7,500 on June 30,
2018, and (iv) $7,500 on October 31, 2018
(C)
Other Agreements
On
February 21, 2017 the Company entered into an Agreement with architect Eli Attia. This Agreement terminated and replaced
the previous Representation Agreement and allows the Company to continue to pursue litigations against Google and Flux.
NOTE
8 LITIGATION
From
time to time, the Company has become involved in various lawsuits and legal proceedings, which arise in the ordinary course of
business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise
from time to time that may harm its business.
On
January 21, 2015, the Company filed a patent infringement action against Netflix Inc., Netflix Luxembourg S.a.r.l. and Netflix
International B.V. with the District Court of Mannheim, Germany. The asserted patent is the same patent as in the German proceedingsagainst
Google Inc. and its subsidiaries. The Complaint alleges that Netflix Inc. and its subsidiaries are offering and transmitting video
streams to German customers as part of their video-on-demand business model; the videos being encoded and transmitted in a manner
claimed and protected by the patent. The Company primarily seeks a permanent injunction against the Defendants, plus damages and
information regarding past infringements. The Company, on or about December 2015 upon advice of counsel, decided withdraw the
litigation prior to oral argument, which withdrawal is without prejudice to re-file the lawsuit in the future.
The
Company intends to vigorously prosecute these various patent infringement litigations. The Company believes it has a good likelihood
of success associated with these patent infringement lawsuits. However, no assurance can be given by the Company as to the ultimate
outcome of these actions or its effect on the Company. The law firm is prosecuting this action on a contingency fee basis.
On
January 26, 2015, the Company was named as a defendant in an action filed in the Superior Court for the State of California and
the County of Los Angeles captioned Bibicoff Family Trust v. Max Sound Corporation (Case No. SC123679). The parties participated
in mediation and arrived successfully at a settlement and resolution of the matter. In March 2017 the Company successfully completed
paying the agreed upon settlement amount.
On
August 11, 2014, the Company and VSL simultaneously filed trade secret and patent infringement actions against Google, Inc., and
its subsidiaries YouTube, LLC, and On2 Technologies, Inc., relating to proprietary and patented technology owned by Vedanti Systems
Limited (“Vedanti”), a subsidiary of VSL. The patent infringement complaint was originally filed in the U.S.
District Court for the District of Delaware; the trade secret suit was filed in Superior Court of California, County of Santa
Clara. On September 30, 2014, the Company filed notices of voluntary dismissal without prejudice as to both lawsuits. On
October 1, 2014, the Company amended the patent complaint and filed it in the U.S. District Court for the Northern District of
California. In this patent lawsuit, the Company contends that, in 2010, while Google was in discussions with Vedanti about the
possibility of acquiring Vedanti's patented digital video streaming techniques and other proprietary methods, Google gained access
to and received technical guidance regarding Vedanti’s proprietary codec, a computer program capable of encoding and decoding
a digital data stream or signal. The lawsuit further alleges that soon after Google and Vedanti initiated negotiations,
Google willfully infringed Vedanti's patent by incorporating Vedanti's patented technology into Google's own VP8, VP9, WebM, YouTube,
Google Adsense, Google Play, Google TV, Chromebook, Google Drive, Google Chromecast, Google Play-per-view, Google Glasses, Google+,
Google’s Simplify, Google Maps, and Google Earth, without compensating Vedanti for such use. On May 13, 2015
Google's “motion to dismiss” was denied by the Northern District of California court in a seven page order, stating
that Max Sound had sufficiently alleged the existence and validity of the '339 Patent. However, on November 24, 2015, the
court granted a second motion to dismiss for lack of subject matter jurisdiction based on the defendants’ argument that
the agreements between the Company and VSL/Vedanti did not clearly give the Company standing to enforce the patent rights.
The Company appealed that decision on February 22, 2016. One January 18, 2017 the Company received a notice from the Federal
Circuit Court of Appeals that affirmed the order of the District Court dismissing MAXD's patent infringement lawsuit against Google
for lack of standing. The Court did not issue a written decision explaining its reasoning or that the Company's arguments were
not correct; however, The Company believes that their decision was predicated on the fact that as now co-owners of the patents
with Vedanti, the Company can simply re-file together against Google. The Court also issued an order denying Google's motion arguing
that the Company's appeal should be dismissed as moot. On September 25, 2017, the Court issued an order that the Company
should reimburse defendants for its attorneys’ fees in the amount of $820,321.41. The Company believes that the Order
for fees is without merit and has appealed. For the nine months ended September 30, 2017, the Company recorded judgement
payable on the balance sheet.
In
connection with the dismissal of the aforementioned litigation, the Company initiated an arbitration against VSL Communications,
Ltd., Vedanti Systems, Ltd., Constance Nash, Robert Newell and eTech Investments as respondents before the American
Arbitration Association for breach of contract, fraud, and other causes of action. Subsequently, the Company is pursuing in arbitration
claims against VSL to enforce the agreement and to compel VSL to comply with the agreement’s terms and conditions that inter
alia VSL must fully cooperate with the Company to cure any issues the Court raised with standing to pursue the claims. On January
17, 2017 the AAA notified the Company’s counsel that the respondent’s counterclaim was withdrawn this arbitration
claim was formally concluded.
On
December 5, 2014, the Company, along with renowned architect Eli Attia, filed a lawsuit in the Superior Court of California, County
of Santa Clara, against Google, its co-founders Sergey Brin and Larry Page, Google’s spinoff company Flux Factory, and senior
executives of Flux. Plaintiffs’ allege misappropriation of trade secrets, breach of contract and other contract-related
claims, breach of confidence, slander of title, violation of California’s Unfair Competition Law (California Business and
Professionals Code §§ 17200 et seq.), and fraud, and also a claim for declaratory relief. The lawsuit contends that
Google and the other Defendants stole Mr. Attia’s trade secrets, proprietary information, and know-how regarding a revolutionary
architecture design and building process that he alone had invented, known as Engineered Architecture. Defendants are alleged
to have engaged Mr. Attia in 2010 and 2011 to translate his architectural technology into software for a proof of concept, with
the goal of determining at that point whether to continue with full-scale development with Mr. Attia. Instead, the lawsuit claims
that once Mr. Attia had disclosed the trade secrets and proprietary information Defendants needed to bring the technology to market,
they severed ties with Mr. Attia, and continued to use his technology without a license and without compensation, in order to
bring the technology to market themselves. Plaintiffs seek a permanent injunction against Google, damages (including punitive
damages), and restitution. As exclusive agent to Eli Attia to enforce all rights with respect to the subject technology, the Company
has retained Buether Joe & Carpenter LLC to represent the Company in the suit, on a contingency fee basis. The case will be
vigorously prosecuted, and the Company believes it has a good likelihood of success. Defendants have filed multiple demurrers to
the complaint, and the Court has issued orders allowing the case to proceed. Defendants filed another demurrer on March
17, 2016, which was denied by the Court on August 12, 2016. On October 4, 2017, the Court granted Mr. Attia leave to amend
the complaint to add causes of action against defendants for civil violations of the federal Racketeer Influenced and Corrupt
Organizations Act (commonly known as RICO). Subsequently, on October 23, 2017, the defendants removed the lawsuit
from California state court to the federal district court in the Northern District of California, San Jose Division. The parties
continue to file motions and are expected to begin the discovery phase of the litigation.
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. Despite the fact that the Company was never served with the Complaint,
default was entered against the Company. The Default has been set aside and the Company has responded to the Complaint
with an Answer and Cross-Complaint for Breach of Contract, Professional Negligence, Breach of Fiduciary Duty, Conversion, and
Fraud, due to the fact, that among other things, Adli Law reassigned the Company's primary patent to itself. The
parties have begun the discovery phase of the litigation and the Judge has set a status hearing for January 19, 2018.
On
September 22, 2016, the Company filed an action in the Superior Court of the State of California, County of San Diego –
North County Regional Center, captioned Max Sound Corporation v. Globex Transfer, LLC (Case No. 37-2016-0003037-CU-MC-NC). The
Company requests injunctive relief and declaratory relief regarding the release of 13 million restricted shares of Company stock.
On September 26, 2016, the Court granted the Company a preliminary injunction, enjoining Defendant from releasing any restriction
of the subject shares without first obtaining the Company’s consent, pending the outcome of the litigation.”
In
November 2016, the Company entered into an agreement with Vedanti Licensing Limited ("VLL") and Vedanti Systems Limited
("Vedanti") under (the "VLL/Max Sound Agreement") granting the Company co-ownership of U.S. Patent No. 7,974,339
(the "`339 Patent") along with the other patents owned by Vedanti Systems Limited. Thus, the Company is now a co-owner
with VLL of the `339 Patent and ODT Patent portfolio, pursuant to the VLL/Max Sound Agreement, the Company and VLL intend to file
new lawsuit against Google and others for infringement as co-owners.
On
December 20, 2016 Companies House, the United Kingdom's registrar of companies, notified the Company that VSL Communications
Limited was dissolved, thereafter voiding any remaining agreement with VSL Communications or its previous Officers, Directors
or Management.
No
assurance can be given as to the ultimate outcome of these actions or their effect on the Company.
NOTE
9 SUBSEQUENT EVENTS
On
January 29, 2018 the Company entered into a consulting services agreement with a consultant. The agreement will continue until
January 29, 2019. During the last nine months of the agreement, either Consultant or the Company may terminate the agreement at
any time and for any reason by giving the other party 30 day notice. In connection with this agreement, the consultant receive
30,000,000 shares of common stock each upon the executing of the agreement.
On
February 6, 2018, the Company entered into an agreement whereby the Company will issue up to $78,000. The note matures on November
15, 2018 and bears an interest charge of 12%. The conversion price equals the “Variable Conversion Price”, which is
61% of the lowest three trading prices for the Common Stock during the 10 day period ending on the latest day prior to the conversion
date. 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 $75,000 of proceeds on February 18, 2018.
On
February 9, 2018, the Company entered into an agreement whereby the Company will issue up to $75,000. The note matures on demand
of the holder on or after February 9, 2018 and bears an interest charge of 8%. The conversion price equals the “Variable
Conversion Price”, which is 40% of the lowest trading prices for the common stock during the ten trading day to the date
of 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 $73,000 of proceeds on February 13, 2018. Subsequent to the year end, the
Company converted a total of $334,451 in convertible debt comprised of principal and accrued interest into 1,224,030,746 common
shares.
Subsequent
to the year end, the principal shareholder advanced $72,739 additional capital to the Company under the terms of the line of credit
agreements.
Subsequent
to the year end, the principal shareholder was repaid $76,000 loaned under the line of credit agreement.