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EX-31.02 - EXHIBIT 31.02 - Kiwibox.Com, Inc.v325453_ex31-02.htm
EX-32.01 - EXHIBIT 32.01 - Kiwibox.Com, Inc.v325453_ex32-01.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 September 30, 2012

 

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 (IRS Employer Identification No.)
Incorporation or Organization)  

 

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 ¨

 

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 November 23, 2012, was 679,544,746 shares.

 

 
 

 

Due to Hurricane Sandy and its aftermath, Company management and its auditors and accountants were unable to communicate due to telecommunication and power outages endured on the East Coast and we are relying upon the Order, issued by the Securities and Exchange Commission in Release No. 68224 on November 14, 2012, for the relief from the filing deadline applicable to our Form 10-Q for the quarter ended September 30, 2012.

 

KIWIBOX.COM, INC.

 

INDEX

 

    Page
    Number
PART  1  -  FINANCIAL INFORMATION  
     
Item 1 Financial Statements   
     
  Consolidated Balance Sheets  
   - September  30, 2012 (unaudited) and December 31, 2011 3
     
  Consolidated Statements of Operations  
   - Three and nine months ended September  30, 2012 and 2011 (unaudited) 4
     
  Consolidated Statements of Cash Flows  
   - Nine months ended September  30, 2012 and 2011 (unaudited) 5 - 6
     
  Notes to Consolidated Financial Statements 7 - 19
     
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 20– 21
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
     
Item 4 Controls and Procedures 22
     
PART II  -  OTHER INFORMATION 23 - 24
     
Item 1. Legal Proceedings 23
     
Item 1A.  Risk Factors 23
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
     
Item 3. Defaults Upon Senior Securities 23
     
Item 4T. Submission of Matters to a Vote of Security Holders 23
     
Item 5. Other information 23
     
Item 6. Exhibits 24
     
SIGNATURES 25

 

2
 

 

PART I - Item 1 Financial Statements

KIWIBOX.COM, INC. and SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

   September 30, 2012   December 31, 2011 
   (Unaudited)     
Assets          
           
Current Assets          
Cash  $35,600   $195,613 
Accounts receivable, net of allowance for doubtful accounts of $0   216,584    383,742 
Due from related parties   10,851    17,582 
Other receivables   24,073    91,443 
Income taxes receivable   107,321    90,138 
Prepaid expenses and other current assets   93,196    42,241 
Total Current Assets   487,625    820,759 
Property and equipment, net of accumulated depreciation of $727,292 and $605,111   118,694    244,314 
Website development costs, net of accumulated amortization of $282,405 and $187,128   148,588    145,211 
Goodwill   6,193,082    5,937,378 
Deferred tax asset   1,008,392    1,052,454 
Other assets   38,547    43,815 
Total Assets   7,994,928    8,243,931 
           
Liabilities and Stockholders’ Equity (Impairment)          
           
Current Liabilities          
Bank overdraft   207,457    - 
Accounts payable   246,298    228,555 
Accrued expenses   1,230,105    761,191 
Due to related parties   22,810    187,264 
Obligations to be settled in stock   264,838    249,275 
Dividends payable   620,313    581,865 
Kwick! Acquisition indebtedness   -    5,221,093 
Loans and notes payable - other   140,000    140,000 
Loans and notes payable – related parties   340,000    340,000 
Convertible notes payable-related parties   8,463,699    4,007,950 
Convertible note payable-other, net of debt discount $20,833   29,167    - 
Current maturities of long-term debt   33,529    33,529 
Liability for derivative conversion features   51,017    - 
Liability for derivative conversion feature –related parties   9,441,807    4,704,987 
Total Current Liabilities   21,091,040    16,455,709 
           
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 678,944,746 and 586,168,060 shares   67,892    58,618 
Additional paid-in capital   52,650,922    49,700,653 
Accumulated deficit   (65,736,203)   (57,588,185)
Accumulated other comprehensive loss   (78,809)   (382,950)
Total Stockholders’ Equity (Impairment)   (13,096,112)   (8,211,778)
Total Liabilities and Equity (Impairment)  $7,994,928   $8,243,931 

 

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

 

3
 

 

KIWIBOX.COM, INC. and SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
Net Sales                    
Advertising   267,814    1,500    1,030,455    2,272 
Other   1,449    -    79,459    - 
Total Revenues  $269,263   $1,500   $1,109,914   $2,272 
                     
Cost of Goods Sold                    
Website hosting expenses   180,844    980    741,660    2,835 
Total Cost of Goods Sold   180,844    980    741,660    2,835 
                     
Gross Profit (Loss)   88,419    520    368,254    (563)
                     
Selling expenses   131,449    78,505    631,010    198,631 
General and administrative expenses   342,603    215,562    1,064,239    626,196 
                     
Loss from Operations   (385,633)   (293,547)   (1,326,995)   (825,390)
                     
Other Income (Expense)                    
Miscellaneous income   5,369    -    32,202    - 
Misc. non-operating expenses   918    -    (1,189)   (1,205)
Foreign currency transaction gain (loss)   (189)   -    50,586    (586)
Change in fair value –derivative liability   15,396    (1,277,496)   663,239    (556,927)
Interest expense-derivative conversion   (583,647)   (2,509,379)   (6,917,459)   (3,208,162)
Interest Income   52    -    52    - 
Amortized debt discount   (12,500)   -    (29,167)   - 
Interest expense   (230,782)   (68,931)   (524,378)   (193,092)
Total Other Income (Expense)   (805,383)   (3,855,806)   (6,726,114)   (3,959,972)
                     
Loss before Benefit (Provision) for Income Taxes   (1,191,016)   (4,149,353)   (8,053,109)   (4,785,362)
Benefit (Provision) for income taxes   (17,998)   -    (56,461)   - 
                     
Net Income (Loss)  $(1,209,014)  $(4,149,353)  $(8,109,570)  $(4,785,362)
                     
Dividends on Preferred Stock   (12,816)   (12,816)   (38,447)   (38,447)
                     
Net Income (Loss) applicable to Common Shareholders, basic and diluted  $(1,221,830)  $(4,162,169)  $(8,148,017)  $(4,823,809)
                     
Net Loss per Common Share, basic and diluted  $(0.002)  $(0.008)  $(0.013)  $(0.010)
                     
Weighted Average Number of Common Shares Outstanding   678,944,746    507,190,886    641,085,737    498,401,302 
                     
Comprehensive Income (Loss):                    
Net Income (Loss)  $(1,209,014)  $(4,149,353)  $(8,109,570)  $(4,785,362)
Foreign currency translation adjustment   276,470    -    304,141    - 
Total Comprehensive Income (Loss)  $(932,544)  $(4,149,353)  $(7,805,429)  $(4,785,362)

 

All of the stock-based compensation relates to selling, general and administrative expenses.

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

 

4
 

 

KIWIBOX.COM, INC. and SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended 
   September 30, 
   2012   2011 
Cash Flows from Operating Activities          
Net Loss  $(8,109,570)  $(4,785,362)
Adjustments to Reconcile Net Loss to Net Cash Used by Operations          
Depreciation and amortization   250,814    72,454 
Value of stock for services   13,500    - 
Change in fair value – derivative liabilities   (663,239)   556,927 
Intrinsic value of beneficial conversion rights   6,917,460    3,208,161 
Foreign currency transaction gain   (50,586)   - 
Deferred tax expense   54,864      
Decreases (Increases) in Assets          
Accounts receivable   167,158    175 
Income taxes Receivable   (17,183)   - 
Other receivables   67,370    - 
Prepaid expenses   (50,955)   (33,907)
Increases (decreases) in Liabilities          
Bank overdraft   207,457    - 
Liabilities to be settled in stock   31,860    58,010 
Accounts payable   17,554    - 
Accrued expenses   469,504    164,010 
Net Cash Used by Operating Activities   (693,992)   (759,532)
           
Cash Flows from Investing Activities          
Cash outlay - website development costs   (58,139)   (32,623)
Cash acquired in business combination   -    57,852 
Cash proceeds (outlay)  – other assets   5,783    (21,000)
Purchases of property and equipment   (1,953)   (794)
Net Cash Used by Investing Activities   (54,309)   3,435 
           
Cash Flows from Financing Activities          
Proceeds from loans and notes   745,000    820,000 
Net repayments to related parties   (157,723)   - 
Net Cash Provided by Financing Activities   587,277    820,000 
           
Net Increase (Decrease) in Cash   (161,024)   63,903 
Effect of exchange rates on cash   1,011    - 
           
Cash at Beginning of Period   195,613    377 
Cash at End of Period  $35,600   $64,280 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:      
           
Interest Paid   13,808    4,016 
Income taxes paid   19,487    - 

 

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

 

5
 

 

KIWIBOX.COM, INC. and SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:     
      
Nine Months Ended September 30, 2012     
      
Settlement of obligations with common stock  $16,297 
      
Conversions of debt  $1,413,361 
      
Year to date dividend accruals  $38,448 
      
Reduction of derivatives from conversion of debt  $1,516,384 
      
Debt discount created from derivative instrument  $50,000 
      
Direct payment of acquisition indebtedness for issuance of convertible debentures  $5,170,318 
      
Nine Months Ended September 30, 2011     
      
Settlement of obligations with common stock  $24,000 
      
Acquisition of subsidiary via acquisition indebtedness and affiliate debentures  $8,620,343 
      
Conversions of debt and related derivative liabilities  $3,210,262 
      
Warrants granted in acquisition of other assets     

 

6
 

 

Kiwibox.Com, Inc. and Subsidiary

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.

 

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

 

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.

 

Principles of Consolidation

 

The consolidated financial statements as of and for the three months and nine months ended September 30, 2012 and as of December 31, 2011 include the accounts of Kiwibox.com, Inc. and its subsidiary, KWICK! Community GmbH & Co. KG. The activities of the Company’s subsidiary KWICK! Community GmbH & Co. KG. are included in the financial statements from the date of acquisition (September 30, 2011) through September 30, 2012. Any significant inter-company balances and transactions have been eliminated.

 

The condensed balance sheet at December 31, 2011 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 consolidated 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 consolidated 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 consolidated 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, 2011.

 

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.

 

7
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

Foreign Currency Translation

 

Assets and liabilities of foreign operations are translated into U.S. dollars at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted average exchange rates prevailing during each period presented. Gains and losses resulting from foreign currency transactions are included in the results of operations. Gains and losses resulting from translation of financial statements of our foreign subsidiary operating in a non-hyperinflationary economy are recorded as a component of accumulated other comprehensive loss until either sale or upon complete or substantially complete liquidation by the Company of its investment in the foreign entity. Foreign currency transaction gain (loss) was $(189) and $50,586 for the three and nine months ended September 30, 2012. Foreign currency translation gain (loss) was 276,470 and $ 304,141 for the three and nine months ended September 30, 2012, respectively. Accumulated gain or (loss) on foreign currency translation adjustment was $(78,809) through September 30, 2012.

 

Advertising Costs

 

Advertising costs are charged to operations when incurred. Advertising expense was $2,173 and $10,847 for the three and nine months ended September 30, 2012 and $25 and $6,298 for 2011, 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, 2011 and the nine months ended September 30, 2012 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.

 

8
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Consolidated 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 $58,139 and $32,623 was capitalized for web-site development work during the nine months ended September 30, 2012 and 2011, respectively.

 

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. The remaining deferred tax asset represents the value of future taxable income of the foreign subsidiary that is expected to be offset by amortization of the excess value of the purchase price from the business combination over the subsidiary capital. During the nine months ended September 30, 2012, the German subsidiary recognized an approximately $56,000 income tax provision, which consists of approximately $42,000 based on the effect of the amortization noted above and the remainder for other tax basis differences. The tax rate used for the nine months September 30, 2012 is the trade tax rate of 13% payable by partnerships in Germany on taxable profits under tax law in that jurisdiction.

 

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 271,345,799 common shares at September 30, 2012, comprised of 155,731,315 shares issuable upon exercise of stock purchase warrants, 7,250,000 shares issuable upon exercise of stock options, 729,537 shares exercisable upon conversion of convertible preferred shares, and 107,634,947 shares potentially issuable upon conversion of convertible debt. Such debt and the related accrued interest, convertible at the option of four debt holders at a price of 50% of the average closing price for the preceding 10 days, and another holder at $0.025 per share subject to reset, totals $8,513,365 which would yield approximately 850 million shares if fully converted at September 30, 2012, however, the respective notes, all of which were issued to these 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.

 

9
 

 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Consolidated 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, 2011, 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. The Company’s German subsidiary maintains cash balances in a financial institution which is insured by the German Einlagensicherungsfonds up to EUR 100,000. Balances in these accounts may, at times, exceed the respective insured limits. At September 30, 2012 and December 31, 2011, 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:  September 30, 2012   December 31, 2011 
Professional fees – related parties  $65,000   $- 
Rent   14,962    20,512 
Promotional supplies inventory   8,823    10,302 
Business insurance   4,005    9,237 
Other   406    2,190 
   $93,196   $42,241 

 

10
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 

5. PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following at:  September 30, 2012   December 31, 2011 
Furniture  $14,322   $14,322 
Leasehold Improvements   24,130    24,130 
Computer equipment   616,239    620,746 
Equipment   191,295    190,227 
    845,986    849,425 
Less accumulated depreciation   727,292    605,111 
Total   118,694   $244,314 

 

Depreciation expense charged to operations was $125,872 and $5,955 in the first nine months of 2012 and 2011, respectively.

 

6. INTANGIBLE ASSETS

 

   September 30, 2012   December 31, 2011 
Website development costs  $430,993   $332,339 
Less accumulated amortization   282,405    187,128 
Total  $148,588   $145,211 

 

Amortization expense of intangible assets for the nine months ended September 30, 2012 and 2011 was $95,775 and $66,499, respectively. Additional amortization over the next 5 years is estimated to be as follows:

 

   Amortization expense 
     
December 31, 2012   21,271 
December 31, 2013   54,988 
December 31, 2014   9,921 
December 31, 2015   1,906 
December  31, 2012   1,145 
Thereafter   2,799 

 

7. ACCRUED EXPENSES

 

Accrued expenses consisted of the following at:

 

   September 30, 2012   December 31, 2011 
         
Accrued interest  $972,590   $462,020 
Accrued payroll, payroll taxes and commissions   47,406    85,756 
Accrued professional fees   146,639    151,862 
Accrued rent   -    15,158 
Miscellaneous accruals   63,470    46,395 
Total  $1,230,105   $761,191 

 

11
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 

8. OBLIGATIONS TO BE SETTLED IN STOCK

 

Obligations to be settled in stock consisted of the following at

 

   September 30,   December 31, 
   2012   2011 
         
Obligation for warrants granted for compensation  $100,000   $100,000 
           
600,000 common shares issuable to a consultant who formerly was a director of the company, for services rendered.   36,000    36,000 
           
800,000 (2012) and 500,000 shares (2011) Issuable to the CEO under a consulting agreement   20,400    12,750 
           
2,900,000 options due to former director under an employment agreement   56,858    56,858 
           
4,200,000 (2012) and 3,300,000 (2011) stock options issuable to one director who also serves as the   Company’s general counsel   41,580    32,670 
           
1,000,000 warrants granted on the Pixunity.de asset Purchase (see Note 13)   10,000    10,000 
           
25,000 shares issuable to employee (issued 2012)   -    997 
           
   $264,838   $249,275 

 

9. LOANS PAYABLE

 

The Company (Formerly Magnitude, Inc.) had borrowings under short term loan agreements with the following

terms and conditions at September 30, 2012 and December 31, 2011:

 

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 

 

12
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 

10. NOTES PAYABLE

 

   September 30,   December 31, 
   2012   2011 
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 September 2012 four 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 12).   8,463,699    4,007,950 
           
During the three months ended March 2012, an individual loaned the Company funds under the terms of a convertible promissory note  at interest of 5% per year (see Note 12)   50,000    - 
           
Less: debt discount on above note   (20,833)   - 
           
In January and again in February 2011, a shareholder loaned the Company $50,000 under a demand note at 10%. In 2011, this shareholder loaned the Company $240,000  under a demand note at 10%.   340,000    340,000 
           
Total  $8,897,866   $4,412,950 

 

11. LONG-TERM DEBT

 

Long-term debt as of September 30, 2012 and December 31, 2011 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  $- 

 

13
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 

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. During the three and nine months ended September 30, 2012 Cambridge Services, Inc. converted $-0- and $581,269, respectively. For the three and nine months ended September 30, 2012 Cambridge Services advanced $310,000 and $1,359,251,respectively, of which $664,251 was advanced in the nine months ending September 30, 2012 as a payment towards the acquisition of Kwick!. Discovery Advisory Services advanced $2,436,588 as a payment towards the purchase of Kwick! in the nine months ended September 30, 2012.During the nine months ended September 30, 2012 Kreuzfeld LTD advanced $2,069,479 and converted $419,100. VGZ converted $409,200 during the same period.

 

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 note, 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 has an outstanding balance due (including accrued interest) of $3,548,142 as of September 30, 2012; (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 has an outstanding balance due (including accrued interest) of $3,821,743 as of September 30, 2012; 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 $1,459,392 as of September 30, 2012, and; 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 $473,962 as of September 30, 2012. 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.. 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 Pledgor’s wholly-owned 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.

 

The Company accounted for the conversion features underlying these convertible debentures modified or issued in the year ended December 31, 2011 and the nine months ended September 30, 2012 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 nine months ended September 30, 2012 under these terms at the relevant commitment dates to be $6,911,467 utilizing a Black-Scholes valuation model. The company also recognized $1,516,383 in reduction of fair value to capital for

 

14
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 

12. DERIVATIVE CONVERSION FEATURES (Continued)

 

conversions during the nine months ended September 30, 2012. The change in fair value of the liability for the related party conversion features resulted in income of $658,264 for the nine months ended September 30, 2012, which is included in Other Income (Expense) in the accompanying financial statements. The fair value of these related party derivative conversion features was determined to be $9,441,807 at September 30, 2012.

 

On February 28, 2012 the Company signed a convertible note with Michael Pisani. This is a 1 year note that is convertible at $0.025 per share in the amount of $50,000. In the event that any portion of any outstanding Company promissory note, preferred share, warrant or stock option held of record by a non-affiliate of the Company is converted, exercised or exchanged for common shares of the Company at a conversion price or conversion rate less than $0.025 per one (1) common share anytime any part of the outstanding principal amount of this note is outstanding, the conversion rate of this note shall automatically be adjusted to such lower conversion rate. The Company evaluated this conversion contingency under the guidance at ASC 815-40-15 and determined that this conversion feature should be bifurcated from the host contract and measured at fair value. The Company valued this conversion feature utilizing a Black-Scholes valuation model and a probability analysis with regard to the reset provision of the conversion price. The Company determined the initial value to be $55,241, with $50,000 recorded as a debt discount and the remainder as interest expense-derivative conversion features. The discount is being amortized over the life of the note. A total of $29,167 in amortization expense was recorded during the nine months ended September 30, 2012. The Company recognized an additional $751 in value for convertible accrued interest incurred in the nine months ended September 30, 2012. The change in fair value of this liability for the conversion feature resulted in income of $4,975 for the nine months ended September 30, 2012, which is included in Other Income (Expense) in the accompanying financial statements. The fair value of these derivative conversion features was determined to be $51,017 at September 30, 2012.

 

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 and again in April 30, 2011 through December 31, 2012 with no changes to the monthly rent.

 

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 was 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 August 2011 the lease was extended through December 31, 2011 at the rate of $2,837 per month. In December 2011 the lease was again extended through May 31, 2012 with no change in the base rent. In May 2012 the lease was extended through December 31, 2012 at a monthly rate of $2,943.

 

Kwick! has operating leases related to office space in Weinstadt, Germany along with vehicle leases. The office lease is for a term of one year expiring on December 31, 2012 at the rate of $5,858 per month plus utilities. All operating lease contracts over 5 years contain clauses for yearly market rental reviews. Kwick! has a sublease arrangement with Jaumo GmBH a related party (see Note 14). Kwick!’s operating leases relate to leases of land and vehicles with lease terms of between 3 and 5 years. All operating lease contracts over 5 years contain clauses for yearly market rental reviews. The company does not have an option to purchase the leased land at the expiry of the lease periods.

          

   Payments recognized as an expense:

 

For the nine months ended September 30, 2012:     
      
Minimum lease payments  $64,792 
Sub - lease payments received   (11,538)
      
Net leasing expense  $53,254 

 

15
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 

13. COMMITMENTS AND CONTINGENCIES (Continued)

 

Operating lease commitments at September 30, 2012:

2012  $17,933 
2013  $71,731 
2014  $771 
2015   - 
2016   - 
Total  $90,435 
Sub – lease payments to be received   (28,924)
Net lease commitments  $61,511 

 

The Company does not have an option to purchase the leased office at the expiration of the lease period. These vehicle leases call for minimum monthly payments of $1,688 per month and have a remaining term of less than sixteen months.

 

Our total rent expenses were $99,592 and $45,319 during the nine months ended September 30, 2012 and 2011, respectively.

 

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 extended through December 31, 2011, and called for compensation to the consultant in the form of 2,000,000 five year warrantsfor 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. The 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.

 

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 us 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.

 

14. RELATED PARTY TRANSACTIONS

 

During the nine months ended September 30, 2012 and 2011 one outside director of the Company who also serves as The Company’s general and securities counsel, was paid an aggregate $45,000 and $45,000, respectively, for legal services. The director also received 100,000 common stock options per month during the three and nine monthperiods ended September 30, 2012 and 2011, valued at $2,970 and $8,910, respectively in each year. The legal fees due for the three months ended December 31, 2012 of $15,000 were prepaid prior to September 30, 2012 and are included in prepaid expenses.

 

During the three and nine months ended September 30, 2012 we incurred aggregate expenses of $66,338 and $163,751, and $74,480 and $187,604 for 2011 respectively, to companies controlled by the Chief Executive Officer, for website hosting, website development, server farm installations and technical advisory services. The Chief Executive Officer is also party to a consulting agreement with the Company, which calls for a monthly consulting fee of $16,667 in cash plus 100,000 restricted shares. This agreement has been verbally extended through December 2012. In the nine months ended September 30, 2012 and September 30, 2011 this officer was granted 900,000 shares. The consulting fees due for the three months ended December 31, 2012 of $50,000 were prepaid prior to September 30, 2012 and are included in prepaid expenses.

 

16
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 

Through September 30, 2012, 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 11.4% and approximately 9.9% of the voting stock was beneficially held by Discovery Advisory Company, located in the Bahamas, and Cambridge Services Inc., Kreuzfeld, LTD and Vermoegensverwaltungs-Gesellschaft Zurich LTD. (VGZ) of Switzerland. Discovery Advisory Company, Cambridge Services Inc., Kreuzfeld, LTD and VGZ are major creditors, having advanced operating capital against issuance by the Company of convertible promissory notes during 2012, 2011 and 2010. During the three and nine months ended September 30, 2012 Cambridge Services, Inc advanced an additional $310,000 and $1,319,251, respectively, and converted $581,269 of debt during the nine months ended September 30, 2012. During the nine months ended September 30, 2012 Discovery Advisory Company advanced an additional $2,436,588. Kreuzfeld, LTD advanced $2,069,479 and converted $419,100 of debt in the nine months ended September 30, 2012, and VGZ converted $409,200 during the same period.. At September 30, 2012, principal of $3,221,722 and $1,270,398 of such notes were outstanding and owed to Discovery Advisory Company and Cambridge Services Inc, respectively and $3,564,959 and $406,620 principal owed to Kreuzfeld, Ltd. and VGZ, respectively.

 

The Company, through its subsidiary, Kwick, is party to a service agreement with JAUMO GmbH, Germany, a company partially owned by the officers of Kwick. The subsidiary recognized approximately $84,000 in service revenue from this entity in the nine months ending September 30, 2012.

 

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.

 

17
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Consolidated 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 nine months ended September 30, 2012, 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, 2012  $4,704,987 
Present V Value of beneficial conversion features of new debentures   6,967,458 
Present V Change in value of beneficial conversion features during period   (663,238)
Reductions in fair value due to principal conversions   (1,516,383)
Conversion Liability at September 30, 2012  $9,492,824 

 

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.

 

16. ACQUISITION OF KWICK!

 

On September 30, 2011 Kiwibox.com acquired 100% of the limited partner’s interests in the social network, KWICK! Community GmbH & Co. KG, a private German Limited Partnership and all of the shares of its General Partner, Kwick! Community Beteiligungs GMBH for 7,100,000 Euros, payable as follows: 2,500,000 euros at the closing onSeptember 30, 2011;on March 14, 2012 payment arrangements were changed to reflect the following: 2,300,000 Euros by April 13, 2012 and a third payment on or before April 26, 2012 of 1,600,000. This converts using the conversion rate in effect on September 30, 2011 to $8,567,843. The original agreement also called for 700,000 Euros, contingent on certain earnings goals (“original bonus payment”).The original payment was amended by mutual consent of both parties and the original bonus payment possibly due Kwick! were eliminated. On May 14, 2012 the amended agreement was changed to reflect a decrease in salaries based on restated employment contracts for the former Kwick owners, provided for late payment fees, and the third payment due date was changed to on or before the date the parties sign the amendment (“Amendment 2”). The second payment was paid on April 19, 2012 in the amount of $2,436,588. On May 14, 2012, the final payment was made in the amount of $2,069,479. During the nine months ended September 30, 2012, the Company paid a total of $5,221,093 against the acquisition indebtedness, plus $78,263 for late payment fees in accordance with Amendment 2.

 

Kwick! is a leading Social network Community in Europe focused on the German speaking market, with more than 1 million members.

 

The Company completed its purchase price allocation in the third quarter of 2012. The allocation resulted in $41,500 being allocated to identified intangible assets (website development costs), which are being amortized over their estimated life of three years.

 

Due to exchange rate fluctuation, the carrying amount of goodwill that resulted from the acquisition of Kwick increased in value, with a total of $96,372 in unrealized appreciation from acquisition through September 30, 2012.

 

18
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 

16. ACQUISITION OF KWICK! (continued)

 

The following unaudited pro forma financial information for the nine months ended September 30, 2011 combines the historical results of the company Kiwibox.com and its acquired subsidiary Kwick! as if the acquisition occurred on January 1, 2011, as follows:

 

   2011 
     
Revenues  $2,950,794 
      
Net Operating Loss   (181,443)
      
Net Loss   (4,474,913)
      
Net loss per share   (0.009)

 

17. SUBSEQUENT EVENTS

 

Since September 30, 2012 we have received $90,000 of working capital from accredited investors, which are covered by convertible promissory notes.

 

On October 5, 2012, 600,000 shares were issued to Andre Scholz under his consulting agreement with the company.

 

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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, 2011 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

 

We are continuing to optimize this website and develop mobile applications to keep these users engaged across multiple platforms and devices. The Kwick! dating app was ranked in the top Five German dating apps in 2012. As one of the first social networks Kiwibox integrated in the 2nd Quarter 2012 for Kiwibox and Kwick! mobile advertising in its mobile-apps, to substitute the income loss of the movement based on higher mobile usage. With promotional teams, we are continuing to develop partnerships for Kiwibox with event organizers and businesses along the East Coast of the United States and plan further expansion the West Coast by end of the year.

 

The nearly finished migration of Kwick! into the Kiwibox network and optimizing its workflow process will continue to generate savings by end of this year. The Company will continue to add impressive features also into Pixunity – a division of the Kiwibox network – within the next months. We have recently added the Russian, Chinese and Indian speaking markets to Pixunity. The Company will continue focusing on growth through acquisition and explore new language markets.

 

Based on the integration work and the financial translation overhead the operating expenses, not including stock-based compensation, are at a level of approximately $100,000 per month. We expect income received as a result of the recent acquisition to minimize or wave the funding needed from existing investors (see sections “Loans and Notes Payable”).

 

Results of Operations for the Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine Months Ended September 30, 2011

 

For the three and nine months ended September 30, 2012, total revenues amounted to $269,263 and $1,109,914, respectively compared to $1,500 and $2,272 recorded in the same periods in 2011. This increase is due to the results of our wholly-owned subsidiary, Kwick!, which was acquired on September 30, 2011.

 

Gross Profit (Loss) for the nine months ended September 30, 2012 amounted to $368,254 after accounting for $741,660 in cost of sales. For the three months ended September 30, 2012 gross profit amounted to $88,419 after accounting for cost of sales of $180,844. The reduction in cost of sales was the result of the cost cutting measures undertaken at Kwick! by management that were fully realized in the third quarter.

 

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After deducting selling - and general and administrative expenses of $474,052 and $1,695,249 for the three and nine months ended September 30, 2012, compared to $294,067 and $824,827 recorded in the same period in 2011, the Company realized operating losses of $385,633 and $1,326,995 for the three and nine months ended September 30, 2012 compared to operating losses of $293,547 and $825,390 in the same periods in 2011. The decline in selling expenses is the result of reductions in staffing initiated during the first quarter but not fully realized until the end of the third quarter 2012.

 

The period concluded with a net loss of $1,209,014 for the quarter and a loss of $8,109,570 for the first nine months of 2012. After accounting for dividends accrued on outstanding preferred stock which totaled $38,447, the net loss applicable to common shareholders for the nine months ended September 30, 2012 was $8,148,017 or $0.013 per share compared to a net loss applicable to common shareholders of $4,823,809 or $0.01 per share for the same period in 2011.

 

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 $310,000 in cash from short-term loans from accredited private investors during the three months ended September 30, 2012. 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 $20,603,415 at September 30, 2012, as compared to $15,634,950 at December 31, 2011. The change is primarily attributable the new convertible notes issued to complete the acquisition of Kwick!. Stockholders’ equity showed an impairment of $13,096,112 at the end of the period, compared to an impairment of $8,211,778 at the beginning of the year. The negative cash flow from operations during the six months totaled $693,992 and was financed by new debt.

 

Our bank debt as of September 30, 2012 consisted of a bank overdraft of $207,457. Aside from trade payables and accruals, our remaining indebtedness at September 30, 2012 mainly consisted of certain notes and loans aggregating $8,993,699 and the following obligations. The position “Obligations to be settled in stock” of $264,838 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 $620,313 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.

 

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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 September 30, 2012, 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 September 30, 2012, 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 September 30, 2012 and December 31, 2011 and the related statements of operations, and cash flows for the three and nine months ended September 30, 2012 and 2011, 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 September 30, 2012, 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.

 

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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 three and nine months in 2012 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 $607,000. 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

 

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Item 6  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)      Exhibits

 

10.41   Form of Class AA Senior Secured Convertible Revolving Promissory Note issued to Discover Advisory Company, Kreuzfeld Ltd.,, Cambridge Services, Inc. and Vermoegensverwaltunga-Gesellschaft Zurich LTD,
     
10.42   Form of Equity and Stock Pledge Agreement, dated as of August 1, 2012, made by Kiwibox.Com, Inc., in favor of Discover Advisory, Company, Kreuzfeld Ltd.,, Cambridge Services, Inc. and Vermoegensverwaltunga-Gesellschaft Zurich LTD
     
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 20, 2012
   
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 20, 2012.
   
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 20, 2012.

 

(b)        Reports on Form 8-K:

 

On July 19, 2012 the company filed a report on form 8-K with the commission announcing the release of additional Ipad and Iphone apps and that Kwick! was ranked among the top five German dating apps..

 

On August 27, 2012, the company filed a current report on 8-K with the commission announcing that Pixunity had entered the Russian, Chinese and Indian speaking markets.

 

On September 17,2012, the Company filed a current report on Form 8-K with the Commission, announcing an updated Iphone app and Mobile HTML5 version..

 

On September 25, 2012, the Company filed a current report on Form 8-K with the Commission, announcing the Pixunity platform was launching in the French language.

 

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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:  November 23, 2012
     
  By: /s/  Andre Scholz
    Andre Scholz
    Chief Executive Officer

 

Date: November 23, 2012 By: /s/ Craig S. Cody
    Craig S. Cody
    Chief Financial Officer

 

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