Quarterly Report (10-q)

FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, DC 20549

 

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended March 31, 2017

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _______ to _______

 

Commission file number 33-20432

 

KIWIBOX.COM, INC.

Formerly known as Magnitude Information Systems, Inc.

(Exact Name of Registrant as Specified in its Charter) 

 

Delaware		75-2228828
(State or other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)
330 West 42 nd Street, #3210 New York, NY 10036		[phone]
(Address of Principal Executive Office) (Zip Code)		(Registrant’s telephone number including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☒
Emerging growth company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): 

Yes ☐  No ☒

 

The number of shares of Registrant’s Common Stock, $0.0001 par value, outstanding as of May 15, 2017, was 688,493,060 shares.

 

1

 

 

KIWIBOX.COM, INC.

 

	Page No.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Balance Sheets - March 31, 2016 (unaudited) and December 31, 2015	3
Statements of Operations and Comprehensive Income (Loss) - Three months ended March 31, 2016 and 2015 (unaudited)	4
Statements of Cash Flows - Three months ended March 31, 2016 and 2015 (unaudited)	5
Notes to Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3. Quantitative and Qualitative Disclosures About Market Risk	25
Item 4. Control and Procedures	25
PART II - OTHER INFORMATION	26
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3. Defaults Upon Senior Securities	26
Item 4T. Submission of Matters to a Vote of Security Holders	26
Item 5. Other Information	26
Item 6. Exhibits	27
SIGNATURES	28

 

2

 

PART I - Item 1 Financial Statements

Kiwibox.Com, Inc.

Balance Sheets

 

		March 31, 2017 (Unaudited)				December 31, 2016
Assets
Current Assets
Cash and cash equivalents		$	1,926			$	15,185
Accounts receivable - affiliate, net of allowance for Doubtful accounts of $0			66,500				63,715
Prepaid expenses and other current assets			165,000				220,182
Total Current Assets			233,426				299,082
Property and equipment, net of accumulated Depreciation of $117,278 and $116,530, respectively			3,577				4,325
Other assets			12,007				12,007
Total Assets		$	249,010			$	315,414
Liabilities and Stockholders’ Equity (Impairment)
Current Liabilities
Accounts payable			275,618				274,750
Accrued expenses			6,275,523				5,929,729
Due to related parties			85,371				111,215
Obligations to be settled in stock			289,468				289,198
Dividends payable			850,998				838,182
Loans and notes payable - other			100,000				100,000
Convertible notes payable - related parties			14,212,019				14,017,019
Current maturities of long-term debt			33,529				33,529
Liability for derivative conversion feature –related parties			19,417,264				18,889,495
Total Current Liabilities			41,539,790				40,483,117
Stockholders’ Equity (Impairment)
Preferred Stock, $0.001 par value, non-voting, 3,000,000 shares authorized; 85,890 shares issued and outstanding			86				86
Common Stock, $0.0001 par value, 1,400,000,000 shares authorized; issued and outstanding 688,493,060 and 688,493,060 shares respectively			68,847				68,847
Additional paid-in capital			52,733,065				52,733,065
Accumulated deficit			(94,092,778	)			(92,969,701	)
Total Stockholders’ Equity (Impairment)			(41,290,780	)			(40,167,703	)
Total Liabilities and Stockholders’ Equity (Impairment)		$	249,010			$	315,414

 

The accompanying notes are an integral part of the financial statements.

 

3

 

Kiwibox.Com, Inc.

Statements of Operations and Comprehensive Income (Loss) (Unaudited)

 

		Three Months Ended March 31,
		2017				2016
Net Sales
Advertising - affiliate		$	2,785			$	2,337
Total Net Sales			2,785				2,337
Cost of Goods Sold
Website hosting expenses			4,650				1,650
Total Cost of Goods Sold			4,650				1,650
Gross Profit (Loss)			(1,865	)			687
Selling expenses			108,752				135,663
Stock-based compensation			—				2,280
General and administrative expenses			124,410				173,644
Loss From Operations			(235,027	)			(310,900	)
Other Income (Expense)
Miscellaneous income/(expense)			—				(960	)
Interest expense			(347,465	)			(319,668	)
Interest expense - derivative conversion features			(542,670	)			(563,489	)
Change in fair value – derivative liabilities			14,901				(60,719	)
Total Other Income (Expense)			(875,234	)			(944,836	)
Loss Before Benefit (Provision) for Income Taxes			(1,110,261	)			(1,255,736	)
Benefit (Provision) for Income Taxes			—				—
Net Loss		$	(1,110,261	)		$	(1,255,736	)
Dividends on Preferred Shares			(12,816	)			(12,816	)
Net Loss Applicable to Common Shareholders, basic and diluted		$	(1,123,077	)		$	(1,268,552	)
Net Loss Per Common Share, basic and diluted		$	(0.002	)		$	(0.002	)
Weighted Average of Common Shares Outstanding			688,493,060				685,275,478

 

The accompanying notes are an integral part of the financial statements.

 

4

 

 

Kiwibox.Com, Inc.

Statements of Cash Flows (Unaudited)

 

		Three Months Ended March 31,
		2017				2016
Cash Flows From Operating Activities
Net Loss		$	(1,110,261	)		$	(1,255,736	)
Adjustments to Reconcile Net Loss to Net Cash Used by Operations
Depreciation and amortization			748				450
Securities issued for services			—				2,280
Loss on debt extinguishment			—				960
Change in fair value – derivative liabilities			(14,901	)			60,719
Intrinsic value of  beneficial conversion feature			542,670				563,489
Decreases (Increases) in Assets
Accounts receivable - affiliates			(2,785	)			(2,338	)
Prepaid expenses			55,182				55,160
Increases (Decreases) in Liabilities:
Liabilities to be settled in stock			270				3,270
Accounts payable			868				(2,576	)
Accrued expenses			345,794				318,476
Net Cash Used by Operating Activities			(182,415	)			(255,846	)
Cash Flows From Financing Activities
Proceeds from loans/notes payable			195,000				230,000
Net  proceeds (repayments) to related parties			(25,844	)			26,641
Net Cash Provided by Financing Activities			169,156				256,641
Net Increase (Decrease) in Cash			(13,259	)			795
Cash at beginning of period			15,185				—
Cash at end of period		$	1,926			$	795
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid		$	—			$	—
Income Taxes Paid		$	—			$	31

 

The accompanying notes are an integral part of the financial statements.

 

5

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES
Three Months Ended March 31, 2017
Quarter to date dividend accruals		$	12,816
Three Months Ended March 31, 2016
Settlement of obligations with common stock		$	2,280
Quarter to date dividend accruals		$	12,816

 

6

 

 

Kiwibox.Com, Inc.

Notes to Financial Statements

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The condensed balance sheet at December 31, 2016 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The other information in these condensed financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These condensed financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These condensed financial statements should be read in conjunction with the financial statements and additional information as contained in our Annual Report on Form 10-K for the year ended December 31, 2016.  

 

Nature of Organization

 

Kiwibox.Com, Inc. (the “Company”) was incorporated as a Delaware corporation on April 19, 1988 under the name Fortunistics, Inc. On November 18, 1998, the Company changed its name to Magnitude Information Systems, Inc. On December 31, 2009, the Company changed its name to Kiwibox.com, Inc.

 

On August 16, 2007 the Company acquired all outstanding shares of Kiwibox Media, Inc.

 

The Company, Magnitude, Inc. and Kiwibox Media Inc. were separate legal entities until December 31, 2009, with Kiwibox Media, Inc. being a wholly owned subsidiary. On December 31, 2009, the two subsidiaries, Magnitude, Inc. and Kiwibox Media, Inc. merged into the Company.

 

On September 30, 2011, Kiwibox.com acquired the German based social network Kwick! Community GmbH & Co. KG (“Kwick”), a wholly-owned subsidiary.

 

On September 24, 2013, Kwick Community GmbH & Co. KG signed an equity purchase agreement to acquire Interscholz Internet Services GmbH and Co KG, a German limited liability company, and all the equity of its general partner, Interscholz Beteiligungs GmbH. As of the balance sheet date, and pursuant to the terms of the contract, since full payment was not made for the purchase price of Interscholz Internet Services GmbH & Co KG, ownership does not transfer to Kwick Community GmbH & Co KG. Full payment must be made for ownership to transfer to Kwick. As of December 31, 2013 only $515,037 of the total purchase price of $1,352,000 was made. On December 9, 2013 the acquisition of Interscholz Internet Services GmbH and Co KG by Kwick was rescinded due to non compliance with the terms of the addendum to the contract, calling for the full purchase price to have been paid. However, Kwick did acquire all the equity of the general partner, Interscholz Beteiligungs GmbH, as full payment was not a requirement for transfer of ownership of that entity.

 

On December 10, 2013, the Company signed an Equity Purchase Agreement with Marcus Winkler to sell to him eighty (80%) percent of the equity of its German subsidiary, KWICK! Community GmbH & Co. KG, a German limited liability company, and Kwick! Beteiligungs GmbH, its general partner (collectively, “Kwick”). The sale was approved on December 18, 2013. Due to the fact that the parent company ceased to have a controlling financial interest in Kwick, the subsidiary was deconsolidated from that date forward. On December 30, 2013 a total of 15% of the remaining 20% of the equity of Kwick was transferred to the Chief Executive Officer of Kwick (the “Kwick CEO”), in consideration for the Kwick CEO pledging to the bank 5,000 Euros as collateral, on behalf of Kiwibox, for bank overdrafts incurred by “Kwick’s” wholly-owned subsidiary Interscholz Beteiligungs GmbH, as general

 

7

 

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

partner (managing partner) for Interscholz Internet Services GmbH & Co KG; as it is the duty of the general/managing partner to secure liquidity for the partnership. Since Kiwibox owned 20% of Kwick they were required, under German law, as managing partner of Interscholz Beteiligungs GmbH to secure liquidity for Interscholz Internet Services GmbH & Co KG. Therefore, 15% of Kiwibox’s 20% of Kwick was given to the Kwick CEO in exchange for the CEO pledging the necessary collateral. In addition to the collateral given by the Kwick CEO, as new 15% shareholder of Kwick, the Kwick CEO also agreed to keep the Interscholz Beteiligungs GmbH business going. This transfer was unanimously approved with written consent of the Board of Directors. Since the fair value of Kiwibox’s interest in Kwick is zero, this transaction had no material impact on the financial statements.

 

Cash and Cash Equivalents

 

The Company accounts for cash and other highly liquid investments with original maturities of three months or less as cash and cash equivalents.

 

Depreciation and Amortization

 

Property and equipment are recorded at cost. Depreciation on equipment, furniture and fixtures and leasehold improvements is computed on the straight-line method over the estimated useful lives of such assets between 3-10 years, or lease term for leasehold improvements, if for a shorter period. Maintenance and repairs are charged to operations as incurred. Software costs are amortized using the straight line method and amortized over their estimated useful lives. Amortization begins when the related software is ready for its intended use in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software, Subsequent Measurement.

 

Advertising Costs

 

Advertising costs are charged to operations when incurred. Advertising expense was $4,000 and $1,500 for the three months ended March 31, 2017 and 2016, respectively.

 

Evaluation of Long Lived Assets

 

Long-lived assets are assessed for recoverability on an ongoing basis. In evaluating the fair value and future benefits of long-lived assets, their carrying value would be reduced by the excess, if any, of the long-lived asset over management’s estimate of the anticipated undiscounted future net cash flows of the related long-lived asset.

 

Any impairment of the Company’s internally-developed software is recognized and measured in accordance with the provisions of ASC 360-10-35, Intangibles-Goodwill and Other, Internal-Use Software, Subsequent Measurement, which requires that assets be grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The guidance is applicable, for example, when one of the following events or changes in circumstances occurs related to computer software being developed or currently in use indicating that the carrying amount may not be recoverable:

 

a.

Internal-use computer software is not expected to provide substantive service potential.

b.

A significant change occurs in the extent or manner in which the software is used or is expected to be used.

c.

A significant change is made or will be made to the software program.

d.

Costs of developing or modifying internal-use computer software significantly exceed the amount originally expected to develop or modify the software.

 

8

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

Fair Value Measurements

 

The Company adopted the provisions of ASC 820, Fair Value Measurements and Disclosures , which is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Under ASC 820, a framework was established for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Company accounted for certain convertible debentures issued in the year ended December 31, 2014 and the three months ended March 31, 2015 as derivative liabilities required to be bifurcated from the host contract in accordance with ASC 815-40, Contracts in Entity’s Own Equity , as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares (see Note 13).

 

Securities Issued for Services

 

The Company accounts for stock, stock options and stock warrants issued for services and compensation by employees under the fair value method. For non-employees, the fair market value of the Company’s stock on the date of stock issuance or option/grant is used. The Company has determined the fair market value of the warrants/options issued under the Black-Scholes Pricing Model. The Company has adopted the provisions of ASC 718, “Compensation – Stock Compensation”, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant).

 

Reclassification of Certain Securities Under ASC 815-15

 

Pursuant to ASC 815-15, “Contracts in Entity’s own Equity”, if a company has more than one contract subject to this Issue, and partial reclassification is required, there may be different methods that could be used to determine which contracts, or portions of contracts, should be reclassified. The Company's method for reclassification of such contracts is reclassification of contracts with the latest maturity date first.

 

Capitalization of Software /Website development costs

 

The Company capitalizes outside-contracted development work in accordance with the guidelines published under ASC 350-50, “Website Development Costs”. Under ASC 350-50, costs incurred during the planning stage are expensed, while costs relating to software used to operate a web site or for developing initial graphics should be accounted for under ASC 350-50, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use , unless a plan exists or is being developed to market the software externally. Under ASC 350-50, internal and external costs incurred to develop internal-use computer software during the application development stage should be capitalized. Costs to develop or obtain software that allows for access or conversion of old data by new systems should also be capitalized, excluding training costs.

 

Fees incurred for web site hosting, which involve the payment of a specified, periodic fee to an Internet service provider in return for hosting the web site on its server(s) connected to the Internet, are expensed over the period of benefit, and included in cost of sales in the accompanying financial statements.

 

A total of $0 and $0 was capitalized for web-site development work during the three months ended March 31, 2017 and 2016, respectively.

 

9

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

Income Taxes

 

The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expenses are expected to be settled in the Company’s income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset.

 

Net Loss Per Share

 

Net loss per share, in accordance with the provisions of ASC 260, “Earnings Per Share” is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period. Common Stock equivalents have not been included in this computation since the effect would be anti-dilutive. Such common stock equivalents totaled 220,002,714 common shares at March 31, 2017, comprised of 4,000,000 shares issuable upon exercise of stock purchase warrants, 3,500,000 shares issuable upon exercise of stock options, 729,537 shares exercisable upon conversion of convertible preferred shares, and 211,773,177 shares potentially issuable upon conversion of convertible debt. Such debt and the related accrued interest, is presently convertible at the option of five holders at a conversion price of 50% of the ten day trailing market price and one holder at a fixed conversion price of $0.001. The total principal due under these notes of $14,212,019 would yield in excess of 43 billion shares if fully converted, however, the respective notes, all of which were issued to these four investors, carry a stipulation whereby the number of all shares issued pursuant to a conversion, may in the aggregate not exceed a number that would increase the total share holdings beneficially owned by such investor to a level above 9.99%. At the end of the year, this clause limits any conversion to the aforementioned number of shares. All of the aforementioned conversions or exercises, as the case may be, are at the option of the holders.

 

Revenue Recognition

 

The Company’s revenue is derived from advertising on the Kiwibox.Com or, formerly, Kwick websites. Most contracts require the Company to deliver the customer impressions, click-throughs or new customers, or some combination thereof. Accordingly, advertising revenue is estimated and recognized for the period in which customer impressions, click through or new customers are delivered. Licensing or hosting revenue consists of an annual contract with clients to provide web-site hosting and assistance.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

10

 

 

2. GOING CONCERN

 

The ability of the Company to continue its operations is dependent on increasing sales and obtaining additional capital and financing. Our revenues during the foreseeable future are insufficient to finance our business and we are entirely dependent on the willingness of existing investors to continue supporting the Company with working capital loans and equity investments, and our ability to find new investors should the financial support from existing investors prove to be insufficient. If we were unable to obtain a steady flow of new debt or equity-based working capital we would be forced to cease operations. In their report for the fiscal year ended December 31, 2016, our auditors had expressed an opinion that, as a result of the above, there was substantial doubt regarding our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company were unable to continue as a going concern. Management has also concluded that due to the conditions described above, there is substantial doubt about the entity’s ability to continue as a going concern through May 22, 2018. We have evaluated the significance of the conditions in relation to our ability to meet our obligations and believe that our current cash balance and our operations will not provide sufficient capital to continue operations through 2017. Management’s plans are to continue seeking equity and debt capital until cash flow from operations cover funding needs. We cannot assure you that financing will be available on favorable terms or at all.

 

3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK

 

The Company maintains cash balances in a financial institution which is insured by the Federal Deposit Insurance Corporation up to $250,000. Balances in these accounts may, at times, exceed the federally insured limits. At March 31, 2017, cash balances in bank accounts did not exceed this limit. The Company provides credit in the normal course of business to customers located throughout the U.S. and overseas. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.

 

4. PREPAID EXPENSES

 

Prepaid expenses consist of the following at:

 

		March 31, 2017				December 31, 2016
Consulting fees		$	165,000			$	220,000
Business insurance			—				182
		$	165,000			$	220,182

 

5. PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following at:

 

		March 31, 2017				December 31, 2016
Furniture		$	15,040			$	15,040
Leasehold Improvements			24,130				24,130
Equipment			81,685				81,685
			120,855				120,855
Less accumulated depreciation			117,278				116,530
Total		$	3,577			$	4,325

 

Depreciation expense charged to operations was $748 and $450 in the first three months of 2017 and 2016, respectively.

 

6. INTANGIBLE ASSETS

 

Intangible assets consisted of software for website development costs as follows:

 

			December 31, 2016
Website development costs		$	254,264
Less accumulated amortization			254,264
Total		$	0

 

Amortization expense for the three months ended March 31, 2017 and 2016 was $0 and $0, respectively.

 

11

 

 

7. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY

 

On December 10, 2013, the company signed an equity purchase agreement with Marcus Winkler to sell to him eighty (80%) percent of the equity of its German subsidiary, Kwick. Pursuant to the terms of the agreement, the purchaser paid 36,000 Euros as the purchase price and the company was required to obtain shareholder approval of the sale as required under applicable Delaware Law. The majority shareholder approval was obtained on December 18, 2013. In addition, the Company and Mr. Winkler signed a Lock-Up and Standstill Agreement pursuant to the general terms of which the Company agreed not to participate in the management, operations or finances of Kwick, which shall be exclusively managed and under control of the purchaser. Accordingly, the Company’s minority ownership position shall be subject, in all respects, to the exclusive control of the purchaser. Mr. Winkler also has investment and voting control over Kreuzfeld Ltd., a major creditor of the company, which holds a Class AA convertible promissory note with an outstanding balance (including accrued interest) of $6,654,258 as of March 31, 2017. Mr. Winkler also personally holds a class AA convertible promissory note which was converted to a class A senior convertible revolving promissory note on November 25, 2016 with an outstanding balance (including accrued interest) of $311,765 on March 31, 2017. On June 22, 2015, a Class A Senior Revolving Promissory Note with a principal amount of $340,000 was assigned from Ulrich Schuerch to Mr. Winkler. On November 25, 2016 this note was converted to a class A senior convertible revolving promissory note (see Note 13).

 

On December 30, 2013 a total of 15% of the remaining 20% of the equity of Kwick was transferred to the Chief Executive Officer of Kwick (the “Kwick CEO”), in consideration for the Kwick CEO pledging to the bank 5,000 Euros as collateral, on behalf of Kiwibox, for bank overdrafts incurred by “Kwick’s” wholly-owned subsidiary Interscholz Beteiligungs GmbH, as general partner (managing partner) for Interscholz Internet Services GmbH & Co KG: as it is the duty of the general partner/managing partner to secure liquidity for the partnership. Since Kiwibox owned 20% of Kwick they were required, under German law, as managing partner of Interscholz Beteiligungs GmbH to secure liquidity for Interscholz Internet Services GmbH & Co KG. Therefore, 15% of Kiwibox’s 20% was given to the Kwick CEO in exchange for the CEO pledging the necessary collateral. In addition to the collateral given by the Kwick CEO, as new 15% shareholder of Kwick, the Kwick CEO also agreed to keep the Interscholz Beteiligungs GmbH business going. This transfer was unanimously approved with written consent of the Board of Directors. Since the fair value of Kiwibox’s interest in Kwick is zero, this transaction had no material impact on the financial statements.

 

Due to the significant reductions in fair value of this reporting unit that were considered other than temporary, and impairment of the related goodwill, the carrying value of this cost method investment was zero at December 31, 2016 and March 31, 2017.

 

8. ACCRUED EXPENSES

 

Accrued expenses consisted of the following at:

 

		March 31, 2017				December 31, 2016
Accrued interest		$	6,119,689			$	5,772,224
Accrued payroll, payroll taxes and commissions			24,145				25,586
Accrued professional fees			99,817				99,197
Accrued rent/deferred rent obligation			7,937				8,787
Miscellaneous accruals			23,935				23,935
Total		$	6,275,523			$	5,929,729

 

12

 

 

9. OBLIGATIONS TO BE SETTLED IN STOCK

 

Obligations to be settled in stock consisted of the following at:

 

		March 31, 2017				December 31, 2016
Obligation for warrants granted for compensation		$	100,000			$	100,000
600,000 common shares issuable to a consultant who was a director of the company, for services rendered.			36,000				36,000
1,500,000 (2017) and 1,200,000 (2016) common shares, and 2,900,000 (2017) and 2,900,000 (2016) stock options issuable to two officers of the Company pursuant to their respective employment Agreements			58,328				58,057
8,600,000 (2016) and 8,600,000 (2016) stock options issuable to one director who also serves as the Company’s general counsel			85,140				85,140
1,000,000 warrants granted in the Pixunity.de asset purchase			10,000				10,000
		$	289,468			$	289,198

  

10. LOANS PAYABLE

 

The Company (formerly Magnitude, Inc.) had borrowings under short term loan agreements with the following terms and conditions at March 31, 2017 and December 31, 2016:

 

On December 4, 1996, the company (formerly Magnitude, Inc.) repurchased 500,000 shares of its common stock and retired same against issuance of a promissory note maturing twelve months thereafter accruing interest at 5% per annum and due December 4, 1998. This note is overdue as of September 30, 2005 and no demand for payment has been made.		$	75,000
Total		$	75,000

 

13

 

 

11. NOTES PAYABLE

 

		March 31, 2017				December 31, 2016
Balance of non-converted notes outstanding. Attempts to locate the holder of this note, to settle this liability, have been unsuccessful.		$	25,000			$	25,000
From September 2008 through March 2017 seven creditors loaned the Company funds under the terms of the convertible notes issued, as modified in March 2009 and July 2010 and April 2011 and August 2012(see Note 13).On November 25, 2016, the Company issued a Class A Senior Convertible Revolving Promissory Note (“Class A Note”) to Marcus Winkler in the amount of $636,725 consolidating the series of loans (and related accrued interest) made to the company since February 2011 and including all advances made during the current year. On February, 27, 2017 a class AA Senior Secured Convertible Revolving Promissory Note with a principal amount of $1,130,398 was assigned from Cambridge Services, Inc to Tanja Greilinger. Each of these promissory notes is due on demand, and accrues interest at the rate of 10%, per annum. The conversion features applicable to the other creditors’ notes do not apply to Mr. Winkler’s notes as his notes have a fixed conversion price of $0.001.			14,212,019				14,017,019
Total		$	14,237,019			$	14,042,019

  

12. LONG-TERM DEBT

 

Long-term debt as of March 31, 2017 and December 31, 2016 is comprised of the following:

 

Discounted present value of a non-interest bearing $70,000 settlement with a former investor of Magnitude, Inc. to be paid in 24 equal monthly payments commencing July 1, 1997. The imputed interest rate used to discount the note is 8% per annum. This obligation is in default.		$	33,529
Total			33,529
Less current maturities			33,529
Long-term debt, net of current maturities		$	—

 

14

 

 

13. DERIVATIVE CONVERSION FEATURES  

 

On July 27, 2010, the Company issued two Class A Senior Convertible Revolving Promissory Notes (“Class A Notes”), one to Cambridge Services, Inc., in the principal amount of $683,996, consolidating the series of loans (and related accrued interest) made to the Company since June 26, 2009, and one to Discover Advisory Company, in the principal amount of $1,160,984, consolidating the series of loans (and related accrued interest) made to the Company since September 19, 2008 and including advances through September 30, 2010. On November 25, 2016, the Company issued a Class A Senior Convertible Revolving Promissory Note (“Class A Note”) to Marcus Winkler in the amount of $636,725 consolidating the series of loans (and related accrued interest) made to the company since February 2011 and including all advances made during the current year. Each of these promissory notes are due on demand, accrue interest at the rate of 10%, per annum. All promissory notes contain conversion caps, limiting conversions under these notes to a maximum beneficial ownership position of Company common stock to 9.99% for each lender. Each of these notes contains Company covenants, requiring the lenders’ prior written consent in order for the Company to merge, issue any common or preferred stock or any convertible debt instruments, declare a stock split or dividends, increase any compensation to its officers or directors by more than five (5%) during any calendar year. Each of the notes, with the exception of Mr. Winkler’s notes are convertible (including accrued interest) at the option of each lender into Common Stock of the Company at 50% of the averaged ten closing prices for the Company's Common Stock for the ten (10) trading days immediately preceding the Conversion Date but in no event less than $0.001 (the "Conversion Price"). The conversion feature applicable to the other creditors’ notes does not apply to Mr. Winkler’s notes as his notes have a fixed conversion price of $0.001. During the three months ended March 31, 2017 and March 31, 2016, there were no note conversions.

 

The Company renegotiated certain outstanding promissory notes with its four major creditors, Discover Advisory Company of the Bahamas (“DAC”), Kreuzfeld Ltd. of Switzerland (“Kreuzfeld”), Cambridge Services, Inc. of Panama (“CSI”) and Vermoegensverwaltungs-Gesellschaft Zurich LTD of Switzerland (“VGZ”). As of August 1, 2012, the Company authorized the issue of a new series of corporate notes, the Class AA Senior Secured Convertible Revolving Promissory Notes, dated as of August 1, 2012 (the New Note(s)”) and issued New Notes: (1) to DAC, with a maximum credit facility of $5,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated July 27, 2010, in the original principal amount of $1,080,984, now cancelled, which had an outstanding balance due (including accrued interest) of $6,860,911 as of December 31, 2016 and $7,113,698 at March 31, 2017; (2) to Kreuzfeld, with a maximum credit facility of $5,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated September 16, 2011, in the original principal amount of $2,000,000, now cancelled, which had an outstanding balance due (including accrued interest) of $6,475,261 at December 31, 2016 and $6,654,258 at March 31, 2017; (3) to CSI, with a maximum credit facility of $2,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated August 1, 2011, in the original principal amount of $1,303,996, now cancelled, with an outstanding balance due (including accrued interest) of $4,347,340 as of December 31, 2016; and $3,114,551 at March 31, 2017; On February, 27, 2017 a class AA Senior Secured Convertible Revolving Promissory Note with a principal amount of $1,130,398 was assigned from Cambridge Services, Inc to Tanja Greilinger which has an outstanding balance due (including accrued interest) of $1,308,734 at March 31, 2017 and; (4) to VGZ, with a maximum credit facility of $2,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated September 30, 2010, in the original principal amount of $2,000,000, now cancelled, with an outstanding balance due (including accrued interest) of $1,186,746 as of December 31, 2016 and $1,205,781 at March 31, 2017. The Company also converted a private loan and a demand note with Mr. Winkler into a Class AA Senior Convertible Revolving Promissory note, dated November 25, 2016, with an outstanding balance due (including accrued interest) of $852,961 as of December 31, 2016 and $868,661 at March 31, 2017. All of the New Notes accrue interest at the rate of 10%, are convertible into common shares at the conversion rate equal to 50% of the averaged ten closing prices for the Company's Common Stock for the ten (10) trading days immediately preceding the Conversion Date but in no event less than $0.001, and are due on demand. The above conversion feature does not apply to Mr. Winkler’s notes as his notes have a fixed conversion price of $0.001. Pursuant to an Equity and Stock Pledge Agreement, also negotiated and executed as of August 1, 2012, the repayment of the outstanding indebtedness of the New Notes is secured by all of the limited partnership interests of the Company’s partly-owned (now deconsolidated) German subsidiary, KWICK! Community GmbH & Co. KG, a private German limited partnership (“KG”), and all of its shares of the sole general partner of KG, KWICK! Community Beteiligungs GmbH.

 

15

 

 

13. DERIVATIVE CONVERSION FEATURES  (continued)

 

The Company accounted for the conversion features underlying these convertible debentures in accordance with ASC 815-40, Contract in Entity’s Own Equity , as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares. The Company determined the value of the derivate conversion features of new debentures issued to these holders plus accrued interest during the three months ended March 31, 2017 under these terms at the relevant commitment dates to be $542,670 utilizing a Black-Scholes valuation model. The change in fair value of the liability for the conversion feature resulted in income of $14,901 for the three months ended March 31, 2017, which is included in Other Income (Expense) in the accompanying financial statements. The fair value of these derivative conversion features was determined to be $19,417,264 at March 31, 2017.

 

14. COMMITMENTS AND CONTINGENCIES

 

We maintain offices for our operations at 330 W. 42th Street, New York, New York 10036, for approximately 990 square feet. This lease requires initial minimum monthly rentals of $3,833 plus tenants’ share of utility/cam/property tax charges which average approximately $291 per month. During 2013 the Company successfully negotiated a 5 year lease, with future minimum rentals as follows:

 

2017	38,202
2018	47,847

 

In May 2010 the Company negotiated a lease of an apartment in New York City for the CEO in order to reduce travel costs. In December 2013 the lease was extended through May 31, 2015 at a monthly rate of $2,943. In March of 2015 the lease was again extended to May 31, 2016 at the same terms. In April 2016 the lease was extended through May 31,2017 at a monthly rate of $3,154..

 

Our total rent expenses were $22,464 and $18,400 during the three months ended March 31, 2017 and 2016, respectively.

 

The Company is party to a consulting agreement with its Chief Executive Officer for monthly cash compensation of $18,333, or $220,000 per year. This agreement was extended through December 31, 2017. Payment for the period January 1, 2016 through December 31, 2016 was made on December 1, 2015 in accordance with the terms of this extended agreement. During 2016, the officer received $220,000 fees towards 2017 under terms of a consulting agreement; the agreement calls for the total payment of $220,000 to be payable in advance and as soon as practicable. There were no changes to the stock compensation portion of any earlier agreement.

 

In the three months ended March 31, 2017 and March 31, 2016 this officer was granted 300,000 shares.

 

16

 

 

15. RELATED PARTY TRANSACTIONS

 

During the three months ended March 31, 2017, the Company sold advertising space on its Kiwibox.com website to Kwick totaling $2,785, which is included in the $66,500 balance due from Kwick at March 31, 2017. Kwick is Majority-owned by Mr. Winkler, who in turn is a related party of the Company (see Note 7).

 

During the three months ended March 31, 2017 and 2016 one outside director of the Company who also serves as the Company’s general and securities counsel, was paid an aggregate $1,997 and $15,375 respectively, for legal services.

 

The director also received 0 common stock options during the three month period ending March 31, 2017 as this outside director is no longer a director of the company effective July 31, 2016 and, as part of his resignation as director, he cancelled his rights to continue to receive options effective June 1, 2016. The director received 300,000 common stock options during the three month period ending March 31, 2016, valued at $2,970. This resignation was not prompted by any disagreement with the company with regard to any of its policies, operations or practices.

 

During the three months ended March 31, 2017 and 2016 we incurred aggregate expenses of $108,751   and $117,445, respectively, to companies controlled by the Chief Executive Officer, for website hosting, website development and technical advisory services, server farm installations and IT equipment purchases. The officer also earned 100,000 common shares per month during the three months ended March 31, 2017 and 2016 under a consulting agreement, valued at $270 and $300 respectively. The officer also received $220,000 during 2016 for prepaid consulting fees toward 2017 under the terms of a consulting agreement.

 

Through March 31, 2017, approximately 10% of the voting stock was beneficially held by Discovery Advisory Company, located in the Bahamas, and Cambridge Services Inc., Kreuzfeld, LTD,Vermoegensverwaltungs-Gesellschaft Zurich LTD. (VGZ) of Switzerland, Mr. Winkler, and Tanja Greilinger. Discovery Advisory Company, Cambridge Services Inc., Kreuzfeld, LTD, VGZ, Mr. Winkler, and Tanja Greilinger are major creditors, having advanced operating capital against issuance by the Company of convertible promissory notes during 2017 and 2016.

 

During the three months ended March 31, 2017, Kreuzfeld, LTD and Discovery Advisory Company advanced an additional $65,000 and $130,000 respectively. At March 31, 2017, $5,056,722 and $1,949,622 of such notes were outstanding and owed to Discovery Advisory Company and Cambridge Services Inc, respectively and $4,666,554, $771,958, $636,725 and $1,130,398 owed to Kreuzfeld, Ltd., VGZ , Mr. Winkler and, Tanja Greilinger respectively.

 

16. FAIR VALUE

 

Some of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, receivables and payables.

 

Effective July 1, 2009, the Company adopted ASC 820, Fair Value Measurements and Disclosures . This topic defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance supersedes all other accounting pronouncements that require or permit fair value measurements. The Company accounted for the conversion features underlying certain convertible debentures in accordance with ASC 815-40, Contracts in Entity’s Own Equity , as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares.

 

Effective July 1, 2009, the Company adopted ASC 820-10-55-23A, Scope Application to Certain Non-Financial Assets and Certain Non-Financial Liabilities , delaying application for non-financial assets and non-financial liabilities as permitted. ASC 820 establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

 

Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange- traded securities and exchange-based derivatives.  

 

17

 

 

16 FAIR VALUE (Continued)

  

Level 2 — inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges.

 

Level 3 — unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently- traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models. The company values the conversion liabilities using the Black- Scholes model and the assumptions are updated using independent data such as the risk free rate, volatility and expected life for each valuation date based on changes over time.

 

For the three months ending March 31, 2017 and 2016, the fair value of the embedded conversion liabilities was determined using the Black-Scholes model calculating fair value based on the conversion discount as well as the term and short-term bond rate. During the three months ending March 31, 2017 the following assumptions were used: (1) conversion discounts of 50%; (2) a look back period of 10 days (3) bond rates of 0.46% to 0.75% and (4) volatility range of 75% to 177%.

 

Fluctuation in value is largely based on the change in the daily share price accompanied by the conversion discount. The change in volatility has the greater affect on the conversion liability during each reporting period, as higher volatility levels will yield larger values.

  

The following table reconciles, for the three months ended March 31, 2017, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements:

 

Conversion Liability at January 1, 2017			18,889,495
Value of beneficial conversion features of new debentures			542,670
Change in value of beneficial conversion features during period			(14,901	)
Conversion Liability at March 31, 2017		$	19,417,264

 

The fair value of the conversion features are calculated at the time of issuance and the Company records a conversion liability for the calculated value. The Company recognizes interest expense for the recognition of the conversion liability.

 

17. SUBSEQUENT EVENTS

 

During April 2017 and through May 16, 2017 we received $60,000 of working capital from accredited investors, which are covered by convertible promissory notes.

 

On May 16, 2017 Andre Scholz, the company’s President, CEO and CFO passed away. The interim President CEO and CFO is Michael Zaroff effective as of May 18, 2017.

 

18. RECENTLY ISSUED AND NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to the first quarter of 2018 to provide companies sufficient time to implement the standards. Early adoption will be permitted, but not before the first quarter of 2017. Adoption can occur using one of two prescribed transition methods. In March and April 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” which provide supplemental adoption guidance and clarification to ASC 2014-09. ASU 2016-08 and ASU 2016-10 must be adopted concurrently with the adoption of ASU 2014-09. The Company has evaluated the impact of these new standards and feels that this will not have a material impact.

 

In June 2014, FASB issued Accounting Standards Update (ASU) No. 2014-12 Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. A performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition under Accounting Standards Codification (ASC) 718, Compensation - Stock Compensation. As a result, the target is not reflected in the estimation of the award’s grant date fair value. Compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved. The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted. The Company adopted the provisions of this standard, but it did not have a material effect on its results of operations.

 

18

 

 

On August 2014, FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concerns (Subtopic 205-40): Disclosures of Uncertainties about an Entity’s Ability to continue as a Going Concern. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This was adopted by the company for the current period and the period ending December 31,2016. The adoption of ASU 2014-15 does not have a material impact on our financial position or results of operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company were unable to continue as a going concern.

 

In April 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the license consistent with its accounting of other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. This ASU is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those years. The Company adopted the provisions of this standard, but it did not have a material effect on its results of operations.

 

During February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). The standard requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of the new standard.

 

In March 2016, FASB issued ASU No. 2016-09, “Improvements to Employee Share-based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the standard and the impact on its consolidated financial statements and footnote disclosures .

 

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments – a consensus of the FASB Emerging Issues Task Force , (“ASU 2016-15”). The purpose of ASU 2016-15 is to reduce the diversity in practice regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. A retrospective transition method should be used in the application of the amendments within ASU 2016-15. If retrospective application is considered impracticable, retrospective application may be used as of the earliest date practicable. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2016-15 on its condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, or ASU No. 2015-03. The amendments of ASU No. 2015-03 were issued to reduce complexity in the balance sheet presentation of debt issuance costs. ASU No. 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this standard. Additionally, in August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, or ASU No. 2015-15, as ASU No. 2015-03 did not specifically address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU No. 2015-15 allows an entity to continue to defer and present debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance in ASU No. 2015-03 and ASU No. 2015-15 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted this standard for the current period and the year ended December 31, 2016, which did not have a material effect on the Company’s consolidated financial statements.

 

We have reviewed all FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.

 

Management does not believe there would have been a material effect on the accompanying consolidated financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period.

 

19

 

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934

 

The information in this annual report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their businesses so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than those statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

 

The following discussion and analysis should be read in conjunction with the consolidated financial statements of Kiwibox.Com, Inc., contained herein and in the Company’s annual report for the year ended December 31, 2016 as filed on Form 10-K. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

 

Description of Business

 

Overview

 

On December 31, 2009 Magnitude Information Systems, Inc. changed its name to Kiwibox.Com, Inc.

 

We own and operate “Kiwibox.com”, a social networking website. Initially launched in 1999, Kiwibox.com is a social network.

 

Kiwibox Operations

 

Kiwibox.com is a social network for young adults all around the world for web and mobile usage, a community to find new friends and to meet new people online and in the real world. Unlike traditional social networking sites such as Facebook, Kiwibox combines its own "magazine" content and social networking technology in its website, creating attractive topics for its membership to peruse and enjoy.

 

Our operating expenses, not including stock-based compensation, are at a level of approximately $78,000 per month. (see sections “Loans and Notes Payable”).

 

Potential Revenue Streams and Marketing Strategy

 

Currently we generate all of our revenue from advertising/sponsorships. We anticipate revenue growth from increased membership activity and our revitalized website as we continue to implement new marketing strategies. Our software and networking technologies that we incorporated during the last 5 years now permit our mobile devices to accept and receive direct advertising. Our social networks permit us to work with potential advertisers to identify the right member groups for direct target advertising, a marketing channel that is readily accessible to our social media community.

 

Our continuing membership growth is fueled by infiltrating our users into local event venues where they participate and simultaneously communicate with our social network via the regular deployment of our cutting-edge App updates. As a result, the Kiwibox network enjoys continuing user sign-ups and continuing loyalty of users to our social network.

 

Community means social network – and thrives on membership networking. Our website is based on the latest web technology which makes it easier for users to stay connected and to interact with each other.

 

20

 

 

The results of our year-long marketing efforts clearly show the following positive trends in the growth of our community at March 31, 2017:

 

•

Active Members – Our Kiwibox.com website has 5.03 Million Active Members as of March 31, 2017, an increase of approximately 1.47 % over the fourth quarter, 2016. Active users are those which have logged in to Kiwibox.com during the last 90 days.

 

•

Unique Visitors – For the quarter ended March 31, 2017, we had 7.74 Million Unique Visitors to our Kiwibox.com website, an increase of approximately .52% over the fourth quarter 2016 results. Unique Visitors refers to the number of distinct individuals requesting pages from our Kiwibox.com website during a specific period, regardless of how often they visit. Visits refer to the number of times our Kiwibox.com website is visited, no matter how many visitors make up those visits.

 

•

Page Impressions – We had 211.9 Million Page Impressions during the first quarter of 2017, a decrease of approximately 3.81 % over the fourth quarter 2016. Generally, Page Views refer to a number of pages which are viewed or clicked on our Kiwibox.com website during the quarter.

 

•

Guestbook Entries – For the quarter ended March 31, 2017, Kiwibox.com had 168.9 Million Guestbook Entries, an increase of approximately 1.9% from the fourth quarter 2016. A Guestbook is a logging system that permits visitors to our Kiwibox.com website to leave a public comment.

 

•

Blog Entries – Our Kiwibox.com website members and visitors entered 121.0 Million Blog Entries during the first quarter of 2017, an approximate 3.6% increase over the fourth quarter 2016. A Blog Entry is a message entered in our Kiwibox.com.

 

•

Unique Mobile Visitors – For the quarter ended March 31, 2017 Kiwibox.com had 1.26 million Unique Mobile Visitors, an increase of approximately 24.75% over the fourth quarter 2016.

 

Market Position

 

Our social media’s market penetration continues to rely upon our innovations where we strive to enhance our member’s experiences with our community. Our members enjoy our interactive platforms where we blog, play games, chat and share pictures.

 

The Kiwibox Network is in a unique position because it combines the excitement of a dating community with the benefits and accessibility of a real social network. The Kiwibox Group encourages members to explore local events in their area, connect with other members and enjoy the additional member exclusive benefits the social network is offering, such as games, blogging, chatting, picture-sharing and online-flirting. This community behavior binds users to the platform and is the base for our viral marketing.

 

Market Position-What’s New

 

Kiwibox is using its growing community to establish its brand throughout social media outlets. We continue to expand our membership and community events, highlighting our active presence in the marketplace.

 

Kiwibox attracts more young adventurers who seek friendship and community involvement every day.

 

Safety

 

Kiwibox.com has developed an effective monitoring model which assists in maintaining a safe site for our member base, combining both technology based systems and user moderation. Users communicate and share information in an environment where they feel both secure and at ease. Members of the Kiwibox team monitor forums and groups daily to ensure the content is appropriate.

 

In addition to our monitoring system, the Kiwibox.com platform is equipped with advanced technology safety features. This includes the private sphere configuration of users, contact blocs for larger age differentials, anti-spam protection and intelligent self-learning user-scoring feature. In addition to this, Kiwibox.com has implemented state of the art security features such as former Attorney General Andrew M. Cuomo’s hash value database in order to block images of illegal sexual content. With the combination of human moderation and advanced technology, users are afforded a safe and secure site.

 

Safety-What’s New

 

Content analysis and security:

 

We have integrated our own new content detection system which analyses content for real/fake contents. This has reduced the page impressions; but high quality content is more important for us. Our spamming mechanism has been extremely modified to give our users a security protection. We integrated new teen own developed protection mechanism and our whole content and customer connections are now server based encrypted.

 

21

 

Competition

 

Our primary competitors are other online social networks, including Facebook, Instagram, Tinder and Tumbler. Facebook is widely considered as the industry leaders; however, recent statistics and strategic announcements have indicated a shift in the target audience from teens and college students to a much broader and more adult demographic, because of their international focus. We plan to distinguish ourselves by targeting the US-market and by combining the social-network advantages with user generated content – from users to users, while stressing the community feeling.

 

Technology Development

 

The Company attaches great importance to its innovative technology developments and continues to follow the top social network market leaders with technology upgrades, providing its users with an alternative social networking opportunity.

 

The Kiwibox Network is focusing on the fast growing mobile usage phenomenon, being online with friends’ all the time and everywhere. At present, more than 960,000 company Apps are installed worldwide.

 

During the third quarter of 2016 we focused further on mobile development and released an additional Mobile App for the Android 6 and 7 Platform- the Kiwibox Go! App.

 

New Kiwibox “Meet and Date” App

 

In addition to our free platform, Kiwibox introduced, and is to release; a membership based flirting/dating platform in the next few months. This development is now in its last steps. We are also integrating useful features for our users, like a regional based database for jobs and apartments.

 

Intellectual Property

 

The Kiwibox.com web and mobile software and other related intellectual property rights are important assets. Most of our software is unique and individual and developed internally.

 

Governmental Regulations

 

Our Kiwibox website operations are subject to state, federal and international laws, rules and regulations that cover on-line business, privacy policies, consumer protection and product marketing. The Kiwibox website business is subject to state, federal and international laws, rules and regulations applicable to online commerce, including user privacy policies, product pricing policies, website content and general consumer protection laws.  Various laws, rules and regulations have been adopted, and probably will be adopted in the future, that apply to the Internet, including available online content, privacy concerns, online marketing, “spam” and unsolicited commercial email, taxation issues, and regulations that effect and monitor the quality of products and services.  

 

A portion of these laws, rules and regulations that concern the Internet and its uses have been only recently adopted. Courts and administrative agencies have not yet fully interpreted these legal requirements as to their application and scope. Accordingly, our Kiwibox website business is subject to the uncertainties of future interpretations and application of these legal requirements. The application and interpretation of these legal requirements or the passage of new and/or revised laws, rules and regulations could reduce the demand for Kiwibox website services, increase its operational costs, and expose it to potential liability. Any such events could have a material adverse effect upon our Kiwibox website business and financial condition. Our failure, or that of our business partners, to accurately predict and anticipate the interpretation or application of these laws, rules and regulations, whether now in force or adopted in the future, could have a detrimental impact on our operations, create negative publicity for us and expose us to potential liability.

 

22

 

 

State and federal agencies are applying consumer protection laws to regulate the on-line use, collection and dissemination of personal information and website content. These laws require us to implement programs to notify our website users of our privacy and security programs. Consumer protection laws will require us to obtain the consent of our website users if we want to collect and use certain portions of their personal information.

 

The Federal Trade Commission (“FTC”) is the lead federal agency monitoring Internet websites and their content. State attorneys general have become active monitors of the Internet at the local State level. These governmental bodies may investigate or bring enforcement actions against website operators they deem in violation of applicable consumer protection laws. We believe that our Kiwibox website’s collection and dissemination of information programs, including our privacy policies, do and will continue to comply with existing laws. However, a decision by a federal or state agency that any of our Kiwibox website’s business practices do not meet applicable legal standards could result in liability and have a material adverse effect on our business and financial condition.

 

Employees

 

Currently, we have 2 employees.

 

Results of Operations for the Three Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2016

 

Our website presence is not yet supported by a volume of active members-users that would provide a basis for significant growth in advertising revenue. For the quarter ended March 31, 2017, total revenues amounted to $2,785 compared to $2,337 recorded in the first quarter in 2016 All revenue was received from our affiliate company Kwick.

 

Gross profit (loss) for the quarter ended March 31, 2017 amounted to $(1,865) as compared to $687 for the corresponding interim period in 2016.

 

After deducting selling and general and administrative expenses of $233,162 for the first quarter ended March 31, 2017 compared to $311,587 recorded in the same period in 2016, the Company realized an operating loss of $235,027 for the first quarter of 2017 as compared to an operating loss of $310,900 for the same period in 2016. These operating expenses went down primarily due to two reasons. Two major investors have not committed to future financing and the other investors have given the order to reduce costs by 5-10% on the employee side. Therefore some of the growing services (support) were outsourced. Receiving less money had the effect of not being able to spend more. Additionally, the hardware costs became cheaper by merging pixunity into Kiwibox and optimizing hardware. Based on newer technology, more features could be used with less hardware and therefore the associated management costs and development costs decreased. For the year 2017 management expects operating expenses to remain steady and an expected increase in revenues due to new mobile advertising, this will start a process of putting the company on a path towards eventually eliminating the erosion of shareholder value.

 

The quarter concluded with a net loss of $1,110,261. After accounting for dividends accrued on outstanding preferred stock, which totaled $12,816, the net loss applicable to common shareholders was $1,123,077 or $0.002 per share compared to a net loss applicable to common shareholders of $1,268,552 or $0.002 per share for the first quarter in the previous year.

 

Liquidity and Capital Resources

 

We have financed our business with new debt since our cash flow is insufficient to provide the working capital necessary to fund our operations. We received $195,000 in cash from short-term loans from accredited private investors during the quarter. We have an ongoing and urgent need for working capital to fund our operations. If we are unable to continue to receive new equity investments or obtain loans, we will not be able to fund our operations and we will be required to close our business.

 

Our deficit in working capital amounted to $41,306,364 at March 31, 2017, as compared to $40,184,035 at December 31, 2016. Stockholders’ equity showed an impairment of $41,290,780 at the end of the period, compared to an impairment of $40,167,703 at the beginning of the year. The negative cash flow from operations during the three months totaled $182,415 and was financed by new debt.

 

The Company has $0 of bank debt as of March 31, 2017. Aside from trade payables and accruals, our remaining indebtedness at March 31, 2017 consisted of certain notes and loans aggregating $14,345,548 and the following obligations. Amounts due to related parties were $85,371. The liabilities from derivative conversion features were $19,417,264. The position “Obligations to be settled in stock” of $289,468 accounts for common shares due under consulting agreements, and for services to be settled in common stock options and warrants, where the underlying securities had not yet been issued. Current liabilities also include $850,998 accrued unpaid dividends on outstanding preferred stock. Such dividends will be paid only if and when capital surplus and cash-flow from operations are sufficient to cover the outstanding amounts without thereby unduly impacting the Company’s ability to continue operating and growing its business.

 

Our current cash reserves and net cash flow from operations expected during the near future will be insufficient to fund our operations and website development and marketing plan over the next twelve months. We expect to fund these requirements with further investments in form of debt or equity capital and are in ongoing discussions with existing investors to secure funding. There can be no assurance, however, that we will be able to secure needed financing in the future and identify a financing source or sources, and if we do, whether the terms of such financing will be acceptable or commercially reasonable.

 

Absent the receipt of needed equity investment or loans, we will be compelled to severely curtail operations and possibly, close our business operations. Absent the receipt of sufficient funds, our website development, results of operations and financial condition could be subject to material adverse consequences . There can be no assurance that we will find alternative funding for the working capital required to finance on-going operations.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

A smaller reporting company is not required to provide the information required by this Item.

 

Item 4T. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures.

 

The Company’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the fiscal period ended March 31, 2017 covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.

 

As of March 31, 2017, management assessed, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework for effective internal control over financial reporting established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments.  Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective as more fully described below.  Based on management’s assessment over financial reporting, management believes as of March 31, 2017, the Company’s internal control over financial reporting was not effective due to the following deficiencies:

 

1. The Company’s control environment did not have adequate segregation of duties and lacked adequate accounting resources to address non routine and complex transactions and financial reporting matters on a timely basis.

 

The Company had only a part time chief financial officer performing all accounting related duties on site, presenting the risk that the reporting of these non routine and complex transactions during the preparation of our future financial statements and disclosures may not be accomplished in a timely manner. Additionally in September 2012 the Company hired a comptroller to assist the Chief Financial Officer. Effective May 31, 2015 the chief financial officer resigned and the CEO Andre Scholz took over the position as chief financial officer while comptroller that was assisting the previous part time chief financial officer assumed the day to day transactional activity.

 

Company management believes that notwithstanding the above identified deficiencies that constitute our material weakness, that the financial statements fairly present, in all material respects, the Company’s consolidated balance sheets as of March 31, 2017 and December 31, 2016 and the related statements of operations, and cash flows for the three months ended March 31, 2017 and 2016, in conformity with generally accepted accounting principles.

 

24

 

 

Remediation of Material Weaknesses in Internal Control over Financial Reporting

 

The Company commenced efforts to address the material weakness in its internal control over financial reporting and its control environment through the following actions:

 

-

We will continue to seek qualified fulltime or part-time employees and third party consultants to supplement our financial personnel when and if additional resources become available;

 

-

We will continue to institute a more stringent approval process for financial transactions, and

  

-

We will continue to perform additional procedures and analysis for significant transactions as a mitigating control in the control environment due to segregation of duties issues.

 

Changes in Internal Controls over Financial Reporting

 

Other than as stated above, during the quarter ended March 31, 2017, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

25

 

 

PART II - OTHER INFORMATION

 

Item 1. LEGAL PROCEEDING S

 

At the time of this report, the Company is not a party in any pending material legal proceedings.

 

Item 1A. RISK FACTORS

 

A smaller reporting company is not required to provide the information required by this Item.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

a) Issuance of unregistered securities

 

During the first quarter in 2017 the Company did not sell any unregistered securities.

 

(b) Not applicable

 

(c) None

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

The Company, as of the date of this filing, is in arrears on the payment of certain dividends on its Series A, C, and D Senior Convertible Preferred Stock. Such arrears total approximately $850,998. These dividends have been accrued, however, the Company’s management has refrained from making payments at this time because of the absence of positive equity and/or surplus funds.

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None

 

Item 5. OTHER INFORMATION

 

None

 

26

 

 

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Exhibits

 

31.01		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 15, 2013.
31.02		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 16, 2013.
32.01		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 16, 2013.

 

(b) Reports on Form 8-K:

 

On May 2, 2017, the company filed a report on 8K disclosing first quarter 2017 operational highlights.

 

27

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

 

		Kiwibox.Com, Inx.
Date: May 22, 2017	By:	/s/ Michael Zaroff
		Interim Chief Financial Officer
		(Interim Principal Financial Officer and Principal Accounting Officer)

 

28