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, 2009
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) |
| 330 W. 38th St., New York, NY 10018 | (212) 967-1953 |
| (Address of Principal Executive Office) (Zip Code) | (Registrant’s telephone number including area code) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.: Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
The number of shares of Registrant’s Common Stock, $0.0001 par value, outstanding as of August 12, 2009, was 454,099,712 shares.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
| Page | |||
| Number | |||
| PART 1 - FINANCIAL INFORMATION | |||
| Item 1 | Financial Statements | ||
| Consolidated Balance Sheets | |||
| - June 30, 2009 (unaudited) and December 31, 2008 (audited) | 3 | ||
| Consolidated Statements of Operations | |||
| - Three and six months ended June 30, 2009 and 2008 (unaudited) | 4 | ||
| Consolidated Statements of Cash Flows | |||
| - Six months ended June 30, 2009 and 2008 (unaudited) | 5 - 6 | ||
| 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 | 17 | |
| Item 4 | Controls and Procedures | 17 | |
| PART II - OTHER INFORMATION | 19 - 20 | ||
| Item 1. Legal Proceedings | 19 | ||
| Item 1A. Risk Factors | 19 | ||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 19 | ||
| Item 3. Defaults Upon Senior Securities | 19 | ||
| Item 4. Submission of Matters to a Vote of Security Holders | 19 | ||
| Item 5. Other information | 19 | ||
| Item 6. Exhibits | 20 | ||
| SIGNATURES | 21 | ||
2
PART I - Item 1 Financial Statements
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| June 30, 2009 (Unaudited) | December 31, 2008 (Audited) | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 45,578 | $ | 5,000 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $0 and $0 | 5,374 | 9,800 | ||||||
| Prepaid expenses | 4,890 | 16,162 | ||||||
| Total Current Assets | 55,842 | 30,962 | ||||||
| Property and equipment, net of accumulated depreciation of $81,394 and $63,722 | 22,493 | 40,165 | ||||||
| Software, net of accumulated amortization of $23,104 and $12,329 | 41,546 | 52,321 | ||||||
| Deferred financing costs, net of accumulated amortization of $619,900 and $615,900 | - | 4,000 | ||||||
| Other assets | 17,724 | 3,224 | ||||||
| Total Assets | 137,605 | 130,672 | ||||||
| Liabilities and Stockholders’ Equity (Impairment) | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | 783,482 | 931,676 | ||||||
| Obligations to be settled in stock | 148,200 | 135,200 | ||||||
| Dividends payable | 453,708 | 428,076 | ||||||
| Loans and notes payable | 1,170,000 | 320,000 | ||||||
| Derivative liability – warrants and options | - | 3,330,812 | ||||||
| Current maturities of long-term debt | 33,529 | 33,529 | ||||||
| Total Current Liabilities | 2,588,919 | 5,179,293 | ||||||
| Long-term Debt | - | - | ||||||
| Total Liabilities | 2,588,919 | 5,179,293 | ||||||
| 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 G Convertible Preferred Stock, | ||||||||
| of which a combined total 85,890 and 129,500 shares are issued and outstanding | 86 | 129 | ||||||
Common Stock, $0.0001 par value, 1,400,000,000 shares authorized; issued and outstanding 454,099,712 and 436,242,570 shares | 45,410 | 43,624 | ||||||
| Additional paid-in capital | 44,386,294 | 40,159,909 | ||||||
| Loans receivable – stockholders | (131,262 | ) | (131,262 | ) | ||||
| Accumulated (deficit) | (46,751,842 | ) | (45,121,021 | ) | ||||
| Total Stockholders’ Equity (Impairment) | (2,451,314 | ) | (5,048,621 | ) | ||||
| Total Liabilities and Equity (Impairment) | $ | 137,605 | $ | 130,672 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
3
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Total Revenues | $ | 20,959 | $ | 4,300 | $ | 38,844 | $ | 18,214 | ||||||||
| Cost of Goods Sold | 2,263 | 18,559 | 11,497 | 31,750 | ||||||||||||
| Gross Profit (Loss) | 18,696 | (14,259 | ) | 27,347 | (13,536 | ) | ||||||||||
| Selling expenses . | 12,769 | 12,410 | 101,565 | 73,204 | ||||||||||||
| Provision for bad debts | - | - | - | 7,893 | ||||||||||||
| Stock-based compensation (see below) | - | 57,000 | - | 57,000 | ||||||||||||
| Research and development cost | - | 7,200 | - | 7,200 | ||||||||||||
| General and administrative expenses | 260,261 | 762,869 | 845,776 | 1,297,713 | ||||||||||||
| Loss from Operations | (254,334 | ) | (853,738 | ) | (919,994 | ) | (1,456,546 | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Miscellaneous income | - | - | - | 27,008 | ||||||||||||
| Misc. non-operating expenses | - | (3,102 | ) | - | (3,102 | ) | ||||||||||
| Change in fair value –derivative liability | - | 1,945,641 | (77,806 | ) | (245,796 | ) | ||||||||||
| Amortization of deferred financing cost | - | (11,666 | ) | (4,000 | ) | (70,303 | ) | |||||||||
| Gain on extinguishment of debt | 32,416 | 25,000 | 32,416 | 718,856 | ||||||||||||
| Interest income | 5 | 549 | 5 | 549 | ||||||||||||
| Interest expense | (20,623 | ) | - | (635,810 | ) | (5,375 | ) | |||||||||
| Total Other Income (Expense) | 11,798 | 1,956,422 | (685,195 | ) | 421,837 | |||||||||||
| Profit (Loss) before Provision for Income Taxes | (242,536 | ) | 1,102,684 | (1,605,189 | ) | (1,034,709 | ) | |||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net Profit (Loss) | $ | (242,536 | ) | $ | 1,102,684 | $ | (1,605,189 | ) | $ | (1,034,709 | ) | |||||
| Dividends on Preferred Stock | (12,816 | ) | (13,916 | ) | (25,632 | ) | (27,832 | ) | ||||||||
| Net Profit (Loss) applicable to Common Shareholders | $ | (255,352 | ) | $ | 1,088,768 | $ | (1,630,821 | ) | $ | (1,062,541 | ) | |||||
| Net Profit (Loss) per Common Share | $ | (0.001 | ) | $ | 0.003 | $ | (0.004 | ) | $ | (0.003 | ) | |||||
| Weighted Average Number of Common Shares Outstanding | 454,099,712 | 376,242,570 | 449,635,427 | 337,270,348 | ||||||||||||
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 SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2009 | 2008 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net Loss | $ | (1,605,189 | ) | $ | (1,034,709 | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash Used by Operations | ||||||||
| Depreciation and amortization | 32,447 | 87,900 | ||||||
| Change in fair value – derivative liabilities | 77,806 | (680,056 | ) | |||||
| Secutities issued for expenses | 5,940 | 57,000 | ||||||
| Loss on disposal of assets | - | 2,553 | ||||||
| Intrinsic value of beneficial conversion rights | 600,000 | - | ||||||
| Gain on extinguishment of debt | - | (693,856 | ) | |||||
| Decreases (Increases) in Assets | ||||||||
| Accounts receivable | 4,426 | 7,893 | ||||||
| Prepaid expenses | 11,272 | (9,371 | ) | |||||
| Other assets | (14,500 | ) | - | |||||
| Increases (decreases) in Liabilities | ||||||||
| Obligations to be settled in stock | 13,000 | 925,852 | ||||||
| Accounts payable and accrued expenses | 65,376 | (194,349 | ) | |||||
| Net Cash Used by Operating Activities | (809,422 | ) | (1,531,143 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Cash outlay for website development costs | - | (64,650 | ) | |||||
| Cash paid as additional consideration-Kiwibox Acquisition | - | (50,000 | ) | |||||
| Purchases of equipment and fixtures | - | (22,205 | ) | |||||
| Net Cash Used by Investing Activities | - | (136,855 | ) | |||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from loans and notes | 850,000 | 40,000 | ||||||
| Issuance of common stock | - | 1,610,000 | ||||||
| Net Cash Provided by Financing Activities | 850,000 | 1,650,000 | ||||||
| Net Increase (Decrease) in Cash | 40,578 | (17,998 | ) | |||||
| Cash at Beginning of Period | 5,000 | 470,148 | ||||||
| Cash at End of Period | $ | 45,578 | $ | 452,150 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Interest paid | - | - | ||||||
| Taxes paid | - | - | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
5
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||
| Six Months Ended June 30, 2009 | ||||
| Reclassification of derivative liabilities to Additional Paid-in capital | $ | 3,408,618 | ||
| Forgiveness of debt by related party | $ | 213,570 | ||
| Six Months Ended June 30, 2008 | ||||
| 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 SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
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. 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.
7
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
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-K for the year ended December 31, 2008 and its quarterly report on Form 10-Q for the period ended March 31, 2009.
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, 2009, the results of operations for the three and six months ended June 30, 2009 and 2008, and the cash flows for the six months ended June 30, 2009 and 2008, 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, or lease term for leasehold improvements, if for a shorter period. 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 SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
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 has determined the fair market value of the warrants/options issued under the Black-Scholes Pricing Model. The Company has 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).
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. During the first quarter of 2009, we reclassified a position of $3,408,618 from liabilities for derivative securities to additional paid-in capital after the indeterminate factor in connection with the conversion clause of certain convertible preferred shares was removed.
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 $0 and $64,650 was capitalized for web-site development work during the six months ended June 30, 2009 and the year ended December 31, 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. Since the number of shares issuable under the Company’s Series G convertible preferred stock was indeterminable during the year ended December 31, 2008, the Company had measured the fair value of warrants and options outstanding at December 31, 2008, which was determined to be $3,330,812, measured using significant unobservable inputs (Level 3) under a Black-Scholes valuation method. The change in value during the six months ended June 30, 2009 was a loss of $77,806 and during the six months ended June 30, 2008 a profit of $1,945,641, both reported in the Statement of Operations under Other Income (Expense).
9
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
On February 19, 2009, all outstanding shares of the Series G stock automatically converted into 17,857,142 common shares, thereby removing the indeterminable factor and giving rise to a reclassification of the entire position of $3,408,618 into additional paid-in capital, which included a further $77,806 loss incurred during the first quarter 2009.
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 six months ended June 30, 2009.
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. Such common stock equivalents totaled 183,578,598 common shares at June 30, 2009, comprised of 151,139,648 shares issuable upon exercise of stock purchase warrants, 16,753,542 shares issuable upon exercise of stock options, 729,537 shares exercisable upon conversion of convertible preferred shares, and 14,955,871 shares potentially issuable upon conversion of convertible debt. Such debt, presently convertible at the option of the holder at a price of $0.01 per share, totals $950,000 which would yield 95,000,000 shares if fully exercised, however, the respective notes, all of which were issued to the same investor, 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 9.9%. At the end of the quarter, this clause limits any conversion to the aforementioned 14,955,871 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 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.
10
.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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.
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 report for the fiscal year ended December 31, 2008, 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 March 31, 2009, cash balances in bank accounts did not exceed this limit. The Company provides credit in the normal course of business to customers located throughout the U.S. and overseas. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
4. PREPAID EXPENSES
Prepaid Expenses at the end of the quarter consisted of $3,506 prepaid health insurance and $1,384 prepaid business insurance costs.
5. PROPERTY AND EQUIPMENT
| Property and equipment consist of the following at | June 30, 2009 | December 31, 2008 | ||||||
| Furniture | $ | 2,014 | $ | 2,014 | ||||
| Leasehold Improvements | 24,131 | 24,131 | ||||||
| Equipment | 77,742 | 77,742 | ||||||
| 103,887 | 103,887 | |||||||
| Less accumulated depreciation | 81,394 | 63,722 | ||||||
| Total | $ | 22,493 | $ | 40,165 | ||||
Depreciation expense charged to operations was $17,672 and $6,357 in the first six months of 2009 and 2008, respectively.
11
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
6. INTANGIBLE ASSETS
Intangible assets at June 30, 2009 consisted of software for website development cost:
| June 30, 2009 | December 31, 2008 | |||||||
| Website development costs | $ | 64,650 | $ | 64,650 | ||||
| Less accumulated depreciation | 23,104 | 12,329 | ||||||
| Total | $ | 41,546 | $ | 52,321 | ||||
Amortization expense charged to operations was $10,775 and $2,680 in the first six months of 2009 and 2008, respectively.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| Accounts payable and accrued expenses consisted of the following at | June 30, 2009 | December 31, 2008 | ||||||
| Accounts payable | $ | 293,829 | $ | 474,315 | ||||
| Accrued interest | 101,653 | 65,872 | ||||||
| Accrued salaries and payroll taxes | 34,580 | 21,119 | ||||||
| Accrued commissions | 3,720 | 3,720 | ||||||
| Accrued professional fees | 321,635 | 324,636 | ||||||
| Miscellaneous accruals | 28,065 | 42,014 | ||||||
| Total | $ | 783,482 | $ | 931,676 | ||||
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, all of the penalty shares have been issued. The promissory note for $225,000 had subsequently been reduced by $75,000 in connection with a settlement agreement reached with one of the former shareholders of Kiwibox, and the remaining $150,000 was paid during the last quarter of 2008.
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
GOODWILL (continued)
The excess of the purchase price over the net assets acquired had been previously recognized as Goodwill in the amount of $3,138,751.
Management projected the discounted cash flow for the operations of the Company’s Kiwibox Media Inc. subsidiary, including the costs incurred by the Company’s Magnitude, Inc. subsidiary which has no own revenue basis but provides management, accounting, and investor relations and other professional services for the combined entity, over a period of five years. This analysis showed that the reliance on outside investors to provide needed additional funding to augment cash flow from operations would likely persist for a period in excess of one year. Management decided to write off the entire goodwill position at the end of the 2008 year because the willingness of outside investors to continue funding operations until positive cash flow can be realized, cannot be assured. A fair value of the Kiwibox subsidiary cannot be determined due to the fact that at this time this is essentially a start-up business with minimal revenues.
9. LOANS PAYABLE
The Company and Magnitude, Inc. had borrowings under short term loan agreements with the following terms and conditions at June 30, 2009 and December 31, 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 as of 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 equity on behalf of the depositor by issuing 2,000,000 restricted common shares and 2,000,000 five-year common stock warrants with an exercise price of $0.07 per share. The warrants were valued at $36,051 using a Black-Scholes model, with the following assumptions: volatility - 169%, dividends – none, risk-free rate – 2.6%. This issuance resulted in a gain on extinguishment of this liability of $23,949 based on the fair value of the shares delivered in settlement.
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
11. NOTES PAYABLE (continued)
| June 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| Balance of non-converted notes outstanding. Attempts to locate the holder of this note, to settle this liability, have been unsuccessful. | $ | 25,000 | $ | 25,000 | ||||
| In January 2008 a shareholder loaned the Company $40,000 pursuant to which the Company issued a demand note bearing interest at the rate of 5% per year. | 40,000 | 40,000 | ||||||
| In September 2008 and December 2008 a shareholder loaned the Company $50,000 and $100,000, repayable under convertible promissory notes bearing interest at 10% per annum and payable on demand. | 150,000 | 150,000 | ||||||
| In December 2008 an investor loaned the Company $30,000 repayable on January 15, 2009, bearing interest at 6.5% per year. The Company promised to issue 500,000 restricted common shares as loan origination fee. The note is overdue at March 31, 2009. | 30,000 | 30,000 | ||||||
| In January and February 2009 a shareholder loaned the Company $350,000 and $150,000, repayable under convertible promissory notes bearing interest at 10% per annum and payable on demand. On March 31, 2009, these notes and $100,000 of notes listed above were amended to include an option for the holder to convert the debt into common stock at $0.01 per share. The intrinsic value of the beneficial conversion feature was valued at $600,000 resulting in a charge to interest and a credit to additional paid-in capital in the same amount. | 500,000 | - | ||||||
| During April, May and June 2009, the same shareholder loaned the Company an aggregate $350,000 under the same terms as the earlier notes issued in the first quarter. All of the notes were subsequently amended to include the stipulation that the shares to be issued if the holder elected a conversion, together with other shares held by this shareholder, may not result in an ownership interest exceeding 9.9%. | 350,000 | - | ||||||
| Total | $ | 1,095,000 | $ | 245,000 | ||||
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
11. LONG-TERM DEBT
Long-term debt as of June 30, 2009 and December 31, 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
We maintain offices for our Magnitude and Kiwibox operations at 330 W. 38th Street, New York, New York 10018, for approximately 1,400 square feet. These leases expire with the end of 2010 and pay minimum monthly rentals of $3,769 plus tenants’ share of utility/cam/property tax charges which average approximately $800 per month.
Our total rent expenses were $57,436 and $36,326 during the six months ended June 30, 2009 and 2008, respectively.
During the second quarter we entered into an agreement with a consultant to serve as the Company’s Chief Technology Officer. The agreement has a term of twelve months and may be extended by mutual consent. It provides for remuneration for services and expenses at the rate of $20,000 and 100,000 restricted shares per month, and a signing bonus of 500,000 restricted shares.
13. RELATED PARTY TRANSACTIONS
During the six months ended June 30, 2009 and 2008, one outside director of the Company who also serves as the Company’s general and securities counsel, was paid an aggregate $40,000 and $220,963, respectively, for legal services. At June 30, 2009, the Company conditionally owed this director $100,000 pursuant to an agreement whereby $313,570 owed to him and recorded in the books of the company at December 31, 2008 were cancelled and replaced with a stipulation that $100,000 would be paid to him for his services if his current efforts to obtain additional working capital for the company were successful. This debt forgiveness of $213,570 was booked as a direct contribution to paid-in capital.
During the second quarter in 2008, we paid $24,000 to a major shareholder for investor relations services.
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
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 Magnitude Information Systems, Inc., contained herein and in the Company’s annual report for the year ended December 31, 2008 as filed on Form 10-K, and in the quarterly report for the period ended March 31, 2009. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
Description of Business
The Company is continuing to proceed with a restructuring plan whereby we will optimize our network strategy to improve performance and broaden our reach to an extended circle of potential subscribers. This effort goes hand to hand with a drive to substantially reduce overhead costs. At the end of the quarter, our burn rate for current operations has been reduced to a level between approximately $80,000 and $100,000. Currently, the Company is exploring new website options and features intended to generate revenues and to expand user communications, and is in discussion with certain technology providers to optimize its content and network capabilities.
Results of Operations for the Three and Six Months Ended June 30, 2009 Compared to the Three and Six Months Ended June 30, 2008
The Company had no material revenues during either the first two quarters in 2009 or 2008. Its only revenues are derived by its subsidiary Kiwibox Media Inc. whose business had not yet matured to a stage where significant revenues could be generated. For the three and six months ended June 30, 2009, total revenues amounted to $20,959 and $38,844, respectively, compared to $4,300 and $18,214 recorded in the same periods in 2008.
Gross profits for the six months ended June 30, 2009 amounted to $27,347 after considering $11,497 in website hosting expenses. After deducting selling -, research -, and general and administrative expenses of $273,030 and $947,341 for the three and six months ended June 30, 2009, compared to $839,479 and $1,443,010 recorded in the same periods in 2008, the Company realized operating losses of $254,334 and $919,994 for the three and six months ended June 30, 2009 compared to operating losses of $853,738 and $1,456,546 in the same periods in 2008. The large decline in operating expenses was the result of severe cost cutting measures initiated in the course of current restructuring efforts. In particular, outlays for salaries and consulting expenses were sharply reduced due to cut-backs in staffing and curtailment of consultant retentions.
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During the quarter, the major items included in non-operating income and expenses were the recognition of $32,416 in income from the cancellation of liabilities incurred in prior fiscal years. The quarter concluded with a net loss of $242,536, for the quarter and a loss of $1,605,189 for the first six months in 2009. After accounting for dividends accrued on outstanding preferred stock which totaled $12,816 and $25,632, respectively, the net loss applicable to common shareholders was $255,352 or $0.001 per share and $1,630,821 or $0.004 per share for the quarter and six months ended June 30, 2009, compared to income (loss) of $1,088,768 or $0.003 per share and $(1,062,541) or $(0.003) per share for the same periods in the previous year.
Liquidity and Capital Resources
We have financed our business with new debt since our cash flow is insufficient to provide the working capital necessary to fund our operations. We received $350,000 in cash from short-term loans from accredited private investors during the quarter. We have an urgent need for working capital to fund our operations. If we are unable to immediately 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 $2,533,077 at June 30, 2009, as compared to $5,148,331 at December 31, 2008. The change is primarily attributable to a reclassification of a position of $3,330,812 derivative liabilities included in the December 31, 2008 balance sheet to additional paid-in capital, following the conversion of certain shares of the Series G convertible preferred stock into common stock, in February 2009, and the receipt by the company of an aggregate $850,000 in short term loans during 2009. Stockholders’ equity showed an impairment of $2,451,314 at the end of the period, compared to an impairment of $5,048,621 at the beginning of the year. The negative cash flow from operations totaled $809,422 and was financed by new debt.
We have no bank debt and aside from trade payables and accruals, our indebtedness at June 30, 2009, consisted of certain notes and loans aggregating $1,170,000. The position “Obligations to be settled in stock” of $148,200 includes $119,000 for common shares due under consulting agreements, finance costs of $10,000 to be settled in common shares and $19,200 for services to be settled in common stock warrants, where the underlying securities had not yet been issued by year-end. Current liabilities also include $453,708 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 discussions with potential investors. 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.
Absent the receipt of immediate 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, absent the receipt of this additional funding, 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 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
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As of the end of the period covered by this Form 10-Q for the quarter ended June 30, 2009, 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 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
The Company did not issue any unregistered securities during the quarter.
(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 $454,000. 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 April 3, 2009, the Company filed a report on Form 8-K, informing about a press release which announced the launch of a proprietary custom mobile platform for the Kiwibox website.
On April 3, 2009, the Company filed a report on Form 8-K, informing about the issuance of certain promissory notes.
On April 30, 2009, the Company filed a report on Form 8-K, informing about the Company’s ongoing restructuring of its operations.
On May 22, 2009, the Company filed a report on Form 8-K, informing about the appointment of A. Scholz as a director of the Company. and consolidation of operations in its New York office.
On June 12, 2009, the Company filed a report on Form 8-K, informing about the consolidation of certain outstanding debt in a new master convertible promissory note secured by its shares in its Kiwibox subsidiary, and the conclusion of a consulting agreement with one of its directors.
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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 14, 2009 | By: | /s/ Joerg Klaube |
| Joerg Klaube | ||
| Chief Financial Officer | ||
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