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EX-31.02 - EXHIBIT 31.02 - Kiwibox.Com, Inc.v231593_ex31-02.htm
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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For Quarter Ended June 30, 2011

OR

o 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
(IRS Employer
Incorporation or Organization)
Identification No.)

330 West 38 St. Suite 1602 New York, NY 10018
(212) 239-8210
(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 x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated filer  ¨     Accelerated filer  ¨     Non-accelerated filer  ¨     Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):
Yes ¨    No x

The number of shares of Registrant’s Common Stock, $0.0001 par value, outstanding as of August 10, 2011, was 498,243,060 shares.

 
 

 
 
KIWIBOX.COM, INC.

INDEX
 
     
Page
 
     
Number
 
PART 1 – FINANCIAL INFORMATION      
         
Item 1
Financial Statements
     
         
 
Condensed Balance Sheets
     
 
- June 30, 2011 (unaudited) and December 31, 2010
    4  
           
 
Condensed Statements of Operations
       
 
- Three and six months ended June 30, 2011 and 2010 (unaudited)
    5  
           
 
Condensed Statements of Cash Flows
       
 
- Six months ended June 30, 2011 and 2010 (unaudited)
    6 – 7  
           
 
Notes to Condensed Financial Statements
    8 – 17  
           
Item 2
Management’s Discussion and Analysis of Financial Condition
       
 
and Results of Operations
    18 – 19  
           
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    20  
           
Item 4
Controls and Procedures
    20  
           
PART II – OTHER INFORMATION
    21 – 22  
           
Item 1.
Legal Proceedings
 
21
 
           
Item 1A.
Risk Factors
 
21
 
           
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    21  
           
Item 3.
Defaults Upon Senior Securities
 
21
 
           
Item 4T. Submission of Matters to a Vote of Security Holders
 
21
 
           
Item 5. Other information
 
21
 
           
Item 6.
Exhibits
 
22
 
           
SIGNATURES
    23  
 
 
2

 
 
 
logo_rosenberg
Rosenberg Rich Baker Berman & Company
A Professional Association of Certified Public Accountants
265 Davidson Avenue, Suite 210, Somerset, NJ 08873-4120
P: 908-231-1000 F: 908-231-6894 www.rrbb.com
   
Carl S. Schwartz, CPA*
David N. Roth, CPA
Steven J. Truppo, CPA
Leonard M. Friedman, CPA
Gary A. Sherman, CPA
Robert S. Quick, CPA
Pamela Bezner Ali, CPA
Marsha L. Baldinger, CPA
Howard B. Condo, CPA

Alvin P. Levine, CPA
Daniel M. Brooks, CPA

 Accredited in Business Valuation
 Certified Business Appraiser
Certified Financial Planner
* Registered Investment Adviser


Other Office:

111 Dunnell Road, Suite 100
Maplewood, NJ 07040
973-763-6363
973-763-4430 FAX
Report of Independent Registered Public Accounting Firm

To the Board of Directors of
Kiwibox.com, Inc.

We have reviewed the accompanying financial statements of Kiwibox.com, Inc. as of June 30, 2011, and for the three and six-month periods ended June 30, 2011 and 2010. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2 to the financial statements, the Company has suffered losses from operations and has a working capital deficiency as of June 30, 2011. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

sig_rosenberg
 
Somerset, New Jersey
August 9, 2011
   
   
   
   
   
   
 
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS CENTER FOR AUDIT QUALITY PRIVATE COMPANIES PRACTICE SECTION POLARIS INTERNATIONAL REGISTERED WITH THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
 
 
3

 
 
PART I  – Item 1   Financial Statements

KIWIBOX.COM, INC.
CONDENSED BALANCE SHEETS
 
   
June 30,
 2011
   
December 31,
 2010
 
   
(Unaudited)
       
Assets
           
Current Assets
           
Cash
  $ 69,082     $ 377  
Accounts receivable, net of allowance for doubtful accounts of $0
    120       295  
Prepaid expenses and other current assets
    20,000       34,441  
Total Current Assets
    89,202       35,113  
Property and equipment, net of accumulated depreciation of $90,991 and $88,505
    11,760       15,323  
Website development costs, net of accumulated amortization of $75,225 and $32,864
    87,381       106,244  
Other assets
    40,756       9,756  
Total Assets
    229,099       166,436  
                 
Liabilities and Stockholders’ Equity (Impairment)
               
                 
Current Liabilities
               
Accounts payable and accrued expenses
    618,395       535,877  
Obligations to be settled in stock
    231,588       183,648  
Dividends payable
    556,234       530,602  
Loans and notes payable – other
    140,000       140,000  
Loans and notes payable – related parties
    340,000       240,000  
Convertible notes payable-related parties
    2,384,980       1,894,980  
Current maturities of long-term debt
    33,529       33,529  
Liability for derivative conversion feature –related parties
    2,600,621       2,622,408  
Total Current Liabilities
    6,905,347       6,181,044  
                 
Commitments and Contingencies
    -       -  
                 
Stockholders’ Equity (Impairment)
               
Preferred Stock, $0.001 par value, non-voting, 3,000,000 shares authorized; 85,890 and 85,890 shares issued and outstanding
    86       86  
Common Stock, $0.0001 par value, 1,400,000,000 shares authorized; issued and outstanding 498,243,060 and 498,243,060 shares
    49,824       49,824  
Additional paid-in capital
    45,571,867       45,571,867  
Accumulated deficit
    (52,298,025 )     (51,636,385 )
                 
Total Stockholders’ Equity (Impairment)
    (6,676,248 )     (6,014,608 )
                 
Total Liabilities and Equity (Impairment)
  $ 229,099     $ 166,436  
 
The accompanying notes are an integral part of the financial statements.
 
 
4

 

KIWIBOX.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Total Revenues
  $ 349       670     $ 772     $ 1,403  
                                 
Cost of Goods Sold
    1,120       785       1,855       785  
                                 
Gross Profit (Loss)
    (771 )     (115 )     (1,083 )     618  
                                 
Selling expenses
    56,772       47,063       120,126       72,194  
General and administrative expenses
    199,016       268,995       410,634       509,923  
                                 
Loss from Operations
    (256,559 )     (316,173 )     (531,843 )     (581,499 )
                                 
Other Income (Expense)
                               
Miscellaneous income
    -       11,377       -       11,377  
Misc. non-operating expenses
    (1,205 )     (3,346 )     (1,205 )     (6,531 )
Foreign currency transaction loss
    (586 )     (5,585 )     (586 )     (5,585 )
Change in fair value – derivative liability
    730,217       -       720,569       -  
Interest expense-derivative conversion
    (355,135 )     -       (698,783 )     -  
Gain on disposition of assets
    -       -       -       2,285  
Interest expense
    (67,543 )     (39,758 )     (124,161 )     (68,894 )
Total Other Income (Expense)
    305,749       (37,312 )     (104,166 )     (67,348 )
                                 
Loss from Operations before Provision for Income Taxes
    49,189       (353,485 )     (636,009 )     (648,847 )
                                 
Provision for income taxes
    -       -       -       -  
                                 
Net Income (Loss)
  $ 49,189     $ (353,485 )   $ (636,009 )   $ (648,847 )
                                 
Dividends on Preferred Stock
    (12,816 )     (12,815 )     (25,631 )     (25,631 )
                                 
Net Income (Loss) applicable to Common Shareholders
  $ 36,373     $ (366,300 )   $ (661,640 )   $ (674,478 )
                                 
Earnings (Loss) per Common Share
  $ 0.000     $ ( 0.001 )   $ (0.001 )   $ (0.001 )
                                 
Weighted Average Number of Common Shares Outstanding
    498,243,060       497,743,060       498,243,060       494,544,563  

The accompanying notes are an integral part of the consolidated financial statements.
 
 
5

 
 
KIWIBOX.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Six Months Ended
 
   
June 30,
 
   
2011
   
2010
 
Cash Flows from Operating Activities
           
Net Loss
  $ (636,009 )   $ (648,847 )
Adjustments to Reconcile Net Loss to Net Cash Used by Operations
               
Depreciation and amortization
    46,718       12,807  
Gain on disposal of assets
    -       (2,285 )
Intrinsic value of beneficial conversion rights
    (21,785 )     -  
Decreases (Increases) in Assets
               
Accounts receivable
    175       2,000  
Prepaid expenses
    14,440       13,388  
Increases (decreases) in Liabilities
               
Liabilities to be settled in stock
    37,940       49,826  
Accounts payable and accrued expenses
    82,518       48,989  
Net Cash Used by Operating Activities
    (476,003 )     (524,122 )
                 
Cash Flows from Investing Activities
               
Proceeds from sale of assets
    -       4,520  
Cash outlay – website development costs
    (23,298 )     (58,987 )
Cash outlay – other assets
    (21,000 )     (2,955 )
Purchases of property and equipment
    (794 )     (10,105 )
Net Cash Used by Investing Activities
    (45,292 )     (67,527 )
                 
Cash Flows from Financing Activities
               
Proceeds from loans and notes
    590,000       470,000  
Proceeds from stock subscriptions receivable
    -       125,000  
Net Cash Provided by Financing Activities
    590,000       575,000  
                 
Net Increase in Cash
    68,705       3,351  
Cash at Beginning of Period
    377       2,518  
Cash at End of Period
  $ 69,082     $ 5,869  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
                 
Interest Paid
    4,001        
 
The accompanying notes are an integral part of the financial statements.
 
 
6

 
 
KIWIBOX.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

NON-CASH INVESTING AND FINANCING ACTIVITIES:
     
       
Six Months Ended June 30, 2011
     
       
Warrants granted in acquisition of other assets
     
       
Six Months Ended June 30, 2010
     
       
Cashless exercise of warrants
  $ 1,312  
         
Settlement of obligations with common stock and common stock options
  $ 29,000  
 
 
7

 

Kiwibox.Com, Inc.
Notes to Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

Prior to the implementation of its strategic business plan in 2007, the Company’s primary product was an integrated suite of proprietary software modules previously marketed under the name ErgoEnterprise™. During the latter half of fiscal year 2006, Company management concluded that the marketplace for the Company’s ergonomic software products was not developing, and would not develop to the material extent necessary in the next 12 to 24 months, to support and sustain the Company’s sales efforts. Accordingly, management determined that it would be in the best interests of the Company and its shareholders to identify another business opportunity and pursue it for the benefit of our shareholders. On February 19, 2007, the Company, pursuant to its strategic plan to seek another business opportunity, signed an Agreement and Plan of Reorganization with the owners of a social networking website, to acquire their Kiwibox.com website and business, represented by Kiwibox Media, Inc. Pursuant to that certain Agreement and Plan of Reorganization, in August, 2007, Kiwibox Media, Inc. merged with and into Magnitude Operations, Inc., a wholly owned subsidiary of Magnitude Information Systems, Inc., in a “reverse merger” transaction. The three shareholders of Kiwibox Media, Inc. transferred and delivered all of the outstanding stock of Kiwibox Media, Inc. to Magnitude Operations, Inc. for cancellation and received in exchange shares of Magnitude Information Systems, Inc. at closing. Also at closing and as a result of the merger, the separate legal existence of Magnitude Operations, Inc. ceased and Kiwibox Media, Inc. became the surviving corporation of the merger and a wholly owned subsidiary of Magnitude Information Systems, Inc.

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.

 
8

 

Kiwibox.Com, Inc.
Notes to Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

       Advertising Costs
 
Advertising costs are charged to operations when incurred. Advertising expense was $2,010 and $6,274 for the three and six months ended June 30, 2011 and $1,347 and $1,760 for 2010, 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.

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, 2010 and the  six  months ended June 30, 2011 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 12).

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.

 
9

 
 
Kiwibox.Com, Inc.
Notes to Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
 
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 $23,498 and $58,987 was capitalized for web-site development work during the six months ended June 30, 2011 and 2010, respectively. During 2010, software costs of $11,880 were determined to be impaired and were written off during the year then ended.

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 income (loss) per share, in accordance with the provisions of ASC 260, “Earnings Per Share” is computed by dividing net income (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 223,815,450 common shares at June 30, 2011, comprised of 155,731,315 shares issuable upon exercise of stock purchase warrants, 8,800,000 shares issuable upon exercise of stock options, 729,537 shares exercisable upon conversion of convertible preferred shares, and 58,554,598 shares potentially issuable upon conversion of convertible debt. Such debt and the related accrued interest, presently convertible at the option of two holders at a price of $0.01 per share, totals $2,582,890 which would yield 258,289,000 shares if fully exercised, however, the respective notes, all of which were issued to these two 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.
 
 
 
10

 

Kiwibox.Com, Inc.
Notes to Financial Statements
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

Revenue Recognition
 
The Company’s revenue is derived from advertising on the Kiwibox.Com website. 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.

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, 2010, our auditors had expressed an opinion that, as a result of the losses incurred, 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’s plans are to continue seeking equity and debt capital until cash flow from operations cover funding needs.

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 June 30, 2011 and December 31, 2010, 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 at the end of the year consisted of $14,446 in promotional supplies inventory, $3,205 in prepaid business insurance costs, and $2,349 made up of several smaller positions.

5. PROPERTY AND EQUIPMENT
 
        Property and equipment consist of the following at:  
June 30,
 2011
   
December 31,
 2010
 
           Furniture
  $ 14,322     $ 14,322  
           Leasehold Improvements
    24,130       24,130  
           Equipment
    66,170       65,376  
      104,622       103,828  
           Less accumulated depreciation
    92,862       88,505  
           Total
  $ 11,760     $ 15,323  

      Depreciation expense charged to operations was $4,357 and $5,862 in the first six months of 2011 and 2010, respectively.

 
11

 
 
Kiwibox.Com, Inc.
Notes to Financial Statements

6.  INTANGIBLE ASSETS

Intangible assets consisted of software for website development costs as follows:
 
    June 30,
2011
    December 31,
2010
 
        Website development costs
  $ 162,606     $ 139,108  
        Less accumulated amortization
    75,225       32,864  
        Total
  $ 87,381     $ 106,244  

During 2010, software costs of $11,880 were determined to be impaired and were written off during the year then ended. Amortization expense for the six months ended June 30, 2011 and 2010 was $42,361 and $6,944, respectively. Additional amortization over the next 5 years is estimated to be as follows:
 
   
Amortization expense
 
December 31, 2011
  $ 41,796  
December 31, 2012
    37,129  
December 31, 2013
    8,456  
December 31, 2014
    -  
December 31, 2015
    -  
Thereafter
    -  

7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following at:
 
   
June 30,
 2011
   
December 31,
 2010
 
       Accounts payable
  $ 215,198     $ 226,760  
       Accrued interest
    288,726       168,580  
       Accrued payroll, payroll taxes and commissions
    2,679       7,902  
       Accrued professional fees
    111,354       111,900  
       Miscellaneous accruals
    438       20,735  
       Total
  $ 618,395     $ 535,877  

8.  OBLIGATIONS TO BE SETTLED IN STOCK

Obligations to be settled in stock consisted of the following at:
 
    June 30,     December 31,  
    2011     2010  
Obligation for warrants granted for compensation
  $ 80,000     $ 60,000  
600,000 common shares issuable to a consultant who was a director of the company, for services rendered
      36,000         36,000  
1,100,000 (2011) and 500,000 (2010) common shares, and 2,900,000 (2011 and 2010) stock options issuable to two officers of the Company pursuant to their respective employment Agreements
        78,858           66,858  
 
 
12

 
 
Kiwibox.Com, Inc.
Notes to the Financial Statements
 
8. OBLIGATIONS TO BE SETTLED IN STOCK (continued)
 
2,700,000 (2011) and 2,100,000 (2010) stock options issuable to one director who also serves as the Company’s general counsel
    26,730       20,790  
1,000,000 warrants granted on the Pixunity.de asset Purchase (see Note 13)
    10,000       -  
    $ 231,588     $ 132,900  
 
9. LOANS PAYABLE

The Company (Formerly Magnitude, Inc.) had borrowings under short term loan agreements with the following terms and conditions at June 30, 2011 and December 31, 2010:

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  
 
10. NOTES PAYABLE
   
June 30,
   
December 31,
 
   
2011
   
2010
 
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  
In January 2008 a shareholder loaned the Company $40,000 pursuant to which the Company issued a demand note bearing interest at the rate of 5% per year.
    40,000       40,000  
From September 2008 through June 2011 two shareholders loaned the Company funds under the terms of the convertible notes issued, as modified in March 2009 and July 2010 and April 2011 (see Note 12).
    2,384,980       1,894,980  
In January and again in February 2011, a shareholder loaned the Company $50,000 under a demand note at 10%. In 2010, this shareholder loaned the Company $240,000 under a demand note at 10%.
    340,000       240,000  
Total
  $ 2,789,980     $ 2,199,980  

 
13

 
 
Kiwibox.Com, Inc.
Notes to Financial Statements
 
11. LONG-TERM DEBT

Long-term debt as of June 30, 2011 and December 31, 2010  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
  $ -  
 
12. 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. Each of these promissory notes are due on demand, accrue interest at the rate of 10%, per annum, 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"). Both 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.

The Company accounted for the conversion features underlying these convertible debentures modified or issued in the year ended December 31, 2010 and the six months ended June 30, 2011 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 these debentures issued to these holders during the three months ended June 30, 2011 under these terms at the relevant commitment dates to be $355,135 utilizing a Black-Scholes valuation model. The change in fair value of the liability for the conversion feature resulted in income of $730,217 and $720,569 for the three and six months ended June 30, 2011, respectively, which is included in Other Income (Expense) in the accompanying financial statements. The fair value of the derivative conversion features was determined to be $2,600,621 at June 30, 2011.

13. COMMITMENTS AND CONTINGENCIES

We maintain offices for our operations at 330 W. 38th Street, New York, New York 10018, for approximately 900 square feet. This lease requires minimum monthly rentals of $2,199 plus tenants’ share of utility/cam/property tax charges which average approximately $400 per month. During the 1st quarter of 2010 the Company successfully negotiated with the landlord to give up a lease of an office located at the same address consisting of approximately 500 square feet. This lease was extended in December 2010 through April 30, 2011 and again in January 2011 through December 31, 2011 with no changes to the monthly rent.

 
14

 

Kiwibox.Com, Inc.
Notes to Financial Statements

13. COMMITMENTS AND CONTINGENCIES (CONTINUED)

In May 2010 the Company negotiated a lease of an apartment in New York City for the CEO in order to reduce travel costs. The lease is for 12 months at $2,775 per month through May 31, 2011. In May 2011 the lease was extended through August 31, 2011 at the rate of $2,837. In December 2010 the CEO through a company that he controls reimbursed Kiwibox.com $20,642 for his use of the Company apartment.

Our total rent expenses were $30,368 and $24,302 during the six months ended June 30, 2011 and 2010, respectively.

During the second quarter in 2009 we entered into an agreement with a consultant to serve as the Company’s Chief Technology Officer. The agreement had a term of twelve months and could be extended by mutual consent. It provided for remuneration for services and expenses at the rate of $20,000 and 100,000 restricted shares per month, and a signing bonus of 500,000 restricted shares. During the first quarter in 2010, the Company issued the 500,000 shares for the signing bonus and 950,000 shares towards the accrued monthly allowance. In the third quarter the company issued an additional 500,000 shares towards the accrued monthly allowance.

During the third quarter of 2010 the Chief Technology Officer took over the position of Chief Executive Officer with no changes to the above terms, running through July 30, 2011. On October 6, 2010 the terms of the consulting agreement were modified. The new terms called for a reduced monthly consulting fee of $16,667 to be prepaid in the amount of $50,000 on October 1, 2010 covering the period October 1, 2010 thru December 31, 2010, and for $100,000 to be prepaid on January 1, 2011 covering the period January 1, 2011 thru June 30, 2011. There were no changes to the stock compensation portion of any earlier agreement. This agreement was again extended in April of 2011 through December 31, 2011 with no changes to the compensation.

During the third quarter in 2009 we entered into an engagement agreement with a consultant to assist the Company in the liaison to the Company’s shareholders and investors, to promote the Company and its website to the public markets, and to identify potential strategic partners, acquisition opportunities, and joint venture partners for the Company’s social networking website business. The agreement is deemed to have commenced on January 1, 2009 and extends through December 31, 2011, and calls for compensation to the consultant in the form of 2,000,000 five year warrants for the purchase of common shares, exercisable at $ 0.025 per share with a cashless exercise provision, for every six months period during the term of the agreement, and the payment in cash of unspecified amounts, the latter at the sole discretion of the Company.  This agreement was amended during the second quarter of 2011 so that the options earned in 2011 would be exercisable at $0.075 per share. This amendment did not change the value per warrant and total compensation is unchanged. The original agreement furthermore recognizes that the same consultant had previously provided similar services to the Company for which he received a one-time payment in form of 15,000,000 five year warrants, exercisable at $0.0025 per share. The 15,000,000 warrants were exercised during the three months ended March 31, 2010 pursuant to a cashless exercise into 13,125,000 shares of common stock.

On March 7, 2011 the Company announced its acquisition of the assets of Pixunity.DE a German photo book community. We purchased the internet domain name, the software codes for capturing, uploading and sharing images and the list of its approximate 15,000 members. The principal reason for this purchase was to acquire the source code and technology for image sharing which could have cost up to $100,000 to develop this technology in house. We are currently integrating the image sharing software into our Kiwibox website and do not intend to market or rely upon the pixunity brand for our business.

In addition, we are in the process of completing our due diligence investigation of an international social network with whom we signed a letter of intent and which we announced in our current report filed on Form 8-K with the Commission on November 30, 2010.

 
15

 

Kiwibox.Com, Inc.
Notes to Financial Statements

14. RELATED PARTY TRANSACTIONS
 
During the six months ended June  30, 2011 and 2010 one outside director of the Company who also serves as the Company’s general and securities counsel, was paid an aggregate $30,000 and $30,000, respectively, for legal services. The director also received 100,000 common stock options per month during the three and six month periods ended June 30, 2011 and 2010, valued at $2,970 and $5,940 respectively.

During the three and six months ended June 30, 2011 we incurred aggregate expenses of $42,881 and $113,124, and $40,155 and $127,277 for 2010 respectively, to companies controlled by the Chief Executive Officer, for website hosting, website development, server  farm installations and technical advisory services.

Through June 30, 2011, the beneficial ownership in the Company’s securities held respectively, by Tell Capital AG of Switzerland and its principal, Ulrich Schuerch on a consolidated basis, was approximately 10.4% and approximately 9.9% for Discovery Advisory Company, located in the Bahamas, and Cambridge Services Inc. of Switzerland, of the voting stock.  Both Discovery Advisory Company and Cambridge Services Inc. are major creditors, having advanced operating capital against issuance by the Company of convertible promissory notes to during 2011 and 2010. During the three  and six months ended June 30, 2011, Cambridge Services, Inc. advanced an additional $290,000 and $490,000, respectively. At June 30, 2011 $1,080,984 and $1,303,996 of such notes were outstanding and owed to Discovery Advisory Company and Cambridge Services Inc, respectively. Additionally, Ulrich Schuerch advanced the Company  $100,000 in the six months ended June 30, 2011, for which $340,000 of demand notes were issued at a rate of interest of 10%.

  15. 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.
 
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.

 
 
16

 

Kiwibox.Com, Inc.
Notes to Financial Statements
 
15. FAIR VALUE (continued)
 
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 following table reconciles, for the six months ended June 30, 2011, the beginning and ending  balances for financial instruments that are recognized at fair value in the consolidated financial statements:
 
Balance of Emb                   Conversion Liability at January 1, 2011
 
2,622,408
 
Present V                             Value of beneficial conversion features of new debentures
   
 
Present V                             Change in value of beneficial conversion features during period
   
698,783
 
              Reductions in fair value due to principal conversions
   
(720,570)
 
              Conversion Liability at June 30, 2011
 
$
2,600,621
 

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

 

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, 2010 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
 
The Company has successfully integrated Pixunity to the US market and will continue to add impressive features throughout the year. At the same time we continue to increase our market presence recording a 35% anti-cyclical growth rate from the first to the second  quarter of 2011.  Our promotional teams, both inside and outside of New York City, continue to develop  partnerships with event organizers and businesses along the East Coast of the United States and plan further expansion of these types of market alliances thoughout 2011.

The Company is in the final stages of negotiations with a potential acquisition target and believes that its acquisition would significantly enhance the Company’s competitive market position. Independent of the success of these negotiations, the Company will continue focusing on growth through acquisition and expects to start another due diligence process in the next six months.

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 operating expenses, not including stock-based compensation, remained at a level of approximately $65,000 to $80,000 per month. We are currently receiving funding at these levels from existing investors (see sections  “Loans and Notes Payable”).

 
18

 

Results of Operations for the Three and Six Months Ended June 30, 2011 Compared to the Three  and Six Months Ended June 30, 2010

For the three and six months ended June 30, 2011, total revenues amounted to $349 and $772, respectively compared to $670 and $1,403 recorded in the same periods in 2010.

Gross Profit (Loss) for the six months ended June 30, 2011 amounted to $(1,083) after accounting for $1,855 in cost of sales.  After deducting selling - and general and administrative expenses of $255,788 and $530,760 for the three and six months ended June 30, 2011, compared to $316,058 and $582,117 recorded in the same period in 2010, the Company realized operating losses of $256,559 and $531,843 for the three and six months ended June 30, 2011 compared to operating losses of $316,173 and $581,499 in the same periods in 2010. The decline in operating expenses was the result of  cost cutting measures initiated in the course of current restructuring efforts. In particular, outlays for salaries and consulting expenses were  reduced due to cut-backs in staffing and curtailment of consultant retentions.
 
The quarter concluded with a net profit of $49,189 for the quarter and a loss of $636,009 for the first six months of 2011. After accounting for dividends accrued on outstanding preferred stock which totaled $12,816 and $25,631, respectively,  the net income applicable to common shareholders was $36,373 or $0.000 per share and the net loss $661,640 or $(0.001) per share for the quarter and six months ended June 30, 2011, compared to a loss of $366,300 or $(0.001) per share and $674,478 or $(0.001) per share for the same periods in 2010.

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 $290,000 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 $6,816,145 at June 30, 2011, as compared to $6,145,931 at December 31, 2010.  The change is primarily attributable the losses incurred in the first quarter of 2011 and the convertible notes issued during the six months ended June 30, 2011.   Stockholders’ equity showed an impairment of $6,676,248 at the end of the period, compared to an impairment of $6,014,608 at the beginning of the year. The negative cash flow from operations during the six months ended June 30, 2011 totaled $476,003 and was financed by new debt.
 
We have no bank debt and aside from trade payables and accruals, our indebtedness at June 30, 2011, consisted of certain notes and loans aggregating $2,864,980. The position “Obligations to be settled in stock” of $231,588 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 $556,234 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. Assuming we can receive current funds to continue to operate our businesses, we may need additional funding for marketing and website development, absent of which our website development, results of operations and financial condition could be subject to material adverse consequences.

 
19

 
 
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 June 30, 2011 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 June 30, 2011, 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 June 30, 2011, 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.

2. 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.

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 June 30, 2011 and December 31, 2010 and the related statements of operations, and cash flows for the three and six months ended June 30, 2011 and 2010, in conformity with generally accepted accounting principles.

Management’s Remediation Initiatives
 
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:

- When available, we will devote additional resources to supplement, where necessary, existing resources with additional qualified third party consultants;

- We are continuing to institute more stringent approval processes for financial transactions, and

- We are continuing to perform additional procedures and analyses 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 June 30, 2011, 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.

 
20

 
 
PART  II  -  OTHER INFORMATION

Item 1 LEGAL PROCEEDINGS

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 second quarter in 2011 the Company did 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 $556,000.  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
 
 
21

 
 
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 August 12, 2011
   
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 August 12, 2011.
   
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 August 12, 2011.
 
 
(b)  Reports on Form 8-K:

On June 14, 2011, the Company filed a current report on Form 8K with the Commission, announcing the launching of the U.S. version of Pixunity.com a photoblogging community.

 
22

 
 
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, Inc.
 
       
Date:  August 12, 2011
By:
/s/ Andre Scholz
 
    Andre Scholz  
    Chief Executive Officer  
       
Date:   August 12, 2011
By:
/s/ Craig S. Cody  
    Craig S. Cody  
    Chief Financial Officer  
 
 
 
23