FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2008
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission file number 33-20432
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) |
| 1250 State Route 26, Branchburg, New Jersey 08876 | (908) 879-2722 | |
| (Address of Principal Executive Office) (Zip Code) | (Registrant’s telephone number including area code) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.: Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer o 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 July 31, 2008, was 407,402,570 shares.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
| Page | ||
| Number | ||
| PART 1- FINANCIAL INFORMATION | ||
| Item 1 Financial Statements | ||
| Consolidated Balance Sheets | ||
| - June 30, 2008 (unaudited) and December 31, 2007 (audited) | 3 | |
| Consolidated Statements of Operations | ||
| - Three and six months ended June 30, 2008 and 2007 (unaudited) | 4 | |
| Consolidated Statements of Cash Flows | ||
| - Six months ended June 30, 2008 and 2007 (unaudited) | 5 | |
| Notes to Consolidated Financial Statements | 7 - 15 | |
| Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 - 17 | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 18 | |
| Item 4T.Controls and Procedures | 18 | |
| PART II - OTHER INFORMATION | 20 | |
| Item 1. Legal Proceedings | 20 | |
| Item 1A. Risk Factors | 20 | |
| Item 3. Defaults Upon Senior Securities | 20 | |
| Item 4. Submission of Matters to a Vote of Security Holders | 20 | |
| Item 5. Other information | 20 | |
| SIGNATURES | 22 |
2
PART I - Item 1 Financial Statements
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| June 30, 2008 (Unaudited) | December 31, 2007 (Audited) | ||||||
| Assets | |||||||
| Current Assets | |||||||
| Cash | $ | 452,150 | $ | 470,148 | |||
| Accounts receivable, net of allowance for doubtful accounts of $7,893 and $0 | - | 7,893 | |||||
| Prepaid expenses | 21,710 | 12,339 | |||||
| Total Current Assets | 473,860 | 490,380 | |||||
| Property and equipment, net of accumulated depreciation of $49,724 and $81,965 | 34,083 | 20,788 | |||||
| Software, net of accumulated amortization of $3,350 and $0 | 61,300 | - | |||||
| Deferred financing costs, net of accumulated amortization of $609,900 and $539,597 | - | 35,303 | |||||
| Goodwill | 3,138,751 | 2,663,751 | |||||
| Other assets | 3,224 | 11,114 | |||||
| Total Assets | 3,711,218 | 3,221,336 | |||||
| Liabilities and Stockholders’ Equity (Impairment) | |||||||
| Current Liabilities | |||||||
| Accounts payable and accrued expenses | 687,922 | 907,799 | |||||
| Obligations to be settled in stock | 601,800 | 1,622,921 | |||||
| Deferred revenue | - | 100,000 | |||||
| Dividends payable | 404,575 | 376,743 | |||||
| Loans and notes payable | 365,000 | 450,000 | |||||
| Derivative liability - warrants and options | 2,145,864 | 2,825,920 | |||||
| Current maturities of long-term debt | 33,529 | 33,529 | |||||
| Total Current Liabilities | 4,238,690 | 6,316,912 | |||||
| Long-term Debt | - | - | |||||
| Total Liabilities . | 4,238,690 | 6,316,912 | |||||
| Stockholders’ Equity (Impairment) | |||||||
| Preferred Stock, $0.001 par value, non-voting, 3,000,000 shares authorized: 2,500 shares have been designated Cumulative Preferred Stock, of which 1 share is issued and outstanding | 0 | 0 | |||||
| 300,000 shares have been designated Series A Convertible Preferred Stock, 350,000 shares have been designated Series B Convertible Preferred Stock, 120,000 shares have been designated Series C Convertible Preferred Stock, 500,000 shares have been designated Series D Convertible Preferred Stock, 500,000 shares have been designated Series E Convertible Preferred Stock, 43,610 shares have been designated Series E Convertible Preferred Stock, of which a combined total 129,500 shares are issued and outstanding | 129 | 129 | |||||
| Common Stock, $0.0001 par value, 700,000,000 shares authorized; issued and outstanding 376,242,570 and 276,703,237 shares | 37,624 | 27,671 | |||||
| Additional paid-in capital | 40,359,961 | 36,739,270 | |||||
| Loans receivable – stockholders | (286,721 | ) | (286,721 | ) | |||
| Accumulated (deficit) | (40,638,465 | ) | (39,575,925 | ) | |||
| Total Stockholders’ Equity (Impairment) | (527,472 | ) | (3,095,576 | ) | |||
| Total Liabilities and Equity (Impairment) | $ | 3,711,218 | $ | 3,221,336 | |||
The accompanying notes are an integral part of the consolidated financial statements.
3
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||
| June 30, | June 30, | ||||||||||||
| 2008 | 2007 | 2008 | 2007 | ||||||||||
| Total Revenues | $ | 4,300 | $ | 933 | $ | 18,214 | $ | 3,956 | |||||
| Cost of Goods Sold | 18,559 | - | 31,750 | - | |||||||||
| Gross Profit (Loss) | (14,259 | ) | 933 | (13,536 | ) | 3,956 | |||||||
| Selling expenses | 12,410 | - | 73,204 | 414 | |||||||||
| Provision for bad debts | - | - | 7,893 | - | |||||||||
| Stock-based compensation (see below) | 57,000 | 172,000 | 57,000 | 292,000 | |||||||||
| Research and development cost | 7,200 | - | 7,200 | 735 | |||||||||
| General and administrative expenses | 762,869 | 391,288 | 1,297,713 | 731,663 | |||||||||
| Loss from Operations | (853,738 | ) | (562,355 | ) | (1,456,546 | ) | (1,020,856 | ) | |||||
| Other Income (Expense) | |||||||||||||
| Miscellaneous income | - | - | 27,008 | - | |||||||||
| Misc. non-operating expenses | (3,102 | ) | (164 | ) | (3,102 | ) | (164 | ) | |||||
| Change in fair value -derivative liability | 1,945,641 | 267,786 | (245,796 | ) | (635,699 | ) | |||||||
| Amortization of deferred financing cost | (11,666 | ) | (203,376 | ) | (70,303 | ) | (203,376 | ) | |||||
| Gain on extinguishment of debt | 25,000 | - | 718,856 | - | |||||||||
| Interest income | 549 | - | 549 | - | |||||||||
| Interest expense | - | (103,443 | ) | (5,375 | ) | (112,803 | ) | ||||||
| Total Other Income (Expense) | 1,956,422 | (39,197 | ) | 421,837 | (952,042 | ) | |||||||
| Profit (Loss) before Provision for Income Taxes | 1,102,684 | (601,552 | ) | (1,034,709 | ) | (1,972,898 | ) | ||||||
| Provision for income taxes | - | 22,846 | - | 22,846 | |||||||||
| Net Profit (Loss) | $ | 1,102,684 | $ | (624,398 | ) | $ | (1,034,709 | ) | $ | (1,995,744 | ) | ||
| Dividends on Preferred Stock | (13,916 | ) | (13,78 | ) | (27,832 | ) | (27,475 | ) | |||||
| Net Profit (Loss) applicable to Common Shareholders | $ | 1,088,768 | $ | (638,136 | ) | $ | (1,062,541 | ) | $ | (2,023,219 | ) | ||
| Net Profit (Loss) per Common Share | $ | 0.003 | $ | (0.003 | ) | $ | (0.003 | ) | $ | (0.009 | ) | ||
| Weighted Average Number of Common Shares Outstanding | 376,242,570 | 229,842,905 | 337,270,348 | 228,325,074 | |||||||||
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
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended | |||||||
| June 30, | |||||||
| 2008 | 2007 | ||||||
| Cash Flows from Operating Activities | |||||||
| Net Loss | $ | (1,034,709 | ) | $ | (1,995,744 | ) | |
Adjustments to Reconcile Net Loss to Net Cash Used by Operations | |||||||
| Depreciation and amortization | 87,900 | 17,750 | |||||
| Securities issued for various expenses | 57,000 | 292,000 | |||||
| Change in fair value – derivative liabilities | 245,796 | 635,699 | |||||
| Loss on disposal of assets | 2,553 | - | |||||
| Accretion of beneficial conversion feature | - | 78,003 | |||||
| Amortization of deferred financing costs | - | 203,376 | |||||
| Gain on extinguishment of debt | (718,856 | ) | - | ||||
| Decreases (Increases) in Assets | |||||||
| Accounts receivable | 7,893 | - | |||||
| Prepaid expenses | (9,371 | ) | 20,545 | ||||
| Increases (decreases) in Liabilities | |||||||
| Deferred revenues | - | (2,720 | ) | ||||
| Obligations to be settled in stock | - | 66,561 | |||||
| Accounts payable and accrued expenses | (169,349 | ) | 236,340 | ||||
| Net Cash Used by Operating Activities | (1,531,143 | ) | (448,190 | ) | |||
| Cash Flows from Investing Activities | |||||||
| Cash outlay for website development costs | (64,650 | ) | - | ||||
| Kiwibox acquisition | (50,000 | ) | - | ||||
| Purchases of equipment and fixtures | (22,205 | ) | (3,308 | ) | |||
| Net Cash Used by Investing Activities | (136,855 | ) | (3,308 | ) | |||
| Cash Flows from Financing Activities | |||||||
| Proceeds from loans and notes | 40,000 | 347,000 | |||||
| Issuance of common and preferred stock | 1,610,000 | 56,000 | |||||
| Net Cash Provided by Financing Activities | 1,650,000 | 403,000 | |||||
| Net Increase (Decrease) in Cash | (17,998 | ) | (48,498 | ) | |||
| Cash at Beginning of Period | 470,148 | 81,307 | |||||
| Cash at End of Period | $ | 452,150 | $ | 32,809 | |||
The accompanying notes are an integral part of the consolidated financial statements.
5
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||
| Additional goodwill incurred by obligation to be settled in stock for 20 million penalty shares | $ | 200,000 | ||
| Additional deferred finance costs incurred by obligation to be settled in stock | $ | 35,000 | ||
| Additional goodwill incurred via promissory note | $ | 225,000 | ||
| Settlement of deferred revenue liability with stock | $ | 40,000 | ||
| Settlement of note conversions and finance cost obligations with stock and warrants | $ | 123,644 | ||
| Issuance of stock and warrants for prior subscription obligations | $ | 1,800,000 | ||
6
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Magnitude Information Systems, 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.
The Company, Magnitude, Inc. and Kiwibox Media Inc. are separate legal entities, with Kiwibox Media, Inc. being a wholly owned subsidiary. The 1% of Magnitude, Inc. not owned by the Company constitutes a minority interest which is valued at $0. The operations of the combined entity are currently comprised almost exclusively of the operations of Kiwibox Media, Inc.
Business
Prior to the implementation of its strategic business plan in 2007, the Company’s primary product was an integrated suite of proprietary software modules previously marketed under the name ErgoEnterprise™. During the latter half of fiscal year 2006, Company management concluded that the marketplace for the Company’s ergonomic software products was not developing, and would not develop to the material extent necessary in the next 12 to 24 months, to support and sustain the Company’s sales efforts. Accordingly, management determined that it would be in the best interests of the Company and its shareholders to identify another business opportunity and pursue it for the benefit of our shareholders. On February 19, 2007, the Company, pursuant to its strategic plan to seek another business opportunity, signed an Agreement and Plan of Reorganization with the owners of a social networking website, to acquire their Kiwibox.com website and business, represented by Kiwibox Media, Inc. Pursuant to that certain Agreement and Plan of Reorganization, in August, 2007, Kiwibox Media, Inc. merged with and into Magnitude Operations, Inc., a wholly owned subsidiary of Magnitude Information Systems, Inc., in a “reverse merger” transaction. The three shareholders of Kiwibox Media, Inc. transferred and delivered all of the outstanding stock of Kiwibox Media, Inc. to Magnitude Operations, Inc. for cancellation and received in exchange shares of Magnitude Information Systems, Inc. at closing. Also at closing and as a result of the merger, the separate legal existence of Magnitude Operations, Inc. ceased and Kiwibox Media, Inc. became the surviving corporation of the merger and a wholly owned subsidiary of Magnitude Information Systems, Inc. Magnitude Information Systems, Inc. is planning to change its corporate name to “KiwiAge Enterprises, Inc.”
Through our subsidiary, we own and operate “Kiwibox.com”, a social networking website for teens. Initially launched in 1999, Kiwibox.com is an online social networking website dedicated to teen users. With approximately 1.8 million registered members, the Kiwibox website provides online content in several categories, dedicated to teens, including entertainment, fashion and games. We have formed a user-based contingent of contributors that submit, review and comment upon content and articles from all over the world, 24 hours a day, seven days a week. Kiwibox.com uses a “points” reward system for users, where a user may acquire elevated peer status and/or earn prizes which in many cases are provided by advertiser and/or sponsors. We are in the final stages of re-launching our website with increased functions, etc., scheduled for release in the summer of 2008.
On May 2, 2008, we disclosed the release of the “Beta” version of the Kiwibox.com new website to its membership. The first stage in the re-development of the Kiwibox.com website, the beta version will be tested and refined in the next several weeks. Following quality control procedures, the Kiwibox.com new website is expected to be released to the public later this month. Originally targeted for full release in April, 2008, extended technical and software implementation processes have delayed the public launch of the new website.
7
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2007 and its quarterly report on Form 10-Q for the quarter ended March 31, 2008.
In the opinion of the Company’s management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2008, the results of operations for the three and six months ended June 30, 2008 and 2007, and the cash flows for the six months ended June 30, 2008 and 2007, have been included.
Principles of Consolidation
The consolidated financial statements include the accounts of Magnitude Information Systems, Inc. and its subsidiaries Magnitude, Inc. and Kiwibox Media, Inc. All significant inter-company balances and transactions have been 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. Maintenance and repairs are charged to operations as incurred.
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.
Goodwill and Intangible Assets
The Company accounts for its goodwill and intangible assets pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS 142, intangibles with definite lives continue to be amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Goodwill and intangibles with indefinite lives are evaluated at least annually for impairment by comparing the asset's estimated fair value with its carrying value, based on cash flow methodology.
The Company’s intangible assets including goodwill are subject to impairment testing in the event of certain indicators. Impairment in the carrying value of an asset is recognized whenever anticipated future cash flows (undiscounted) from an asset are estimated to be less than its carrying value. The amount of the impairment recognized is the difference between the carrying value of the asset and its fair value.
8
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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 determined the fair market value of the warrants/options issued under the Black-Scholes Pricing Model. Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) 123(R), SHARE-BASED PAYMENT, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123(R), 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). During the quarter, we issued 600,000 shares and stock options for an aggregate 3,600,000 shares as compensation, whereby all such shares and 3,100,000 options were granted to officers and directors (see “Related Party Transactions”). The shares were valued at the market price of the Company's common stock at times of grant and the options at their fair value according to the Black-Scholes method, using 169% volatility and a 1.8% risk-free interest rate.
Reclassification of certain securities under EITF 00-19
Pursuant to Emerging Issues Task Force (EITF) Issue 00-19, 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 capitalized outside-contracted development work in accordance with the guidelines published under EITF 00-2, Accounting for Web Site Development Costs, adopted during the quarter ended March 31, 2008. Under EITF 00-2, 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 SOP 98-1, 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 SOP 98-1, 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 $24,120 and $40,530 was capitalized for web-site development work during the first and second quarters 2008, respectively.
Fair Value Measurements
The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, which is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Under FASB Statement No. 157, a framework was established for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Company measured the fair value of warrants and options outstanding at June 30, 2008 since the number of shares issuable under the Company’s Series G convertible preferred stock was indeterminable during the six months then ended. The value at June 30, 2008 was determined to be $2,145,864, measured using significant unobservable inputs (Level 3) under a Black-Scholes valuation method. The change in value during the six months period was $245,796 reported in the Statement of Operations under Other Income (Expense).
9
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities", which included and amendment of FASB Statement No. 115 with respect to improvement of financial reporting of certain investments in debt and equity securities. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The implementation of this new standard did not have a material impact on the Company's financial position, results of operations and cash flows for the three months ended June 30, 2008.
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 Financial Accounting Standards Board No. 128, “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.
Revenue Recognition
The Company’s revenue recognition policy for software sales is in accordance with Accounting Statement of Position (SOP) 97-2 “Software Revenue Recognition” and SOP 98-9 “Software Revenue recognition” which modifies SOP 97-2. Revenue is recognized at the time of licensing provided that the resulting receivable is deemed probable of collection and is fixed or determinable. Revenue from software maintenance contracts is recognized ratably as earned. When a sales contract includes multiple elements, revenues are allocated to the various elements based on Company-specific objective evidence of fair value, regardless of any separate prices for each element that may be stated within the contract.
The Company’s revenue from its KiwiBox Media, Inc. subsidiary derives from advertising on the KiwiBox 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.
10
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
2. GOING CONCERN
The ability of the Company to continue its operations is dependent on increasing sales and obtaining additional capital and financing. In their reports for the fiscal years ended December 31, 2007 and December 31, 2006, 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 $100,000. Balances in these accounts may, at times, exceed the federally insured limits. At June 30, 2008, one bank account maintained with a large nationally represented institution carried a balance $383,341. The Company provides credit in the normal course of business to customers located throughout the U.S. and overseas. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
4. PREPAID EXPENSES
Prepaid Expenses at the end of the quarter included $20,910 prepaid insurance costs, with the remainder representing miscellaneous prepaid expenses.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2008:
| Furniture | 2,014 | |||
| Leasehold Improvements | 9,400 | |||
| Equipment | 72,393 | |||
| 83,807 | ||||
| Less accumulated depreciation | 49,724 | |||
| Total | $ | 34,083 |
Depreciation expense charged to operations was $6,357 and $2,750 in the first six months of 2008 and 2007, respectively.
During the quarter, we disposed of obsolete office and computer equipment with a net book value of $2,553.
6. INTANGIBLE ASSETS
Intangible assets at June 30, 2008 included web site development costs and deferred finance costs.
Website development costs, at June 30, 2008, consisted of:
| $ | 64,650 | |||
| 3,350 | ||||
| Total | $ | 61,300 |
During the three months ended March 31, 2008, the Company incurred finance costs due to a penalty share obligation of 2,250,000 restricted shares valued at $35,000 to extend the maturities of various bridge notes. Amortization of deferred financing costs was $11,667, $70,304, $0 and $0 for the three and six months ended June 30, 2008 and 2007, respectively, resulting in net deferred financing costs of $0 at June 30, 2008.
11
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at June 30, 2008:
| Accounts payable | $ | 502,832 | ||
| Accrued interest | 64,127 | |||
| Accrued salaries | 10,030 | |||
| Accrued commissions | 3,720 | |||
| Accrued professional fees | 56,900 | |||
| Miscellaneous accruals | 50,313 | |||
| Total | $ | 687,922 |
Accrued commissions are due to a consultant who was retained in the capacity of Senior Vice President of Business Development.
8. GOODWILL
On August 16, 2007, the Company completed its acquisition of 100% of the outstanding capital stock of KiwiBox Media, Inc. The total initial purchase price of $2,850,273 was calculated as follows: we issued 30,000,000 restricted common shares based on a total value of $1,500,000 determined by the lower of $0.05 per share and the average sales price of the Company’s common stock for the ten (10) successive trading days immediately preceding the closing, 43,610 shares of our Series G Preferred Stock worth $500,000, paid $450,000 in cash to the three KiwiBox owners, and incurred $57,500 in acquisition fees. In addition, based on the initial Agreement and Plan of Reorganization from February 2007, the Company committed to investing $3.5 million for the operations of Kiwibox. Based on an amendment in July 2007, in the event that certain investment tranches were not made by their respective due dates, the Company agreed to issue 60,000 restricted shares to the former shareholders of Kiwibox for each day that the funds were in arrears. The Company estimated the fair value of this pre-acquisition contingency as of the acquisition date based on the present value of the total expected liability at a discount rate of 5%, with an accreted value of $295,800 at June 30, 2008 (current period value of $3,027 was charged to operations, so net increase in purchase price was $292,773). In February 2008, the Company entered into another amendment that superseded the provisions of amendments in December 2007, whereby the Company agreed to issue 20 million reset shares, valued at $200,000, and a promissory note for $225,000, and $250,000 cash penalties ($100,000 paid in 2007, $150,000 paid in 2008) as additional consideration due to the delays in financing, which increased the value of Goodwill at March 31, 2008. This additional consideration eliminated the requirement for penalty shares to continue accruing, as long as the Company received $1.5 million in financing by March 7, 2008, and invested $700,000 in Kiwibox operations. This financing was received in a timely fashion. The amendment also provided the former shareholders of Kiwibox the option to receive the value of the reset shares in common stock options of equivalent value. To date, none of the penalty shares have been issued.
The excess of the purchase price over the net assets acquired has been recorded as Goodwill in the amount of $3,138,751 as of June 30, 2008. Management expects the future discounted cash flows from Kiwibox’ operations to be equal or higher than the carrying amount of the goodwill.
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
9. LOANS PAYABLE
The Company and Magnitude, Inc. had borrowings under short term loan agreements with the following terms and conditions at June 30, 2008:
| On December 4, 1996, 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 at September 30, 2005 and no demand for payment has been made. | $ | 75,000 | ||
| Total | $ | 75,000 |
10. NOTES PAYABLE
On February 28, 2008, two debtholders agreed to convert their outstanding notes of $350,000, finance cost obligations to be settled in stock of $385,000 and finance cost obligations that could be settled in stock or cash of $22,500 into a total of 9,333,333 common shares and 3,500,000 five-year common stock warrants with an exercise price of $0.07 per share, resulting in a gain on extinguishment of $633,856. The warrants were valued at $30,311 using a Black-Scholes model, with the following assumptions: volatility - 169%, dividends - none, risk-free rate - 2.1%. In addition, in January 2008, the Company converted the $100,000 deposit recorded previously as deferred revenue into common stock on behalf of the depositor by issuing 2,000,000 restricted common shares. This issuance resulted in a gain on extinguishment of this liability of $60,000 based on the fair value of the shares delivered in settlement.
| At December 31, 1999 the Company had $1,475,000 of notes outstanding related to a June 1995 private placement offering. During 2000 the holders of $1,450,000 worth of notes agreed to accept partial repayment of approximately 30% of the note balances and converted the remaining balances into common shares or convertible preferred shares. The total amount of non-converted notes outstanding at June 30, 2008 is $25,000. Attempts to locate the holder of this note, to settle this liability, have been unsuccessful. | 25,000 | |||
| In January 2008 a shareholders 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 | |||
| In February 2008, as partial additional consideration under the Kiwibox acquisition agreement, as amended, the Company issued a $225,000 note payable bearing interest at 5% per year and due on the earlier of (1) the date the Company receives proceeds from any debt or equity financing or (2) June 15, 2008. | 225,000 | |||
| Total | $ | 290,000 | ||
| Subsequent to the reporting date, we repaid $75,000 on the above obligation with $75,000 now due upon receipt of any debt or equity financing; the remaining balance of $75,000 is subject to possible compromise pursuant to on-going negotiations with the holders. |
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
11. LONG-TERM DEBT
Long-term debt as of June 30, 2008 is comprised of the following:
| Discounted present value of a non-interest bearing $70,000 settlement with a former investor of Magnitude, Inc. to be paid in 24 equal monthly payments commencing July 1, 1997. The imputed interest rate used to discount the note is 8% per annum. This obligation is in default. | 33,529 | |||
| Total | 33,529 | |||
| Less current maturities | 33,529 | |||
| Long-term debt, net of current maturities | $ | - |
12. COMMITMENTS AND CONTINGENCIES
Lease Agreements
On September 1, 2006, the Company entered a three year lease (which can be terminated by either party after 12 months) for approximately 850 square feet of office space at 1250 Route 28, Suite 309, Branchburg, New Jersey. This lease agreement currently calls for a base rental payment of $1,137 per month plus utility/cam/property tax charges of approximately $600 per month through August 31, 2008, with a nominal increase for year three ending August 31, 2009. In addition, we maintain offices for our Kiwibox operations at 330 W. 38th Street, New York, New York 10018, consisting of approximately 1,600 square feet. We have a two-year lease covering these offices and pay minimum monthly rentals of $3,908.09 plus tenants’ share of 0.86% of utility/cam/property tax charges through August 31, 2008, and minimum monthly rentals of $4,012.82 plus additional rentals for the twelve months ending August 31, 2009.
13. RELATED PARTY TRANSACTIONS
On January 2, 2007, the Company and a former employee, Steven W. Jagels settled a lawsuit commenced by Mr. Jagels against the Company based upon claims which included breach of his employment agreement. We agreed to make a payment of $20,040 to Mr. Jagels and to issue 3,000,000 common shares to him by January 7, 2007. We also agreed to include these shares in a registration statement and when declared effective by the SEC, to cause a buyer to purchase these shares from Mr. Jagels for $75,000 prior to February 28, 2007. At the time of this report, the law suit has been settled.
In January 2007 we issued warrants for 3,125,000 shares, exercisable at $0.05 per share, to the former president and chief executive officer, in connection with a settlement agreement reached during the fourth quarter in 2006.
In May 2007 the Company reached agreement with the former president and chief executive officer to the effect that, in return for issuance of 2,000,000 shares, he would issue a waiver with respect to the Company’s obligation for filing a registration statement for certain securities previously issued to him by the Company.
During the first and second quarters in 2008, one outside director of the Company who also serves as the Company’s general and securities counsel, was paid an aggregate $170,962 and $50,000, respectively, for legal services. At June 30, 2008, the Company owed this director $179,470. Another outside director was paid $30,000 during the second quarter in 2008, for business consulting services.
During the second quarter in 2008, we paid $24,000 to a major shareholder for investor relations services.
In June, 2008, the Company granted 600,000 shares and stock options to purchase an aggregate 3,100,000 common shares to four officers and directors of the Company, for past services rendered. Such options are exercisable at prices between $0.025 and $0.15/share during three to five years periods. The Company has accounted for the fair value of these options, at $47,500 under the Black-Scholes method, using a volatility of 169% and a risk-free interest rate of 1.8%, in the current financial statements.
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14. SUBSEQUENT EVENTS
In August, 2008, we issued an aggregate 30,560,000 restricted common shares to the three Kiwibox principals pursuant to our Agreement and Plan of Reorganization, dated February 19, 2007, and subsequent amendments, as disclosed in our report and exhibit, filed on Form 8-K with the U.S. Securities and Exchange Commission on March 4, 2008. We also issued 600,000 restricted common shares to a director pursuant to a consulting agreement.
On July 18, 2008, Steven Gray resigned as a director and on August 1, 2008, Edward Marney resigned as President/CEO and director. On July 14, 2008, Rudolf Hauke was appointed Co-President/CEO and as a member of our Board of Directors. Following Mr. Marney resignation, Dr. Hauke assumed control of the positions of President/CEO. Also on July 14, 2008, Dr. Jorg Otzen and Quentin Kelly were appointed as members of the Board of Directors.
We will pay Dr. Hauke $6,000 salary and a $7,000 expense allowance monthly. We also granted Dr. Hauke a 2-year stock option to purchase 500,000 common shares at an exercise price of $.05, and 4-year stock options to acquire 100,000 common shares, exercisable at $.10 per share, for each month of service. All of the above officer and director transitions were disclosed in our report on Form 8-K filed on July 18, 2008.
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Magnitude Information Systems, Inc., included herewith. 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.
Background
On August 16, 2007, we closed on our acquisition of Kiwibox Media, Inc., a business that had developed a social networking website dedicated to teenagers. As a result of this acquisition, accomplished through a reverse merger, Kiwibox Media, Inc. became our wholly owned subsidiary. Prior to this acquisition, we entered into a License and Client Software Support Agreement with Imminent Technologies, LLC on April 10, 2007, licensing our prior business’ suite of ergonomic software products and thereby, effectively terminating our involvement in the ergonomic software business, all as disclosed in the current report on Form 8-K we filed on April 11, 2007.
The Kiwibox Closing - August 16, 2007.
On August 16, 2007, we closed our acquisition of Kiwibox Media, Inc. through a reverse merger between Kiwibox and our wholly owned acquisition subsidiary. As a result of the merger, Kiwibox became our wholly owned subsidiary. At the Kiwibox closing, we (1) issued an aggregate 30,000,000 restricted common shares to the three Kiwibox shareholders, (2) issued an aggregate 43,610 shares of our Senior Convertible Series G Preferred stock to these principals, (3) paid an aggregate $150,000 in cash to these Kiwibox principals, less a $7,000 investment banking fee paid to Southridge Investment Group, and (4) signed two-year employment agreements with Messrs. Lin Dai, Ivan Tumanov and Michael Howard, the three Kiwibox shareholders, all pursuant to the terms and provisions of the Agreement and Plan of Reorganization, dated February 19, 2007, and amendments thereto, and as most recently modified by Amendment No. 6 between the parties on February 28, 2008. The 43,610 Series G Preferred Shares issued to the Kiwibox principals at closing have an aggregate conversion value of $500,000 (the “Conversion Value”), which $500,000 Conversion Value is convertible into our common shares by dividing it by the “Market Price” of our common stock during the twenty (20) successive trading days immediately preceding the second anniversary of the agreement. At the closing, the Company promised to issue 750,000 of the KiwiBox shareholders’restricted common shares to Southridge Investment Group, LLC as part of its fee. Based upon our original Agreement and Plan of Reorganization of February 2007, we committed to invest $3.5 Million in the Kiwibox business. This commitment was based upon our communications with a Swiss based shareholder and investor in our Company, Tell Capital AG, who on July 26, 2007, sent us a commitment to invest $3 million of equity in our Company. Based upon Tell Capital’s commitment, we executed Amendment No. 3 to our original February, 2007 agreement with Kiwibox, committing to invest $3.5 million in various tranches, corresponding to the investment schedule set forth in the Tell Capital commitment, as well as agreeing to pay 60,000 restricted common shares for each day any of our scheduled investment tranches were late. Because of the delays in the receipt of the equity investments from Tell Capital, scheduled through November 1, 2007, our corresponding investment commitments to the Kiwibox business were also late. The continuing lateness of our investment commitments to the Kiwibox business resulted in further amendments to our Kiwibox agreement and required us to make a $100,000 penalty payment to the Kiwibox shareholders in 2007. The final modification to our original agreement, Amendment No. 6, executed on February 28, 2008, provided that if we raised $1.5 million in equity on or before March 7, 2008 and dedicated $700,000 of that amount to the Kiwibox business, made another penalty payment of $150,000 and delivered our corporate note in the principal amount of $225,000 to the Kiwibox shareholders, all rescission rights held by the Kiwibox shareholders and any further obligations to invest in the Kiwibox business would terminate. On March 7, 2008, we received $1.5 Million in subscription proceeds from investors, from which proceeds we dedicated $700,000 to the Kiwibox business, made the $150,000 penalty payment to the Kiwibox shareholders and delivered to them our $225,000 corporate note. Accordingly, the Kiwibox shareholders’ rights of rescission and our obligation to invest further funds in the Kiwibox business terminated. We have paid the Kiwibox shareholders $250,000 in cash, delivered to them our $225,000 corporate note, due June 15, 2008, and must issue to them approximately 30,000,000 restricted common shares resulting from the series of delays in meeting our commitments to invest funds into the Kiwibox business.
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We signed and delivered two-year employment agreements with the three Kiwibox Shareholders at the closing. These employment agreements pay each Kiwibox Shareholder an annual base salary of $150,000 and an annual bonus if certain business goals are met. Each Kiwibox Shareholder received a stock option to purchase up to 7,500,000 shares of our common stock which vests over time as well as a performance stock option to purchase up to an additional 3,000,000 shares of our common stock, vesting upon the attainment of certain business goals. All of these stock options are exercisable at $.05 per share.
Plan of Operations
Since our acquisition of Kiwibox, we have been developing a new version of our website, as well as extending our offerings into different mobile platforms. The mobile WAP version of the Kiwibox.com site has been launched, as well as our new Kiwibox 2.0 website. The new Web 2.0 site contains significant enhancements over the original website, expanding our operations that includes the following new features :
Increase in editorial staff and offerings - The new website combines weekly editorial with daily and up-to-the-minute entertainment news and content. We have hired additional editorial staff persons to augment and expand our existing editorial staff and volunteer teen writers to provide around the clock coverage in our content categories of music, entertainment, games, body & style and life & love.
Establishment of KiwiboxTV - Our new content production department is now established andharged to produce exclusive video content for the website. The KiwiboxTV section on the new website offers exclusive on camera interviews with artists and celebrities by Kiwibox teen Video Journalists, as well as video coverage of red carpet events in order to bring our members one step closer to their favorite celebrities.
Enhanced Community Features - The new website employs advanced social networking functionality such as dynamic profile pages, featuring drag and drop customization, enhanced privacy settings and personal sub-domains for every member. Members can add widgets to aggregate their web presence together with all of their favorite Kiwibox content.
Revamped Points and Prizes - We are expanding the number of activities for our members to earn points and prizes. Members will have more ways to earn KiwiPoints by participating in the social network and contributing editorial content. Members can redeem these KiwiPoints for an expanded selection of real world KiwiPrizes. We expect our expanded Points and Prizes program, as well as our planned offering of virtual prizes in the future, will attract new members to our website.
Expansion of our Game Offerings - We have expanded our KiwiGames offerings to our members, doubling the amount of games to play while connecting and competing with friends. We are continuing to expand our partnerships with online game sites and online game developers, in order to provide a better platform for sponsors to integrate their marketing messages and advertising campaigns.
Results of Operations
The Company had no material revenues during the quarter ended June 30, 2007. For the three and six months ended June 30, 2008, total revenues amounted to $4,300 and $18,214, respectively, generated entirely from the Kiwibox operations. Expenses for website hosting services for Kiwibox’ website are recognized as cost-of-goods-sold and amounted to $18,559 and $31,750 for the three and six months periods ended June 30, 2008.
Our operating expenses increased significantly from the same period a year ago, due to an expansion in staffing and marketing expenses to advance our new Kiwibox business. After accounting for selling-, research-, and general and administrative expenses totaling $839,479 and $1,443,010, the Company realized losses from operations of $853,738 and $1,456,546 for the three and six months ended June 30, 2008, compared to operating losses of $562,355 and $1,020,856 over the similar periods in 2007 during which time we had not yet invested in the new business. Non-operating income and expenses during the three and six months ended June 30, 2008 consisted primarily of a gain on extinguishment of debt of $25,000 and $718,856, respectively, and accounting income (charges) of $1,945,641 and $(245,796) reflecting the change in fair value of outstanding options and warrants during that period. The period results were a net profit of $1,102,684 and a net loss of $1,034,709 for the three and six months, respectively, ended June 30, 2008, compared to losses of $624,398 and 1,995,744 for the same periods in 2007.
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After accounting for dividend accruals on outstanding preferred stock which totaled $27,832 in 2008, the net results applicable to common shareholders for the three and six months periods ended June 30, 2008, were a profit of $1,088,768 or $0.003 per share, and a loss of $1,062,541 or $0.003 per share, respectively, compared to losses of $638,091 or $0.003 per share, and $2,023,219 or $0.009 per share for the same periods in the previous year.
Liquidity and Capital Resources
We have financed our business with new debt and equity capital since our cash flow is insufficient to provide the working capital necessary to fund our operations. We recorded $1,610,000 in cash from subscriptions for new equity capital from accredited private investors during the first quarter of 2008. In addition, we received $40,000 from short-term loans. Our deficit in working capital amounted to $3,764,830 at June 30, 2008, as compared to a deficit of $5,826,532 at December 31, 2007. Stockholders’ equity showed an impairment of $527,472 at June 30, 2008, compared to an impairment of $3,095,576 at the beginning of the year. The negative cash flow from operations totaled $1,531,143 and was substantially financed by new debt and equity which was obtained through private placements. The new equity placements were consummated by issuance of common stock and warrants to primarily foreign investors. Details of such transactions can be found in the “Changes and Issuance of Securities” section of this report.
We have no bank debt and aside from trade payables and accruals, our indebtedness at June 30, 2008, consisted of certain notes and loans aggregating approximately $365,000. The position “Obligations to be settled in stock” of $601,800 represents, the value of penalty shares to be issued to the former shareholders of Kiwibox and stock to be issued to certain consultants. Current liabilities also include $404,575 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 may not be sufficient to fund our website development, operations and marketing plan over the next twelve months. We expect to fund these requirements with further investments in form of debt or equity capital, targeted for the third quarter of 2008. There can be no assurance, however, that we will be able to identify a financing source or sources and if we do, whether the terms of such financing will be acceptable or commercially reasonable. If the Company failed to do so, either by not acquiring sufficient funds, or not receiving such funds in a timely manner, management may be forced to effect cut-backs in the Company’s operations.
.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
A smaller reporting company is not required to provide the information required by this Item.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this Form 10-Q for the quarter ended June 30, 2008, an evaluation was undertaken, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) of the Exchange Act; and; based upon that evaluation, Company management, including the Chief Executive Officer and the Chief Financial Officer, has concluded that the design of the Company’s disclosure controls and procedures are effective and ensure that all material information required to be disclosed by the Company in the reports that it files or submits under the Act, are recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms; in addition, the evaluation confirmed that the Company’s disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to Company management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company maintains a system of internal controls designed to provide reasonable assurance that: (i) the Company’s transactions are properly authorized; (ii) the Company’s assets are protected against unauthorized or improper use, and (iii) the Company’s transactions are properly recorded and reported, all to permit the preparation of complete and accurate financial statements in conformity with generally accepted accounting principles. (b) Changes in Internal Control over Financial Reporting Since the date of the most recent evaluation of the Company’s internal controls by Company management, including the Chief Executive Officer and Chief Financial Officer, there have not been any changes in the Company’s internal controls or other factors for the period covered by the subject Form 10-Q that materially affected or were likely to materially affect the Company’s internal control over financial reporting.
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The Company maintains a system of internal controls designed to provide reasonable assurance that: (i) the Company’s transactions are properly authorized; (ii) the Company’s assets are protected against unauthorized or improper use, and (iii) the Company’s transactions are properly recorded and reported, all to permit the preparation of complete and accurate financial statements in conformity with generally accepted accounting principles.
(b) Changes in Internal Control over Financial Reporting
Since the date of the most recent evaluation of the Company’s internal controls by the Chief Executive Officer and Chief Financial Officer, there have not been any significant changes in the Company’s internal controls or other factors for the period covered by the subject Form 10-Q that materially affected or were 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 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 quarter ended June 30, 2008, the Company did not issue 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 $405,000. 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 |
(3)(i) - Articles of Incorporation and Amendments thereto, incorporated herein by reference to Exhibits of previous filings with the Commission.
(3)(ii) - By-laws of the Company, incorporated herein by reference to Exhibits of previous filings with the Commission.
(31.1) - Certification of Rudolf Hauke, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) - Certification of Joerg H. Klaube, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) - Certification of Rudolf Hauke, Chief Executive Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
(32.2) - Certification of Joerg H. Klaube, Chief Financial Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
| (b) | Reports on Form 8-K: |
On May 2, 2008, the Company filed a report on Form 8-K, informing the release of the “Beta” version of its Kiwibox website.
On June 30, 2008, the Company filed a report on Form 8-K, informing about (i) a consultancy agreement with a major investor and shareholder, (ii) the grant of stock options to members of the board of directors of the Company, and (iii) a press release which announced the extension of access to its social network websire to users of mobile cellular phones.
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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.
| MAGNITUDE INFORMATION SYSTEMS, INC. | |||
| Date: | August 17, 2008 | By: | /s/ Rudolf Hauke |
| Rudolf Hauke | |||
| Chief Executive Officer | |||
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