FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, DC 20549

 

 

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

For Quarter Ended June 30, 2014

 

 

 

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 42ND St. Suite 3210 New York, NY 10036	(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 ☒ 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  ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ☐    No  ☑

 

 

The number of shares of Registrant’s Common Stock, $0.0001 par value, outstanding as of August 13, 2014, was 683,693,060 shares.

 

 

 

KIWIBOX.COM, INC.

 

INDEX

 

	Page
	Number
PART  1  -  FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets - June 30, 2014 (unaudited) and December 31, 2013	3
Condensed Statements of Operations - Three and six months ended June 30, 2014 and 2013 (unaudited)	4
Statements of Cash Flows - Six months ended June 30, 2014 and 2013 (unaudited)	5 - 6
Notes to Financial Statements	7 - 18
Item 2  Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 4 Controls and Procedures	22
PART II  -  OTHER INFORMATION	23
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

 

 

 

PART I - Item 1 Financial Statements

 

KIWIBOX.COM, INC.

BALANCE SHEETS

(Unaudited)

 

		June 30, 2014				December 31, 2013
Assets
Current Assets
Cash		$	—			$	3,659
Due from related parties			19,474				—
Other receivables			5,248				5,248
Prepaid expenses and other current assets			111,674				121,168
Total Current Assets			136,396				130,075
Property and equipment, net of accumulated depreciation of $107,974 and $105,795			6,131				5,795
Website development costs, net of accumulated amortization of $254,264 and $251,688			—				2,576
Other assets			19,125				18,920
Total Assets		$	161,652			$	157,366
Liabilities and Stockholders’ Equity (Impairment)
Current Liabilities
Bank overdraft			5,911				—
Accounts payable			262,214				253,347
Accrued expenses			2,846,362				2,326,283
Due to related parties			73,442				33,612
Obligations to be settled in stock			267,928				259,288
Dividends payable			710,024				684,392
Loans and notes payable - other			100,000				100,000
Loans and notes payable – related parties			340,000				340,000
Convertible notes payable-related parties			10,478,699				9,918,699
Current maturities of long-term debt			33,529				33,529
Liability for derivative conversion feature –related parties			13,497,431				12,068,233
Total Current Liabilities			28,615,540				26,017,383
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 683,693,060 and 683,693,060 shares respectively.			68,367				68,367
Additional paid-in capital			52,726,105				52,726,105
Accumulated deficit			(81,248,446)				(78,654,575)
Total Stockholders’ Equity (Impairment)			(28,453,888)				(25,860,017)
Total Liabilities and Equity (Impairment)		$	161,652			$	157,366

 

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

 

 

 

 

KIWIBOX.COM, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended												Six Months Ended
		June 30,												June 30,
			2014							2013						2014		2013
Advertising		$	25						$	309,834						$25		$578,087
Advertising - affiliate			8,560							—						19,474		-
Other			—							—						-		48,547
Total Revenues			8,585							309,834						19,499		626,634
Cost of Goods Sold
Website hosting expenses			8,790							203,359						8,790		436,065
Total Cost of Goods Sold			8,790							203,359						8,790		436,065
Gross Profit (Loss)			(205)							106,475						10,709		190,569
Selling expenses			121,293							131,388						191,492		289,823
Impairment - goodwill			—							3,685,398						-		3,685,398
General and administrative expenses			258,325							239,309						436,932		524,522
Loss From Operations			(379,823)							(3,949,620)						(617,715)		(4,309,174)
Other Income (Expense)
Miscellaneous income			—							1,312						-		6,575
Change in fair value–derivative liability			(341,389)							4,075,561						(295,603)		4,076,175
Interest expense-derivative conversion features			(650,143)							(608,988)						(1,133,595)		(1,121,399)
(Loss) gain on extinguishment of debt			—							3,520						-		(36,480)
Amortization of debt discount			—							—						-		(8,333)
Interest expense			(264,843)							(242,683)						(521,326)		(471,768)
Total Other Income (Expense)			(1,256,375)							(3,228,722)						(1,950,524)		2,444,770
Loss Before Benefit (Provision) for Income Taxes			(1,636,198)							(720,898)						(2,568,239)		(1,864,404)
Benefit (Provision) for Income Taxes			0							0						0		(650)
Net Income (Loss)		$	(1,636,198)						$	(720,898)						$(2,568,239)		$(1,865,054)
Dividends on Preferred Stock			(12,816)							(12,816)						(25,632)		(25,632)
Net Inomce (Loss) Applicable to Common Shareholders, basic and diluted		$	(1,649,014)						$	(733,714)						$(2,593,871)		$(1,890,686)
Net Loss Per Common Share, basic and diluted		$	(0.003)							(0.001)						$          (0.004)		$          (0.003)
Weighted Average of Common Shares Outstanding			683,693,060							681,049,653						683,693,060		680,498,585
Comprehensive Income (Loss):
Net Income (Loss)		$	(1,636,198)						$	(720,898)						$(2,568,239)		$(1,865,054)
Foreign currency translation adjustment			—							(163,479)						-		(100,702)
Total Comprehensive Income (Loss)		$	(1,636,198)						$	(884,377)						$(2,568,239	)	$(1,965,756)

 

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

 

KIWIBOX.COM, INC. STATEMENTS OF CASH FLOWS
(Unaudited)
		Six Months Ended
		June 30,
		2014				2013
Cash Flows From Operating Activities
Net Income/(Loss)		$	(2,568,239	)		$	(1,865,054	)
Adjustments to Reconcile Net Loss to Net Cash Used by Operations
Depreciation and amortization			4,755				94,760
Change in fair value – derivative liabilities			295,603				(4,076,175	)
Intrinsic value of  beneficial conversion feature			1,133,595				1,121,399
Impairment - goodwill			—				3,685,398
Loss on extinguishment of debt			—				36,480
Decreases (Increases) in Assets
Accounts receivable - affiliate			(19,474	)			(105,602	)
Prepaid expenses			9,494				(83,110	)
Increases (Decreases) in Liabilities
Bank overdraft			5,911				(45,693	)
Liabilities to be settled in stock			8,640				9,960
Accounts payable			8,867				86,408
Accrued expenses			520,079				414,280
Net Cash Used by Operating Activities			(600,769	)			(729,949	)
Cash Flows From Investing Activities
Cash proceeds (outlay) – other assets			(205	)			(4,289	)
Purchases of property and equipment			(2,515	)			(892	)
Net Cash Provided (Used) by Investing Activities			(2,720	)			(5,181	)
Cash Flows From Financing Activities
Proceeds from loans/notes			560,000				495,000
Repayment on convertible note			—				(63,000	)
Net  proceeds (repayments) to related parties			39,830				299,087
Net Cash Provided by Financing Activities			599,830				731,087
Net Increase (Decrease) in Cash			(3,659	)			(4,043	)
Effect of exchange rates on cash			0				2,546
Cash at beginning of period			3,659				56,751
Cash at end of period		$	—			$	55,254
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid		$	1,511			$	7,819
Income Taxes Paid		$	0			$	650

 

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

 

 

KIWIBOX.COM, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

Six Months Ended June 30, 2014
Year to date dividend accruals			$   25,632

 

 

Six Months Ended June 30, 2013
Settlement of obligations with common stock			$   16,100
Year to date dividend accruals			$   25,632
Settlement of bank debt with short term loan			$ 115,344

 

 

 

 

 

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.

 

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

 

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

 

On December 10, 2013, the Company signed an Equity Purchase Agreement with Marcus Winkler to sell to him eighty (80%) percent of the equity of its German subsidiary, KWICK! Community GmbH & Co. KG, a German limited liability company, and Kwick! Beteiligungs GmbH, its general partner (collectively, “Kwick”). The sale was approved on December 18, 2013. Due to the fact that the parent company ceased to have a controlling financial interest in Kwick, the subsidiary was deconsolidated from that date forward.

 

 

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 financial statements for the three months and six months ended June 30, 2013 include the accounts of Kiwibox.com, Inc. and the activities of its former subsidiary, KWICK! Community GmbH & Co. KG (“Kwick”). Any significant inter-company balances and transactions were eliminated.

 

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

 

Kiwibox.Com, Inc.

Notes to Consolidated Financial Statements

 

operations as incurred. Software costs are amortized using the straight line method and amortized over their estimated useful lives. Amortization begins when the related software is ready for its intended use in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software, Subsequent Measurement.

 

 

Foreign Currency Translation

 

Income and expense items of the Company’s former foreign subsidiary operations were translated at the weighted average exchange rates prevailing during the three and six months ended June 30, 2013. Gains and losses, if any, resulting from foreign currency transactions are included in the results of operations during that period.

 

 

Advertising Costs

 

Advertising costs are charged to operations when incurred. Advertising expense was $677 and $ 0 for the three and six months ended June 30, 2014 and $11,728 and $53,675 for the same periods in 2013, respectively.

 

Evaluation of Long Lived Assets

 

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

 

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

 

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

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

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

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

 

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, 2013 and the six months ended June 30, 2014 as derivative liabilities required to be bifurcated from the host contract in accordance with ASC 815-40, Contracts in Entity’s Own Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares (see Note 13).

 

Kiwibox.Com, Inc.

Notes to Consolidated Financial Statements

 

Securities Issued for Services

 

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

 

Reclassification of certain securities under ASC 815-15

 

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

 

 

Capitalization of Software /Website development costs

 

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

 

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

 

Income Taxes

 

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

 

Net Loss Per Share

 

Net loss per share, in accordance with the provisions of ASC 260, “Earnings Per Share” is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period. Common Stock equivalents have not been included in this computation since the effect would be anti-dilutive. Such common stock equivalents totaled 102,503,240 common shares at June 30, 2014, comprised of 24,500,000 shares issuable upon exercise of stock purchase warrants, 4,500,000 shares issuable upon exercise of stock options, 729,537 shares

 

Kiwibox.Com, Inc.

Notes to Consolidated Financial Statements

 

exercisable upon conversion of convertible preferred shares, and 72,773,703 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, represent totals which would yield in excess of 6.1 billion shares if fully converted at June 30, 2014. 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 period, this clause limits any conversion to the aforementioned number of shares. All of the aforementioned conversions or exercises, as the case may be, are at the option of the holders.

 

Revenue Recognition

 

The Company’s revenue is derived from advertising on the Kiwibox.Com 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, 2013, 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, 2014 and December 31, 2013, 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

 

 

Kiwibox.Com, Inc.

Notes to Consolidated Financial Statements

 

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:

	June 30, 2014		December 31, 2013
Consulting Fees Business insurance Other	$ 110,000 1,126 548		$ 110,000 10,620 548
	$ 111,674		$ 121,168

 

 

5. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at:

	June 30, 2014		December 31, 2013
Furniture	$       14,322		$      14,322
Leasehold Improvements	24,130		24,130
Equipment	75,653		73,138
	114,105		111,590
Less accumulated depreciation	107,974		105,795
Total	$        6,131		$       5,795

 

Depreciation expense charged to operations was $2,179 and $53,103 in the first six months of 2014 and 2013, respectively.

 

 

 

6. INTANGIBLE ASSETS

 

	June 30, 2014		December 31, 2013
Website development costs	$        254,264		$         254,264
Less accumulated amortization	254,264		251,688
Total	$                   0		$       2,576

 

Amortization expense for the six months ended June 30, 2014 and 2013 was $2,576 and $46,704, respectively.

 

 

 

7. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY

 

On December 10, 2013, the company signed an equity purchase agreement with Marcus Winkler to sell to him eighty (80%) percent of the equity of its German subsidiary, Kwick. Pursuant to the terms of the agreement, the purchaser paid 36,000 Euros as the purchase price and the company was required to obtain shareholder approval of the sale as required under applicable Delaware Law. The majority shareholder approval was obtained on December 18, 2013. In addition, the Company and Mr. Winkler signed a Lock-Up and Standstill Agreement pursuant to the general terms of which the Company agreed not to participate in the management, operations or finances of Kwick, which shall be exclusively managed and under control of the purchaser. Accordingly, the Company’s minority ownership position shall be subject, in all respects, to the exclusive control of the purchaser. Mr. Winkler also has investment and voting control over

 

Kiwibox.Com, Inc.

Notes to Financial Statements

 

Kreuzfeld Ltd., a major creditor of the company, which holds a Class AA convertible promissory note with an outstanding balance (including accrued interest) of $4,444,617 as of June 30, 2014.

 

7. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY (continued)

 

Due to the significant reduction in the Company’s percentage of controlling interest in Kwick (down to 20%), coupled with the contract restrictions over voting rights and management of the operations of Kwick subsequent to December 18, 2013, the Company recognized the deconsolidation of Kwick as of that date, resulting in a loss on deconsolidation of $253,557, and now carries the investment in Kwick under the cost method of accounting. Due to the significant reductions in fair value of this reporting unit that were considered other than temporary, and impairment of the related goodwill, the carrying value of this cost method investment was zero at December 31, 2013 and June 30, 2014.

 

8. ACCRUED EXPENSES

 

Accrued expenses consisted of the following at:

 

	June 30, 2014		December 31, 2013
Accrued interest	$       2,678,089		$    2,158,274
Accrued payroll, payroll taxes and commissions	2,550		18,585
Accrued professional fees	153,501		116,900
Accrued rent/deferred rent obligation	12,222		11,789
Miscellaneous accruals	-		20,735
Total	$         2,846,362		$    2,326,283

 

 

9. OBLIGATIONS TO BE SETTLED IN STOCK

 

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

 

		June 30, 2014				December 31, 2013
Obligation for warrants granted for compensation		$	100,000			$	100,000
600,000 common shares issuable to a consultant who was a director of the company, for services rendered.			36,000				36,000
600,000 (2014) and 0 shares (2013) common Shares, and 2,900,000 (2014) and 2,900,000 (2013) Stock options issuable to two officers of the Company Pursuant to their respective employment agreements			59,558				56,858
6,000,000 (2014) and 5,400,000 (2013) stock options issuable to one director who also serves as the Company’s general counsel   1,000,000 warrants granted on the Pixunity.de asset Purchase (see Note 13)			62,370     10,000				56,430     10,000
		$	267,928			$	259,288

Kiwibox.Com, Inc.

Notes to Consolidated Financial Statements

 

10. LOANS PAYABLE

 

The Company (Formerly Magnitude, Inc.) had borrowings under short term loan agreements with the following terms and conditions at June 30, 2014 and December 31, 2013:

 

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

 

 

 

11. NOTES PAYABLE

 

		June 30,				December 31,
		2014				2013
Balance of non-converted notes outstanding. Attempts to locate the holder of this note, to settle this liability, have been unsuccessful.		$	25,000			$	25,000
From September 2008 through June 2014 five 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).     During 2011, a shareholder loaned the company $340,000 under demand notes at 10%.			10,478,699       340,000				9,918,699       340,000
Total		$	10,843,699			$	10,283,699

 

Kiwibox.Com, Inc.

Notes to Consolidated Financial Statements

 

12. LONG-TERM DEBT

 

Long-term debt as of June 30, 2014 and December 31, 2013 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. 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 six months ended June 30, 2014 no debt was converted.

 

The Company renegotiated certain outstanding promissory notes with its four major creditors, Discover Advisory Company of the Bahamas (“DAC”), Kreuzfeld Ltd. of Switzerland (“Kreuzfeld”), Cambridge Services, Inc. of Panama (“CSI”) and Vermoegensverwaltungs-Gesellschaft Zurich LTD of Switzerland (“VGZ”). As of August 1, 2012, the Company authorized the issue of a new series of corporate notes, the Class AA Senior Secured Convertible Revolving Promissory Notes, dated as of August 1, 2012 (the New Note(s)”) and issued New Notes: (1) to DAC, with a maximum credit facility of $5,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated July 27, 2010, in the original principal amount of $1,080,984, now cancelled, which had an outstanding balance due (including accrued interest) of $3,952,008 as of December 31, 2013 and $4,111,771 at June 30, 2014; (2) to Kreuzfeld, with a maximum credit facility of $5,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated September 16, 2011, in the original principal amount of $2,000,000, now cancelled, which had an outstanding balance due (including accrued interest) of $4,267,834 at December 31, 2013 and $4,444,617 at June 30, 2014; (3) to CSI, with a maximum credit facility of $2,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated August 1, 2011, in the original principal amount of $1,303,996, now cancelled, with an outstanding balance due (including accrued interest) of $2,729,435 as of December 31, 2013, and $3,417,656 at June 30, 2014 and; (4) to VGZ, with a maximum credit facility of $2,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated September 30, 2010, in the original principal amount of $2,000,000, now cancelled, with an outstanding balance due (including accrued interest) of $955,159 as of December 31, 2013 and $993,440 at June 30, 2014.

Kiwibox.Com, Inc.

Notes to Financial Statements

 

13. DERIVATIVE CONVERSION FEATURES (Continued)

 

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 Company’s partly-owned (now deconsolidated) German subsidiary, KWICK! Community GmbH & Co. KG, a private German limited partnership (“KG”), and all of its shares of the sole general partner of KG, KWICK! Community Beteiligungs GmbH.

 

On February 28, 2012 the Company signed a convertible note with Michael Pisani. This was a 1 year note that was 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 was amortized over the life of the note. A total of $8,333 in amortization expense was recorded during the six months ended June 30, 2013. As of December 31, 2013 this debt plus accrued interest was paid in full.

 

The Company accounted for the conversion features underlying these convertible debentures in accordance with ASC 815-40, Contract in Entity’s Own Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares. The Company determined the value of the derivate conversion features of new debentures issued to these holders plus accrued interest during the six months ended June 30, 2014 under these terms at the relevant commitment dates to be $1,133,595 utilizing a Black-Scholes valuation model. The change in fair value of the liability for the conversion feature resulted in expense of $295,603 for the six months ended June 30, 2014, which is included in Other Income (Expense) in the accompanying financial statements. The fair value of these derivative conversion features was determined to be $13,497,431 at June 30, 2014.

 

 

14. COMMITMENTS AND CONTINGENCIES

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

 

	2014	$	23,460
	2015		47,854
	2016		49,289
	2017		50,768
	2018		47,847

 

In May 2010 the Company negotiated a lease of an apartment in New York City for the CEO in order to reduce travel costs. 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

Kiwibox.Com, Inc.

Notes to Financial Statements

 

14. COMMITMENTS AND CONTINGENCIES (Continued)

 

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, this lease was then extended through December 31, 2013 at the same terms. In December 2013 the lease was extended through May 31, 2014. This lease was again extended to May 31, 2015 in May of 2014.

 

Our total rent expenses were $41,139 and $60,386 during the six months ended June 30, 2014 and 2013, respectively.

 

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, and for $100,000 to be prepaid on January 1, 2011 through June 30, 2011. During the fourth quarter of 2011 this agreement was extended through December 31, 2012. During the fourth quarter of 2012 this agreement was again extended through December 31, 2013 with the same prepayment provision. During the fourth quarter of 2013 the terms of this agreement were modified. The new terms called for an increased monthly consulting fee to $18,333 effective January 1, 2014 through December 31, 2014, with an increased of the mandatory prepayment to $110,000 for each six month period. There were no changes to the stock compensation portion of any earlier agreement.

.

In the six months ended June 30, 2014 and June 30, 2013 this officer was granted 600,000 shares.

 

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.

 

15. RELATED PARTY TRANSACTIONS

 

During the six months ended June 30, 2014, the Company sold advertising space on its Kiwibox.com website to Kwick totaling $19,474, which is the balance due from Kwick at June 30, 2014. Kwick is majority-owned by Mr. Winkler, who in turn is a related party of the Company (see Note 7).

 

During the six months ended June 30, 2014 and 2013 one outside director of the Company who also serves as the Company’s general and securities counsel, was paid an aggregate $19,854 and $22,854 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, 2014 and 2013, valued at $2,970 and $2,970, respectively in each year.

 

During the three and six months ended June 30, 2014 and 2013 we incurred aggregate expenses of $96,441 and $165,757 and $92,881 and $156,323 respectively, to companies controlled by the Chief Executive Officer, for website hosting, website development, server farm installations and technical advisory services.

 

Through June 30, 2014, approximately 9.99% 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 2014, 2013 and 2012. During the three months and six months ended June 30, 2014 Cambridge Services, Inc advanced an additional $335,000 and $560,000. At June 30, 2014, $3,221,722 and $2,920,060 of such notes were outstanding and owed to Discovery Advisory Company and Cambridge Services Inc, respectively and $3,564,959 and $771,958 owed to Kreuzfeld, Ltd. and VGZ, respectively.

Kiwibox.Com, Inc.

Notes to Financial Statements

 

16. FAIR VALUE

 

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

 

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

 

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

 

 

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

 

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

 

The following table reconciles, for the six months ended June 30, 2014, 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, 2014	$		12,068,233
Present V                             Value of beneficial conversion features of new debentures			1,133,595
Present V                             Change in value of beneficial conversion features during period			295,603
Reductions in fair value due to principal conversions			-
Conversion Liability at June 30, 2014		$	13,497,431

 

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.

 

 

 

Kiwibox.Com, Inc.

Notes to Financial Statements

 

 

17. SUBSEQUENT EVENTS

 

During July 2014 and through August 12, 2014 we received $80,000 of working capital from accredited

investors, which are covered by convertible promissory notes.

 

 

 

 

 

 

 

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, 2013 as filed on Form 10-K. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

 

 

Description of Business

 

Overview

 

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

 

We own and operate “Kiwibox.com”, a social networking website. Initially launched in 1999, Kiwibox.com is an online social networking community. Kiwibox has a regional-based advertising-system that allows target-group-optimized ads for advertisers and sponsors.

 

The company successfully acquired the German social network  Kwick! in the third quarter 2011. On December 18, 2013 the company sold 80% of its ownership in Kwick!

 

 

Kiwibox Operations

 

Kiwibox is in a unique position because it combines the excitement of a dating community with the benefits and accessibility of a real social network. The Kiwibox network encourages members to explore local events in their area, connect with other members and enjoy the additional member exclusive benefits the Kiwibox social network is offering.  

 

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 in the web and through mobile apps.

 

Kiwibox was one of the first social networks that  integrated its mobile-apps for social mobile advertising in its mobile-apps, to account for the fast growing  movement to mobile applications from fixed site usage We are continuing to optimize this website and develop mobile applications to keep these users engaged across multiple platforms. At present, more than 500,000 company Apps are installed in our network for our community and our the market. Kiwibox plans to release various monthly updates for its existing Apps and another two new mobile Apps by the end of the year. We plan The company plans to integrate in-App shopping to be less dependent on the advertisement market.

Our continuing membership growth is fueled by infiltrating our users into local event venues where they participate and simultaneously communicate with our social network via the regular deployment of our cutting-edge App updates. As a result, the Kiwibox network enjoys continuing user sign-ups and continuing loyalty of users to our social network Due to our long-time experience with our German affiliate, the KWICK! Community (“Kwick”), we were able to fulfill the front-end and back-end needs for this remarkable growth!

 

Our former subsidiary, Kwick, has negotiated with Triple Double U (“TDU”) – an exclusive German online advertisement company – an exclusive online advertisement agreement for the Kiwibox network for web and mobile advertisements. This “Ads-Delivery” has been transferred to and integrated into the Kiwibox platform in January 2014. This new agreement has resulted in an increase in advertising revenue in this second quarter 2014. The Company attaches great importance to its technology developments and continues to follow the top social network market leaders with technology upgrades, providing its users with an alternative social networking opportunity. 

 

  Potential Revenue Streams and Marketing Strategy

 

Currently we generate the majority of our revenue from advertising/sponsorships.  We anticipate continued revenue growth from increased membership activity and our revitalized website as we continue to implement new marketing strategies. Our software and networking technologies, primarily incorporated during 2013, now permit our mobile devices to accept and receive direct advertising through our exclusive online advertising agreement with TDU. Kiwibox has constructed a new revenue stream through its members mobile devices based on the delivery of our Kiwibox original, editorial content,, supported with the new advertisement-profiles. Overall, we have equipped the entire website with the newest state-of-the-art advertising features which enable sponsors to self-direct their message to specific target audiences based on gender, age, geographic region, education, and interests.

 

Community means social network – and Kiwibox thrives on its membership networking. Our new website is based on the latest web technology which makes it easier for users to stay connected and to interact with each other. Most importantly, our website features permit our community members to stay informed in “real” time about events and parties in areas we are targeting through our promotional teams. 

 

Safety

 

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

 

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

The operating expenses, not including stock-based compensation, are at a level of approximately $105,000 per month.

 

Results of Operations for the Three and Six Months Ended June 30, 2014 Compared to the Three and Six Months Ended June 30, 2013

 

For the three and six months ended June 30, 2014, total revenues amounted to $8,585 and $19,499, respectively compared to $309,834 and $626,634 recorded in the same periods in 2013. This decrease is a result in the deconsolidation that occurred when 80% of Kwick was sold in 2013 (see Note 7 of Financial Statements).

 

Gross Profit (Loss) for the three and six months ended June 30, 2014 amounted to $8,585 and $19,499, respectively, after accounting for $8,790 and $8,790 respectively, in cost of sales. After deducting selling and general and administrative expenses of $379,618 and $628,424 for the three and six months ended June 30, 2014, compared to $370,697 and $814,345 recorded in the same period in 2013 (excluding the goodwill impairment in 2013), the Company realized operating losses of $379,824 and $617,715 for the three and six months ended June 30, 2014 compared to operating losses of $3,949,620 and $4,309,174 in the same periods in 2013. The decline in selling and general and administrative expenses was the result of the deconsolidation of Kwick!.

The quarter concluded with a net loss of $1,636,198 for the quarter and net loss of $2,568,239 for the first six months of 2014. After accounting for dividends accrued on outstanding preferred stock which totaled $25,632, the net loss applicable to common shareholders for the six months ended June 30, 2014 was $2,593,871 or $0.004 per share compared to a net income applicable to common shareholders of $1,890,686 or $0.003 per share for the same period in 2013.

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 $335,000 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 $28,479,144 at June 30, 2014, as compared to $25,887,308 at December 31, 2013. Stockholders’ equity showed an impairment of $28,453,888 at the end of the period, compared to an impairment of $25,860,017 at the beginning of the year. The negative cash flow from operations during the six months totaled $600,769 and was financed by new debt.

The Company had $5,911 of bank debt as of June 30, 2014. Aside from trade payables and accruals, our remaining indebtedness at June 30, 2014 consisted of certain notes and loans aggregating $10,918,699, liabilities for derivative conversion features of $13,497,431, amounts due to related parties of $73,442, and the following obligations. The position “Obligations to be settled in stock” of $267,928 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 $710,024 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.

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, 2014 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, 2014, 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, 2014, 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. Additionally in September 2012 the Company hired a comptroller to assist the Chief Financial Officer.

 

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, 2014 and December 31, 2013 and the related statements of operations, and cash flows for the three and six months ended June 30, 2014 and 2013, 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, 2014, 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.

 

 

 

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 six months in 2014 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 $710,000. 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

 

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 14, 2014
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 14, 2014.
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 14, 2014.

 

(b) Reports on Form 8-K:

 

 

There were no reports on form 8-K filed in the quarter.

 

 

 

 

 

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.

 

 

Date: August 14, 2014		Kiwibox.Com, Inc.
	By:	/s/ Andre Scholz
		Andre Scholz
		Chief Executive Officer

 

 

Date: August 14, 2014		Kiwibox.Com, Inc.
	By:	/s/ Craig S. Cody
		Craig S. Cody
		Chief Financial Officer