SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2013
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE OF 1934
For the Transition Period From to
Commission File No. 33-20432
KIWIBOX.COM, INC.
(formerly known as Magnitude Information Systems, Inc.)
Exact Name of Registrant as Specified in its Charter
| DELAWARE | 75-2228828 |
| State or Other Jurisdiction of | IRS Employer |
| Incorporation or Organization | Identification Number |
330 W. 42 ND Street, #3210, New York, New York 10036
Address of Principal Executive Offices Zip Code
(212) 239-8210
Registrants Telephone Number, Including Area Code
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
| Title of Each Class | Name of Each Exchange on Which Registered | |
| NONE | NONE |
Securities Registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.0001
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of 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.
Yesx No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨
The Registrant’s revenues for the fiscal year ended December 31, 2013 were $934,219.
Common stock, par value $.0001 per share (“Common Stock”), was the only class of voting stock of the Registrant outstanding on March 29,2014. Based on the closing price of the Common Stock on the OTC Electronic Bulletin Board as reported on March 25, 2014 the aggregate market value of the shares of the Common Stock held by persons other than officers, directors and persons known to the Registrant to be the beneficial owners (as the term is defined under the rules of the Securities and Exchange Commission) of more than five percent of the Common Stock on April 8, 2014, was approximately $6,836,931 By the foregoing statements, the Registrant does not intend to imply that any of the officers, directors, or beneficial owners are affiliates of the registrant or that the aggregate market value, as computed pursuant to rules of the Securities and Exchange Commission, is in any way indicative of the amount which could be obtained for such shares of Common Stock.
As of May 14, 2014 683,693,060 shares of Common Stock, $.0001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: SEE EXHIBIT INDEX
KIWIBOX.COM, INC.
CONTENTS
| Page | ||
| PART I. | ||
| Item 1. | Business | 3 |
| Item 1A. | Risk Factors | 6 |
| Item 2. | Properties | 9 |
| Item 3. | Legal Proceedings | 9 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 9 |
| PART II. | ||
| Item 5. | Market for Registrant's Common Equity and Related Shareholder Matters | 10 |
| Item 6. | Selected Financial Data | 11 |
| Item 7. | Management’s' Discussion and Analysis of Financial Condition and Results of Operations | 12 |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risks | 13 |
| Item 8. | Financial Statements | 14 |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 14 |
| Item 9A. | Control and Procedures | 14 |
| Item 9B. | Other Information | 15 |
| PART III. | ||
| Item 10. | Directors and Executive Officers of the Registrant | 16 |
| Item 11. | Executive Compensation | 18 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management | 21 |
| Item 13. | Certain Relationships and Related Transactions | 24 |
| Item 14. | Principal Accountant Fees and Services | 25 |
| PART IV. | ||
| Item 15. | Exhibits | 26 |
| Signatures | 28 | |
| Exhibit Index | 29 |
| 2 |
PART I
| ITEM 1: | BUSINESS |
Section 1.1 The Company
Kiwibox.Com, Inc. (the “Company”) was incorporated as a Delaware corporation on April 19, 1988 under the name Fortunistics, Inc. On November 18, 1998, the Company changed its name to Magnitude Information Systems, Inc. On December 31, 2009, the Company changed its name to Kiwibox.Com, Inc.
On August 16, 2007 the Company acquired all outstanding shares of Kiwibox Media, Inc.
The Company, its subsidiary Magnitude, Inc. and Kiwibox Media Inc. were separate legal entities until December 31, 2009, with Kiwibox Media, Inc. being a wholly owned subsidiary. The 1% of Magnitude, Inc. not owned by the Company constituted a minority interest which was valued at $0. On December 31, 2009, the two subsidiaries Magnitude, Inc. and Kiwibox Media, Inc. merged into the Company.
On September 30, 2011, Kiwibox.com acquired the German based social network Kwick! (see Note 22 of the Financial Statements). On December 18, 2013 the company sold 80% of its ownership interest in Kwick! (see Note 7 of the Financial Statements).
The Company is currently subject to the reporting requirements of Section 15(d) of the Securities Exchange Act of 1934. The Company has the authority to issue an aggregate of One Billion Four Hundred Million (1,400,000,000) Common Shares, par value $.0001, following an increase from 700,000,000 shares, authorized by the Company on January 29, 2009, and Three Million (3,000,000) Preferred Shares, par value $.001, of which at December 31, 2011, Two Thousand Five Hundred (2,500) were designated as Cumulative Preferred Shares, par value $.001; Three Hundred Thousand (300,000) were designated as Series A Senior Convertible Preferred Stock, par value $0.001; Three Hundred Fifty Thousand (350,000) were designated as Series B Senior Convertible Preferred Stock, par value $0.001; One Hundred Twenty Thousand (120,000) were designated as Series C Senior Convertible Preferred Stock, par value $0.001; Five Hundred Thousand (500,000) were designated as Series D Senior Convertible Preferred Stock, par value $0.001; Five Hundred Thousand (500,000) were designated as Series E Senior Convertible Preferred Stock, par value $0.001, and Forty-Three Thousand Six Hundred Ten (43,610) were designated Series G Senior Convertible Preferred Stock
As of December 31, 2013, there were outstanding 683,693,060 Common Shares, 1 Cumulative Preferred Share, and 85,890 Convertible Preferred Shares.
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Description of Business
Overview
On December 31, 2009 Magnitude Information Systems, Inc. changed its name to Kiwibox.Com, Inc.
We own and operate “Kiwibox.com”, a social networking website. Initially launched in 1999, Kiwibox.com is an online social networking community.. Kiwibox has a regional-based advertising-system that allows target-group-optimized ads for advertisers and sponsors.
Kiwibox Operations
Kiwibox was one of the first social networks integrated for social mobile advertising in its mobile-apps, to account for the movement to mobile applications from fixed site usage We are continuing to optimize this website and develop mobile applications to keep these users engaged across multiple platforms. We are presently increasing the number of events sponsored in Germany as a way to bind our German members to our website.
The Company has successfully integrated Pixunity to the US market and will continue to add impressive features throughout the year. At the same time we continue to increase our market presence. Our promotional teams, both inside and outside of New York City, continue to develop partnerships with event organizers and businesses along the East Coast of the United States and plan further expansion of these types of market alliances thoughout 2014.
The Company attaches great importance to its innovative technology developments and continues to follow the top social network market leaders with technology upgrades, providing its users with an alternative social networking opportunity.
The operating expenses, not including stock-based compensation, are at a level of approximately $88,000 per month. (see sections “Loans and Notes Payable”).
Overall, we have equipped the entire website with the newest state-of-the-art advertising features which enable sponsors to self-direct their message to specific target audiences based on gender, age, geographic region, education, and interests. That also included a Search-Engine optimization with privacy options which improves search results. We focused our development resources to construct a scaleable and highly redundant system that can accommodate future growth. Our platform and software was updated in the 2Q to the new Internet Protocol IPv6 to verify being reachable also in the near future. During 2012 Kiwibox and Kwick! paralleled their software developments, versions and technology to optimize future developments. This experience and base technology will help us to integrate easier further networks. These technology improvements will permit us to more easily integrate new applications and networks as they are acquired in the future.
One of the most important features of a social network website is the Search and “be found” function. Here we completely updated our member search function to facilitate friends searches and establish networks of users on a global basis.
Potential Revenue Streams and Marketing Strategy
Currently we generate the majority of our revenue from advertising/sponsorships. We anticipate revenue growth from increased membership activity and our revitalized website as we continue to implement new marketing strategies. Our software and networking technologies we incorporated during 2012 now permit our mobile devices to accept and receive direct advertising, a vital mobile usage component that we expect to drive new advertising revenues during 2014.
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With the integration of target-group optimized advertising we seek to accommodate potential advertisers, recognizing and responding to the importance of a contact-price in relation to the internet target “cloud”. Our social networks permit us to work with potential advertisers to identify the right member groups for direct target advertising, a marketing channel that is readily accessible to our social media community.
Community means social network – and thrives on membership networking. Our new website is based on the latest web technology which makes it easier for users to stay connected and to interact with each other. Most importantly, our website features permit our community members to stay informed in “real” time about events and parties in areas we are targeting through our promotional teams.
Safety
Kiwibox.com has developed an effective monitoring model which assists in maintaining a safe site for our member base, combining both technology based systems and user moderation. Users communicate and share information in an environment where they feel both secure and at ease. Members of the Kiwibox team monitor forums and groups daily to ensure the content is appropriate.
In addition to our monitoring system, the Kiwibox.com platform is equipped with advanced technology safety features. This includes the private sphere configuration of users, contact blocs for larger age differentials, anti-spam protection and intelligent self-learning user-scoring feature. In addition to this, Kiwibox.com has implemented state of the art security features such as former Attorney General Andrew M. Cuomo’s hash value database in order to block images of illegal sexual content.. With the combination of human moderation and advanced technology, users are afforded a safe and secure site.
Competition
Our primary competitors are other youth targeted online social networks, including Facebook.com, Twitter. Facebook and Twitter are widely considered the industry leaders, however, recently statistics and strategic announcements from both companies has indicated a shift in the target audience from teens and college students to a much broader and more adult demographic, because of their international focus. We plan to distinguish ourselves by targeting the US-market and by combining the social-network advantages with user generated content – from users to users, while stressing the community feeling. As these other social networks have made changes to their websites we have been able to capitalize on the disenfranchised users and bring them into our online community.
Intellectual Property
The Kiwibox.com web and mobile software and other related intellectual property rights are important assets. We hold the Internet domain names Kiwibox.com, Kiwibox.net, Kiwibox.org, as well as other country-code top level domains (e.g. kiwibox.cn) and feature-based domains like 4kiwi.com.
Governmental Regulations
Our Kiwibox website operations are subject to state, federal and international laws, rules and regulations that cover on-line business, privacy policies, consumer protection and product marketing. The Kiwibox website business is subject to state, federal and international laws, rules and regulations applicable to online commerce, including user privacy policies, product pricing policies, website content and general consumer protection laws. Various laws, rules and regulations have been adopted, and probably will be adopted in the future, that apply to the Internet, including available online content, privacy concerns, online marketing, “spam” and unsolicited commercial email, taxation issues, and regulations that effect and monitor the quality of products and services.
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A portion of these laws, rules and regulations that concern the Internet and its uses have been only recently adopted. Courts and administrative agencies have not yet fully interpreted these legal requirements as to their application and scope. Accordingly, our Kiwibox website business is subject to the uncertainties of future interpretations and application of these legal requirements. The application and interpretation of these legal requirements or the passage of new and/or revised laws, rules and regulations could reduce the demand for Kiwibox website services, increase its operational costs, and expose it to potential liability. Any such events could have a material adverse effect upon our Kiwibox website business and financial condition. Our failure, or that of our business partners, to accurately predict and anticipate the interpretation or application of these laws, rules and regulations, whether now in force or adopted in the future, could have a detrimental impact on our operations, create negative publicity for us and expose us to potential liability.
State and federal agencies are applying consumer protection laws to regulate the on-line use, collection and dissemination of personal information and website content. These laws require us to implement programs to notify our website users of our privacy and security programs. Consumer protection laws will require us to obtain the consent of our website users if we want to collect and use certain portions of their personal information. We are currently voluntarily working in partnership with the New York State Attorney General’s office and have incorporated hash value technology into our website.
The Federal Trade Commission (“FTC”) is the lead federal agency monitoring Internet websites and their content. State attorneys general have become active monitors of the Internet at the local State level. These governmental bodies may investigate or bring enforcement actions against website operators they deem in violation of applicable consumer protection laws. We believe that our Kiwibox website’s collection and dissemination of information programs, including our privacy policies, do and will continue to comply with existing laws. However, a decision by a federal or state agency that any of our Kiwibox website’s business practices do not meet applicable legal standards could result in liability and have a material adverse effect on our business and financial condition.
Employees
Currently, we have 3 employees.
| ITEM 1.A: | Risks Related to Our Business |
Early Stage Company; Generation of Revenues
Kiwibox.Com, Inc. (“Kiwibox” or “the Company”) can be considered an early stage company and investors cannot reasonably assume that we will ever be profitable. As an early stage company, we are likely to continue to have financial difficulties for the foreseeable future. We may successfully re-develop our website operations and generate additional revenues but still be unable to achieve profitability. Kiwibox had devoted substantial funds to develop its website, but investors should be aware that there can be no assurance that Kiwibox will ever achieve revenues that exceed its operational costs. We may not obtain the funding necessary to provide Kiwibox with the working capital necessary to continue to develop and market its website. Moreover, the Kiwibox.com website may not receive sufficient internet traffic to increase revenues or achieve profitability.
Doubt Raised About our Ability to Continue as a Going Concern.
Our financial statements have been presented on the basis that we will remain a going concern and that our assets will increase and that we will satisfy our liabilities in the normal course of our business. Kiwibox has had minimal revenues and/or has incurred operating losses during the fiscal years ended December 31, 2010, 2011 , 2012, and 2013. Our independent auditors have concluded that these factors create an uncertainty about our ability to continue as a going concern. Our ability to continue as a going concern is dependent, among other factors, on our continued success in raising capital.
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Need for Additional Capital; Short-Term Viability of Company
Our operations require immediate investment of equity capital or loans to continue to operate. If we can not secure funds in the short-term, we will be required to close our entire business operations and our website. Assuming we can receive a current investment or loans to fund our immediate operational needs, our Kiwibox website business’s future capital requirements will depend on many factors, including the degree to which teenagers use the kiwibox.com Website and the degree to which Kiwibox is able to generate revenues from users of its site. We expect to require additional financing before we achieve a profitable level of operations, however, there is no assurance that such funding will be available on acceptable terms, or at all. If we elect to sell equity to raise additional funds, there is no assurance that additional equity can be sold on terms favorable to the Company and to its existing shareholders, with the result that existing shareholders may incur substantial dilution. Without the necessary funding, we may be required to delay, reduce or terminate some or all of our Kiwibox website business or our efforts to obtain additional funding.
No Formal Feasibility and Market Research Plan
We have collected data and statistics concerning the potential market for the Kiwibox.com website and the costs of marketing our services. We have relied principally on the judgment and conclusions of our management, based on their respective knowledge and experiences. We have not performed any formal marketing study that confirms any absolute demand for the services we are providing on our Kiwibox.com website.
Unpredictability of Future Revenues; Potential Downturns in Operating Results
Due to Kiwibox’s minimal revenues since inception and the uncertainty of revenues that may be generated through potential partners and alliances, we are currently unable to forecast our future revenues with accuracy. Our current and future operational costs are based primarily on our marketing and website development plans and our estimates of future revenues. Our potential advertising and joint marketing sales results are difficult to forecast at this stage. It will be difficult for us to realign our operational expenses should future revenue forecasts not materialize which would require that we curtail or cease certain aspects of our operations. Accordingly, if our future revenues are insufficient to fund our planned operations, such a shortfall could have an immediate adverse effect on our business, prospects, financial condition and results of operations.
We may experience cyclical downturns in our future operating results due to various factors, many of which are beyond our control. Some of the factors that could impact our operating results include: (a) our ability to attract and retain new members to our Kiwibox.com website; (b) new developments by our competitor websites; (c) advertising and product price competition; (d) our ability to develop enhancements to our website, upgrade its internet functionality and services; (e) our ability to attract and retain necessary personnel; (f) difficulties with our software or hardware equipment, including any interruptions in the development and maintenance of our internet equipment and related infrastructure systems related to our Kiwibox.com website; (g) the future impact of governmental rules, regulations and laws, and; (h) general economic conditions.
Website and Service Development Risks
The continuing development of our Kiwibox.com website is a highly complex technical process. We are continuing the process of designing and implementing a wide array of feature and contents enhancements in order to remain competitive in our teen marketplace. If we are unable to develop and introduce new services or enhancements to our website in a timely manner in response to changing market conditions or customer requirements, our business, prospects, operating results and financial condition could be materially adversely affected.
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Limited Senior Management Team; Potential Problems with Expanding Personnel
We have a limited number of senior management personnel, planning, developing and managing our website business. We have expanded our website operations to accommodate potential growth in our membership and marketplace. We could experience significant pressure on our financial resources and management personnel as a result of the current expansion. In order to manage this expansion, we may be required to adopt new operating procedures, develop new advertising and marketing plans, financial controls and procedures and policies to supervise a growing employee population. We will also be required to attract, retain and properly administer the expansion of our employee population. Investors should be aware that we may not be able to adequately manage all of these new developments in our expansion, in which case our operations, business prospects, operating results and financial condition could be materially adversely affected.
Competition
Our website business in the young adult and teen marketplace is highly competitive. We can give no assurances that our website business will effectively compete with the more established teen websites currently operating in this marketplace.
Many of our competitors have significantly greater financial resources, established brand names and significantly larger membership and customer bases and we expect our competition to only intensify.
Dependence on Management
The Kiwibox.com website’s success will be substantially dependent on the continued services and on the performance of our current senior management. We will also be dependent upon our ability to retain and provide incentives for our management team. The loss of services of any one or more of our senior management team could have a material adverse affect on our operating results, business prospects and financial condition.
Our success will be dependent, in large part, on the services of our principal officers and employees. The loss of any of these individuals could have a material adverse effect on our business or results of operations. We do not maintain “key-man” life insurance policies on the lives of our officers to compensate us in the event of their deaths.
Except for issues that require shareholder approval, investors should be aware that they will have no vote on our operations, business developments or any management issues, including expansion, website enhancements or personnel decisions. You should not invest in our company unless you understand that all business and operational decisions are made by our management.
Creation of Brand Awareness
It will be crucial to the economic success of our Kiwibox.com website that we promote and establish brand awareness. A successful brand awareness campaign will tend to decrease our marketing expenses over time. If we are not able to adequately establish our brand in our marketplace, our operating results, market growth and financial condition could be materially adversely affected.
Potential for Defects in our Products and Services
Our Kiwibox.com website, its functionality, product offerings and services may contain defects or problems yet undetected. Such defects or problems could delay the launch of our new Kiwibox.com website, generate negative public comment and inhibit marketplace acceptance, any one or more of which could have a material adverse affect on our operating results and financial condition.
Penny Stock Regulation
Our common shares are subject to the “penny stock rules” that require broker-dealers who sell our shares to make specific disclosures before selling to certain persons. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risk associated therewith as well as the written consent of the purchaser of such security prior to engaging in a penny stock transaction. These penny stock restrictions will continue to apply as long as the Company’s common stock continues to trade at market prices below $5.00. Investors should be aware that the regulations on penny stocks may significantly restrict the ability of any purchaser of our common shares to sell his or her Company common shares in the market.
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Absence of Dividends
We have not paid any dividends on our common stock and we are not likely to do so in the foreseeable future. We presently intend to retain earnings for use in growing our business. We may pay for some of our future expansion through debt financing, in which case lenders traditionally prohibit the payment of any such dividends. We also are prohibited from paying dividends on our common stock before we have paid all dividends accrued on our preferred stock, which accruals amounted to $684,392 at December 31, 2013. Investors should be aware, therefore, that the Company intends to re-invest any earnings back into our business for the foreseeable future and that they should have no expectations of receiving any dividends on the common shares they may purchase.
| ITEM 2: | Description of Properties |
We maintain offices for our Kiwibox operations at 330 W. 42nd Street, New York, New York 10036, for approximately 990 square feet. The lease requires initial minimum monthly rentals of $3,833 plus tenants’ share of utility/cam/property tax charges which average approximately $291 per month.
| ITEM 3: | LEGAL PROCEEDINGS |
At the time of this report, the Company is not a party to any material legal proceedings.
| ITEM 4: | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
In December 2013 a majority shareholder written consent was obtained in order to sell 80% of the Company’s ownership interest in its formerly consolidated subsidiary Kwick!
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PART II
| ITEM 5: | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS |
(a) Market Information
The Company’s common stock currently trades on the Electronic Bulletin Board of the OTC market, under the symbol KIWB. The following table sets forth, for the calendar quarters indicated, and for the last three years, the high and low sales prices for the Company’s common stock.
| OTC-BB | ||||||||
| Low/Bid | High/Ask | |||||||
| 2011 | ||||||||
| First Quarter | $ | 0.01 | $ | 0.02 | ||||
| Second Quarter | 0.02 | 0.06 | ||||||
| Third Quarter | 0.04 | 0.06 | ||||||
| Fourth Quarter | 0.02 | 0.06 | ||||||
| 2012 | ||||||||
| First Quarter | $ | 0.03 | $ | 0.05 | ||||
| Second Quarter | 0.02 | 0.04 | ||||||
| Third Quarter | 0.01 | 0.02 | ||||||
| Fourth Quarter | 0.01 | 0.02 | ||||||
| 2013 | ||||||||
| First Quarter | $ | 0.003 | $ | 0.01 | ||||
| Second Quarter | 0.003 | 0.01 | ||||||
| Third Quarter | 0.003 | 0.01 | ||||||
| Fourth Quarter | 0.003 | 0.01 | ||||||
(b) Shareholders
As of April 8, 2014, there were approximately 356 shareholders of record for the Company’s Common Stock. The number of record holders does not include shareholders whose securities are held in street names.
(c) Dividends
The Company has not declared or paid, nor has it any present intention to pay, cash dividends on its Common stock. The Company is obliged to pay cash dividends on its outstanding convertible preferred stock and, under certain circumstances, on its outstanding cumulative preferred stock. See "DESCRIPTION OF CAPITAL STOCK" - "The Series A Stock", "The Series B Stock", "The Series C Stock", "The Series D Stock", the “Series E Stock”, and "The Series G Stock", below.
Recent Issues of Unregistered Securities
On December 18, 2013, the Board of Directors authorized the issue of restricted common shares to one director and an officer of Kwick! for 400,000 shares, 250,000 shares each to another director, the Chief Financial Officer and to its accountant.. These restricted common shares were issued to these recipients pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) thereof.
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| ITEM 6: | Selected Financial Data |
Except for historical information, the Company's reports to the Securities and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases, as well as other public documents and statements, contain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the statements. These risks and uncertainties include general economic and business conditions, development and market acceptance of the Company’s products, current dependence on the willingness of investors to continue to fund operations of the Company and other risks and uncertainties identified in the Company's reports to the Securities and Exchange Commission, periodic press releases, or other public documents or statements.
Readers are cautioned not to place undue reliance on forward-looking statements. The Company undertakes no obligation to republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.
The selected financial information presented below under the captions "Statement of Operations" and "Balance Sheet" for the years ended December 31, 2009 through 2013 is derived from the financial statements of the Company and should be read in conjunction with the financial statements and notes thereto.
The financial data are those of Kiwibox.Com, Inc. (f/k/a Magnitude Information Systems, Inc.) including the operations of Magnitude, Inc. and, starting with August 16, 2007, the date of acquisition, the operations of KiwiBox Media, Inc through December 31, 2009, the date these entities were merged into Kiwibox.Com, Inc. All inter-company accounts and transactions have been eliminated in consolidation through December 31, 2009.
Balance Sheet
| December 31, | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Total assets | $ | 157,366 | $ | 6,877,123 | $ | 8,243,931 | $ | 166,436 | $ | 141,415 | ||||||||||
| Current liabilities | 26,017,383 | 25,910,042 | 16,326,319 | 6,181,044 | 2,311,386 | |||||||||||||||
| Long-term debt | - | - | - | - | - | |||||||||||||||
| Working capital | (25,887,308 | ) | (25,475,653 | ) | (15,505,560 | ) | (6,145,931 | ) | (2,226,345 | ) | ||||||||||
| Stockholders’ equity (impairment) | $ | (25,860,017 | ) | (19,032,919 | ) | $ | (8,211,778 | ) | (6,014,608 | ) | (2,169,971 | ) | ||||||||
Statement of Operations
| For the Year Ended December 31, | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Total revenues | $ | 934,219 | $ | 1,469,705 | $ | 599,615 | $ | 2,039 | $ | 50,450 | ||||||||||
| Operating loss | (7,404,934 | ) | (1,671,156 | ) | (1,500,610 | ) | (1,181,626 | ) | (1,609,956 | ) | ||||||||||
| Net loss | (6,953,532 | ) | (14,010,332 | ) | (5,900,537 | ) | (3,972,372 | ) | (2,440,465 | ) | ||||||||||
| Net loss after dividends on preferred shares | (7,004,795 | ) | (14,061,595 | ) | (5,951,800 | ) | (4,023,635 | ) | (2,491,728 | ) | ||||||||||
| Net loss per common share | $ | (0.01 | ) | $ | (0.022 | ) | $ | (0.011 | ) | $ | (0.008 | ) | $ | (0.006 | ) | |||||
| Number of shares used in computing per share data | 680,961,142 | 650,715,901 | 522,090,046 | 494,315,316 | 447,090,174 | |||||||||||||||
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| ITEM 7: | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934
The information in this annual report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their businesses so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than those statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.
The following discussion and analysis should be read in conjunction with the consolidated financial statements of Kiwibox.Com, Inc., 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.
Description of Business
Based on its market surveys, the Company’s business plan focused on increasing its regional membership during 2013. These efforts in the New York City membership market have resulted in an increased membership growth during 2013. The Company intends to continue its marketing efforts in this region through a series of street promotion and event organizing in 2014. The Company has developed a number of partnerships with event organizers and businesses along the east coast of the United States and plans further expansion of these types of market alliances.
Kiwibox.com is currently negotiating with a number of online advertisers to place advertisements on mobile devices. We expect these agreements to be in place by the beginning of the second quarter 2014 and fully implemented by the end of the second quarter 2014. The Company attaches great importance to its technology developments and continues to follow the top social network market leaders with technology upgrades, providing its users with an alternative social networking opportunity.
The operating expenses, not including stock-based compensation, remained at a level of approximately $88,000 per month. We are currently receiving funding at these levels from existing investors (see sections
“Loans and Notes Payable”).
Results of Operations for the Twelve Months Ended December 31, 2013 Compared to the Twelve Months Ended December 31, 2012
The Company’s acquisition of its subsidiary Kwick! significantly increased revenue. Our website presence is not yet supported by a volume of active members-users that would provide a basis for significant growth in advertising revenues. For the year ended December 31, 2013, total revenues amounted to $934,219 compared to $1,469,705 in 2012. Revenues were derived almost entirely from the Kwick! operations, which were acquired on September 30, 2011. The Company deconsolidated the operations of Kwick! in December 2013.
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Gross Profit (Loss) amounted to $400,258 after considering $592,323 costs of goods sold. After deducting selling, research, and general and administrative expenses of $7,746,830 (which included $6,138,210 impairment of goodwill) compared to the $1,848,690 recorded in 2012, the Company realized an operating loss of $7,404,934 compared to an operating loss of $1,671,156 in 2012. For the year 2014 management expects operating expenses to remain steady and an expected increase in revenues due to new mobile advertising, this will start a process of putting the company on a path towards eventually eliminating the erosion of shareholder value.
The major item included in non-operating income and expenses was a charge of $2,307,402 accounting for the intrinsic value of the beneficial conversion feature associated with convertible debt. We also had a gain of $4,036,848 in connection with changes in the valuation of derivative liabilities, and a $253,557 loss on the deconsolidation of Kwick. In 2012, the major item included in non-operating income and expenses was a charge of $7,663,872 accounting for the intrinsic value of the beneficial conversion feature associated with convertible debt and a charge of $2,895,203 in connection with changes in the valuation of derivative liabilities In 2013, the year concluded with a net loss of $6,953,532. After accounting for dividends accrued on outstanding preferred stock which totaled $51,263 the net loss applicable to common shareholders was $7,004,795 or $0.01 per share, compared to a loss of $14,061,595 or $0.022 per share for 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 parent operations. In addition, we received $1,145,000 from short-term loans for continuing operations. 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 $25,887,308 at December 31, 2013, as compared to $25,475,653 at December 31, 2012. Stockholders’ equity showed an impairment of $25,860,017 at the end of the year, compared to an impairment of $19,032,919 at the beginning of the year. The cash flow from operations totaled $(1,179,932) and was brought about primarily due to operating losses. We have no bank indebtedness at December 31, 2013. Our other indebtedness, excluding the other current liabilities described below, consisted of certain notes and loans aggregating $10,392,228, derivative conversion liabilities of $12,068,233 and advances from related parties of $33,612. The position “Obligations to be settled in stock” of $259,288 includes $113,288 for common shares and options accrued for certain officers and directors pursuant to their respective employment and remuneration agreements, and $146,000 for stock and warrants due under consulting agreements. Current liabilities also include $684,392 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 financing sources, or 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 close our business operations. Absent the receipt of sufficient funds, our website development, results of operations and financial condition could be subject to material adverse consequences. There can be no assurance that we will find alternative funding for the working capital required to finance on-going operations.
| ITEM 7 A: | Quantitative and Qualitative Disclosures about Market Risk |
The Company is subject to certain market risks, for changes in financial market conditions. The Company does not undertake any special actions to limit those exposures. We do not have a significant interest rate risk because the interest on all our debt obligations is based on fixed rates in accordance with the terms of such indebtedness.
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| ITEM 8: | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The Company's Financial Statements and Notes to Financial Statements are attached hereto as Exhibit A and incorporated herein by reference.
| ITEM 9: | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
There have been no changes in or disagreements with the Registrant’s independent auditors during the last two years.
| ITEM 9A: | MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING |
Item 9A(T). Evaluation of Disclosure Controls and Procedures
In connection with the preparation of the Company’s Annual Report on Form 10-K, an evaluation was carried out by our management, with participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) as of December 31, 2013. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed and submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified, and that such information is accumulated and communicated to management, included the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
During our evaluation of disclosure controls and procedures as of December 31, 2013, conducted as part of the Company’s annual audit and preparation of our annual financial statements, several deficiencies were identified which viewed in the aggregate, represent a material weakness. As a result of this material weakness, described more fully below, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2013, the Company’s disclosure controls and procedures were ineffective.
The Company instituted and is continuing to implement corrective actions with respect to the deficiencies in our disclosure controls and procedures.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has conducted, with the participation of the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. Management’s assessment of internal control over financial reporting was conducted using the criteria set forth inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on management’s assessment over financial reporting, management believes as of December 31, 2013, the Company’s internal control over financial reporting was not effective due to the following deficiencies:
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1. The Company’s control environment did not have adequate segregation of duties and lacked adequate accounting resources to address non routine and complex transactions and financial reporting matters on a timely basis, primarily due to a lack of resources.
2. The Company had only a part time chief financial officer performing all accounting related duties on site, presenting the risk that the reporting of these non routine and complex transactions during the preparation of our future financial statements and disclosures may not be accomplished in a timely manner. In September of 2012 the Company hired an additional comptroller to review and assist the Chief Financial Officer.
Company management believes that notwithstanding the above identified deficiencies that constitute our material weakness, that the consolidated financial statements fairly present, in all material respects, the Company’s consolidated balance sheets as of December 31, 2013 and 2012 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2013 and 2012, in conformity with generally accepted accounting principles.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
The Company commenced efforts to address the material weakness in its internal control over financial reporting and its control environment through the following actions:
| - | We will continue to seek qualified fulltime or part-time employees and third party consultants to supplement our financial personnel when and if additional resources become available; |
| - | We will continue to institute a more stringent approval process for financial transactions, and |
| - | We will continue to perform additional procedures and analysis for significant transactions as a mitigating control in the control environment due to segregation of duties issues. |
Changes in Internal Control over Financial Reporting
Other than described above, there have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal year ended December 31, 2013, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
None.
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PART III
| ITEM 10: | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS |
The names of all directors and executive officers of the Company are as follows:
| Name | Positions | Term Served (Expires) | ||
| Andre Scholz | Director | May 13, 2009 to present | ||
| President, Chief Executive Officer | August 1, 2010 to present | |||
| Chief Technology Officer | May 13, 2009 to present | |||
| Joseph J. Tomasek | Director | Feb. 11, 1999 to present | ||
| Craig S. Cody | Chief Financial Officer | May 1, 2010 to present | ||
| Joerg Otzen | Director | July 14, 2008 to October 5, 2011* |
* Mr. Otzen resigned as a director on October 5, 2011. All Directors of the Company hold office until the next annual meeting of the shareholders and until successors have been elected and qualified. Executive Officers of the Company are appointed by the Board of Directors at meetings of the Company's directors and hold office until they resign or are removed from office.
Andre Scholz, Age 36 – Director, Chief Technology Officer. Andre Scholz has more than 15 years business experience in Internet, telecommunication technology and IT security. He holds an advanced degree from the University of Stuttgart and Konstanz in electronic engineering. Mr. Scholz is a consultant and well known technical expert for numerous social networks, communities and high-traffic sites, active around the world. He brings a wealth of social network and internet knowledge to Kiwibox. Mr. Scholz was co-founder of various internet exchange points and manages them until now. Since 1996 he is Managing Director of a carrier and Internet Service Provider in Stuttgart, Germany and since 2002 he is CEO of the Interscholz company group, Leonberg, Germany, which places private investments in and is managing and operating various companies.
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Craig S. Cody, Age 51 – Chief Financial Officer. Effective as of May 4, 2010, Registrant promoted Craig S. Cody to serve as its Chief Financial Officer. Mr. Cody, a licensed Certified Public Accountant, had previously served as the Comptroller for the Registrant. In addition to managing an independent accounting and financial services business in New York for a diverse group of clients, he brings extensive management experience derived in the public sector. Mr. Cody holds a B.S. Degree in Accounting from the State University of New York.
Joseph J. Tomasek, Age 67 - Director. Mr. Tomasek was appointed a director in February 2000. Mr. Tomasek also serves as our General Counsel and coordinates our legal affairs in such role. In addition to serving in these Company positions, Mr. Tomasek represents U.S. and international clients in corporate and securities law matters. Mr. Tomasek received his Juris Doctor and Bachelor of Arts Degrees from Seton Hall University and a Certificate d'Etudes in European Studies from the University of Strasbourg, France. Mr. Tomasek is a member of the Bars of the States of New Jersey,and New York.
Family Relationships
There are no family relationships between any of the directors or executive officers.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company knows of no person, who at any time during the period from the date at which it filed its annual report on Form 10-K for the year ended December 31, 2013 to the present, was a director, officer, beneficial owner of more than ten percent of any class of equity securities of the Company (a "Reporting Person"), that failed to file on a timely basis any reports required to be furnished pursuant to Section 16(a), except for the annual statements of beneficial ownership of securities on Form 5 for the officers and directors of the Company which were filed late.
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ITEM 11: EXECUTIVE COMPENSATION
2013 SUMMARY COMPENSATION TABLE
The following table sets forth certain compensation information for: (i) the person who served as the Chief Executive Officer of the Company during the year ended December 31, 2013, regardless of the compensation level, and (ii) each of our other executive officers, serving as an executive officer at any time during 2011, as well as the most highly compensated employees who did not serve as executive officers during 2011. Compensation information is shown for the fiscal years ended December 31, 2013, 2012 and 2011:
| Non- Equity | Non- Qualified | |||||||||||||||||||||||||||||||||||
| Incentive | Deferred | All | ||||||||||||||||||||||||||||||||||
| Stock | Option | Plan | Compensation | Other | ||||||||||||||||||||||||||||||||
| Name and | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||||||||
| Principal Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | ||||||||||||||||||||||||||||
| Andre Scholz | 2013 | 200,000 | 2,000 | 8,040 | - | - | - | - | 210,040 | |||||||||||||||||||||||||||
| Chief Executive | 2012 | 200,000 | 2,500 | 30,600 | - | - | - | - | 233,100 | |||||||||||||||||||||||||||
| Officer, President, Director | 2011 | 200,000 | - | 28,950 | - | - | - | - | 228,950 | |||||||||||||||||||||||||||
| Joseph J. Tomasek, | 2013 | - | 1,250 | - | 11,880 | - | - | 33,708 | 46,838 | |||||||||||||||||||||||||||
| Esq., Director and | 2012 | - | 2,500 | - | 11,880 | - | - | 60,000 | 74,380 | |||||||||||||||||||||||||||
| General Legal Counsel | 2011 | - | - | - | 11,880 | - | - | 60,000 | 71,880 | |||||||||||||||||||||||||||
| Craig S Cody | 2013 | 73,500 | 1,250 | - | - | - | - | 17,500 | 92,250 | |||||||||||||||||||||||||||
| Chief Financial | 2012 | 91,000 | 2,500 | - | - | - | - | 5,000 | 98,500 | |||||||||||||||||||||||||||
| Officer | 2011 | 91,000 | - | - | - | - | - | 3,500 | 94,500 | |||||||||||||||||||||||||||
| All executive officers | 2013 | 273,500 | 4,500 | 8,040 | 11,880 | - | - | 51,208 | 349,128 | |||||||||||||||||||||||||||
| and named significant | 2012 | 291,000 | 7,500 | 30,600 | 11,880 | - | - | 65,000 | 405,980 | |||||||||||||||||||||||||||
| employees and directors as a group | 2011 | 291,000 | - | 28,950 | 11,880 | - | - | 63,500 | 395,330 | |||||||||||||||||||||||||||
Andre Scholz 2013-2011: Andre Scholz joined the Company in May 2009, as our Chief Technology Officer and as a director. On August 1, 2010 Mr. Scholz took over as President and Chief Executive Officer. During 2013, we paid Mr. Scholz $200,000 as salary. He also has accrued 1,200,000 common shares, earning 100,000 common shares every month. These shares were accrued for and valued at $8,040. During 2012, we paid Mr. Scholz $200,000 as salary. He also has accrued 1,200,000 common shares, earning 100,000 common shares every month. These shares were accrued for and valued at $30,600. During 2011, we paid Mr. Scholtz $200,000 as salary. He also has accrued 1,200,000 common shares, earning 100,000 common shares every month. These shares were for and valued at $28,950. He also had accrued 500,000 common shares as a signing bonus and has been earning 100,000 common shares every month, beginning with May 15, 2009. All of these shares have been issued through December 31, 2013.
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The terms of his consulting /employment agreement are included in our filing on Form 8-K of May 22, 2009 which is incorporated herein by reference to that filing. On January 1, 2013 the terms of his consulting agreement were extended through December 31, 2013 with no changes to the terms. In December 2013 the terms of his contract was updated to $220,000 annually.
Joseph J. Tomasek 2013-2011:During fiscal years 2013, 2012, 2011 and 2010, the Company incurred or paid $33,708, $60,000, $60,000 and $65,000, respectively, to Mr. Tomasek for legal services rendered to the Company. In 2013 Mr. Tomasek earned options for 1,200,000 restricted shares, valued at $11,880 pursuant to the Black-Scholes valuation formula. In 2012 Mr. Tomasek earned options for 1,200,000 restricted shares, valued at $11,880 pursuant to the Black-Scholes valuation formula. In 2011 Mr. Tomasek earned options for 1,200,000 restricted shares, valued at $11,880 pursuant to the Black-Scholes valuation formula. These options are earned at the rate of 100,000 options per month, beginning with April 2009.
Craig S Cody 2013- 2011:During the year 2013, Mr. Cody earned $92,125.During the year 2012, Mr. Cody earned $91,000. During the year 2011, Mr. Cody earned $94,500. During the year 2010, Mr. Cody earned $82,212 and 500,000 stock warrants, valued at $5,000 pursuant to the Black-Scholes valuation formula. In 2009, Mr. Cody earned $18,450.
Stock Options:
No stock options were granted during 2011, 2012 or 2013 pursuant to the Company’s 1997 Stock Option Plan and 2000 Stock Incentive Plan, to any executive officers, directors, employees or to any beneficial owners of more than 10 percent of any class of equity securities of the Company. In addition, there were no stock options or warrants exercised by any officer, director, employee or any beneficial owners of more than 10 percent of any class of equity securities of the Company during 2011, 2012 or 2013.
1997 Stock Option Plan:
The Company’s 1997 Stock Option Plan, as filed with Information Statement pursuant to Section 14(c) with the Commission on July 1, 1997, and with Registration Statement on Form S-8 with the Commission on September 8, 1997, is hereby incorporated by reference.
2000 Stock Incentive Plan:
The Company’s 2000 Stock Incentive Plan, as filed with the Commission as an exhibit to the quarterly report on Form 10-QSB for the period ended March 31, 2000, is hereby incorporated by reference.
Options Granted Outside of Stock Option Plans:
During 2013, one director who also serves as the Company’s general counsel earned 1,200,000 five-year stock options, exercisable at $0.05 per common share.
Outstanding Equity Awards at Fiscal Year-End Table
The following table provides certain information regarding unexercised options to purchase common stock, stock options that have not vested, and equity-incentive plan awards outstanding at December 31, 2013, for each of the persons covered under our Summary Compensation Table.
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| Name and Principal Position | Number of Securities Underlying Unexercised Options Exercisable | Number of Securities Underlying Unexercised Options Unexercisable | Equity Incentive Plan Awards No. of Underlying Unexercised Unearned Options | Option Exercise Price | Option Expiration Date | No. of Shares or Units of Stock that have not vested | Market Value of Shares or Units of Stock that have not vested | Equity Incentive Awards, Shares, Units Or other Rights that have not vested | Equity Incentive Plan Awards: Market or Payout value of Unearned Shares,Units or other rights that have not vested | |||||||||||||||||||||||||
| Rudolf Hauke, CEO and President | 400,000 | - | - | $ | 0.10 | 1/14/14 to 4/14/14 | - | - | - | - | ||||||||||||||||||||||||
| Joseph J. Tomasek, Director and General Legal Counsel | 4,500,000 | - | - | $ | 0.05 | 3/31/14 to 9/30/17 | - | - | - | - | ||||||||||||||||||||||||
Option Exercises and Stock Vested Table: None
Pension Benefits Table: None
Nonqualified Deferred Compensation Table: None
Pre-requisites Table:None
Compensation of Directors:
We did not pay any compensation to any of our directors for services rendered as directors during fiscal years 2013, 2012 and 2011
During 2013, 2012 and 2011, one outside director of the Company who also serves as the Company’s general and securities counsel, incurred or was paid an aggregate of $46,838, $74,380 and $71,880 respectively, for legal services.
CORPORATE GOVERNANCE AND CODE OF ETHICS
The Company has always been committed to good corporate governance. In furtherance of this commitment, during 2002 the Board of Directors expanded the duties of the Company’s Audit Committee by increasing the Committee's duties specifically to include responsibility and oversight of corporate governance matters and adherence to the Company’s Code of Ethics. A copy of the Corporate Code of Ethics and Conduct had been included as an exhibit to the Company’s report on Form 10-KSB for the year ended December 31, 2002.
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Board Committees
AUDIT COMMITTEE
The Company has appointed an Audit Committee in accordance with the provisions of the Sarbanes-Oxley Act of 2002. The Audit Committee is currently comprised of the entire board of directors.
COMPENSATION AND NOMINATING COMMITTEES
Our board of directors intends to appoint such persons and form such committees as are required to meet the corporate governance requirements imposed by the national securities exchanges. Therefore, we intend that a majority of our directors will eventually be independent directors. Additionally, our board of directors is expected to appoint a nominating committee and a compensation committee, and to adopt charters relative to each such committee. Until further determination by the Board, the full Board of Directors will undertake the duties of the compensation committee and nominating committee.
| ITEM 12: | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information known to us with respect to the beneficial ownership of Common Stock held of record as of December 31, 2013, by (1) all persons who are owners of 5% or more of our Common Stock, (2) each of our named executive officers (see “Summary Compensation Table”), (3) each director, and (4) all of our executive officers and directors as a group. Each of the stockholders can be reached at our principal executive offices located at 330 West42nd Street, Suite 3210, New York, New York 10036.
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| Title of Class* | Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership(1) | Percent of Class | |||||
| Directors and Executive Officers: | ||||||||
| Common Stock | Andre Scholz | 8,400,000 | (2) | 1.01 | % | |||
| Pres./CEO/Director | ||||||||
| Joseph Tomasek | 9,930,500 | (3) | 1.29 | % | ||||
| Director | ||||||||
| Craig Cody | 1,250,000 | (4) | 0.10 | % | ||||
Chief Financial Officer | ||||||||
| All Directors and Officers as a Group: | 19,530,500 | 2.4 | % | |||||
| as a Group (3 persons) | ||||||||
Beneficial owners of more than 5% of Common Stock (exclusive of officers and directors): | ||||||||
| Discover Advisory Company | 68,300,937 | (5) | 9.99 | % | ||||
| c/o Horymor Trust Corp. Ltd. | ||||||||
| 50 Shirley Street / P.O.Box N-341, | ||||||||
| Nassau | ||||||||
| Cambridge Services Inc. | 68,300,937 | (6) | 9.99 | % | ||||
| c/o TSZ Treuhandgesellschaft Sauter & Co. | ||||||||
Suedstr. 11, CH-8034 Zurich, Switzerland | ||||||||
| Markus Winkler 330 West 42nd New York, NY 10036 | 68,300,937 | (7) | 9.99 | % | ||||
* The Company also has issued and outstanding as of December 31, 2013, 85,890 shares of its Senior Convertible Preferred Stock, with concentrations in excess of 10% for one or more of the holders of such stock, however, none of such shares bear any voting rights.
| (1) | For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of Common Stock which such person has the right to acquire within 60 days of March 1, 2014. For purposes of computing the percentage of outstanding shares of Common Stock held by each person or group of persons named above, any shares of Common Stock which such person has the right to acquire within such date, whether by exercise of stock options or warrants or conversions of other securities, are deemed to be outstanding and to be beneficially owned by the person holding such option, warrant or convertible security for purposes of computing such person’s percentage ownership but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnote to this table and pursuant to applicable community property laws, the Company believes based on information supplied by such persons, that the persons named in this table have sole voting and investment power with respect to all shares of Common Stock which they beneficially own. (2) Consists of 7,600,000hares 400,000 shares accrued but not yet issued along with 400,000 shares issued in December 2013 (3) Includes 4,500,000 stock options and 500,000 warrants.. (4) Includes 500,000 warrants and 250,000 shares. |
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(5) Includes 33,300,937 shares issuable upon conversion of convertible debt. Karen Buehler has investment and voting control of Discover Advisory Company.
(6) Includes 37,171,829 shares issuable upon conversion of convertible debt. Victor Sauter has investment control of Cambridge Services Inc.
(7) Includes 2,300,937 shares issuable upon conversion of convertible debt of Kreuzfeld, Ltd. and VGZ (Vermoegenssverwaltungsgesellschaft) both of which Markus Winkler has investment and voting control.
All Directors of the Company hold office until the next annual meeting of the shareholders and until successors have been elected and qualified. Executive Officers of the Company are appointed by the Board of Directors at meetings of the Company 's Directors and hold office until they resign or are removed from office.
Family Relationships
There are no family relationships between any of the directors or executive officers.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company knows of no person, who at any time during the year ended December 31, 2013, was a director, officer, or beneficial owner of more than ten percent of any class of equity securities of the Company (a "Reporting Person"), that failed to file on a timely basis any reports required to be furnished pursuant to Section 16(a).
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| ITEM 13: | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
During the year ended December 31, 2013 and 2012 one outside director of the Company who also serves as the Company’s general and securities counsel, incurred an aggregate $33,708 and $60,000, respectively, for each period for legal services. The director also received 100,000 common stock options per month during the year ended December 31, 2013, valued at $11,880, and a stock grant of 250,000 common shares, valued at $1,250. The director also received 100,000 common stock options per month during the year ended December 31, 2012, valued at $11,880. The balance due to this director at December 31, 2013 and 2012 was $9,620 and $0, respectively.
For the year ended December 31, 2013 and 2012 we incurred an aggregate $513,591 and $437,952, respectively, to companies controlled by the Chief Executive Officer of the Company, for website hosting, website development and technical advisory services, server farm installations and IT equipment purchases. The officer also earned 100,000 common shares per month during the year ended December 31, 2013 under a consulting agreement, valued at $8,040. During 2013, the officer received 500,000 shares for prior year share obligations, 1,200,000 shares from the current year obligation, and a stock grant of 400,000 common shares, valued at $2,000. The officer also received $110,000 in December 2013 for prepaid consulting fees towards 2014 under the terms of a consulting agreement. The balance due to this officer and/or his affiliated companies at December 31, 2013 and 2012 was $23,992 and $6,998, respectively. On September 30, 2013, the company announced that Kwick had closed the Equity Purchase Agreement and acquired Interscholz . Kwick issued a promissory note to Interscholz Internet Services GmbH and Co KG for $1,352,000 for the equity purchase agreement. On October 8, 2013, the German register court recognized the transfer of ownership of Interscholz GmbH to Kwick! Interscholz provides website hosting, website development, server farm installations and technical advisory services. As of the balance sheet date, only $516,037 was paid to Andre Scholz towards the purchase price of Intersholz Internet Services GmbH and Co. KG and according to the contract, the ownership in Interscholz Internet Services GmbH and Co. KG does not pass to Kwick until full payment is made.On December 9,2013 the acquisition of Intersholz Internet Services GmbH and Co KG by Kwick was rescinded due to non compliance with the terms of the addendum to the contract, calling for the full purchase price to have been paid.. However, full ownership of Interscholz Beteilgungs GmbH has been transferred to Kwick as of October 8, 2013 based on the purchase price of $33,990.The full purchase price of Interscholz Beteilgungs GmbH did not need to be satisfied for ownership of that entity to transfer to Kwick.
During 2011, one former principal of Kwick! advanced the subsidiary 100,000 Euros, which was repaid during 2012.
During 2013 and 2012, approximately 10% of the Company’s voting stock was beneficially held by Discovery Advisory Company, located in the Bahamas, and Cambridge Services Inc., Kreuzfeld, Ltd. and Vermoegensverwaltungs-Gesellschaft Zurich Ltd. (VGZ) of Switzerland. Discovery Advisory Company, Cambridge Services Inc., Kreuzfeld, Ltd. and VGZ are major creditors, having advanced operating capital against issuance by the Company of convertible promissory notes during 2012 and 2013. During the year ended December 31, 2012, Cambridge Services converted $581,269 of debt. Kreuzefeld, Ltd converted $419,100 and VGZ converted $409,200 of debt.
During the year ended December 31, 2013, Cambridge Services Inc.advanced an additional $1,145,000. During the year ended December 31, 2012, Cambridge Services Inc.advanced $1,303,913, Discovery Advisory Company advanced $2,436,588, Kreuzfeld, Ltd. advanced $2,069,479 and VGZ advanced $365,338. At December 31, 2013, $3,221,722 and $2,360,060 of such notes were outstanding and owed to Discovery Advisory Company and Cambridge Services Inc, respectively and $3,564,959 and $771,958 owed to Kreuzfeld, Ltd. and VGZ, respectively. During 2012 To complete the acquisition of Kwick!, Cambridge Services, Inc.,Discovery Advisory Services, Kreuzfeld, Ltd and VGZ advanced $298,913, $2,436,588, $2,069,479 and $365,388, respectively.
| 24 |
The Company, through its subsidiary, Kwick, was formally a party to a service agreement with JAUMO GmbH, Germany, a company partially owned by the former officers of Kwick. The subsidiary recognized approximately $93,174 in service revenue from this entity in the year ended December 31, 2012.
During 2013, a shareholder loaned Kwick $899,794 plus accrued interest of $19,849. These loans carry an interest rate of 6% and are payable on demand. A portion of this loan was used to pay off a bank line of credit. The balance was eliminated upon deconsolidation of the Company’s Kwick subsidiary.
| ITEM 14: | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
AUDIT FEES
Rosenberg Rich Baker Berman & Company ("Rosenberg") billed us in the aggregate amount of $52,925 and $64,860 for professional services rendered for their audit of our annual financial statements and their reviews of the financial statements included in our Forms 10-K and 10-Q for the years ended December 31, 2013, and December 31, 2012, respectively.
AUDIT-RELATED FEES
Rosenberg did not bill us for, nor perform professional services rendered for assurance and related services that were reasonably related to the performance of audit or review of the Company's financial statements for the fiscal years ended December 31, 2013, and December 31, 2012.
TAX FEES
Rosenberg billed us in the aggregate amount of $0, and $0 for professional services rendered for tax related services for the fiscal years ended December 31, 2013 and December 31, 2012, respectively.
ALL OTHER FEES
The aggregate fees billed by Rosenberg for services rendered to the Company during the last two fiscal years, other than as reported above, were $0 and $0, respectively.
TRANSFER AGENT
The transfer agent for the Company is Securities Transfer Corporation, located at 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034.
ANNUAL REPORT
The Company intends to continue its practice of furnishing annual reports to its shareholders containing financial statements audited by independent certified public accountants.
| 25 |
PART IV
| ITEM 15: | EXHIBITS AND REPORTS ON FORM 8-K |
(a) Exhibits
The Exhibits that are filed with this report or that are incorporated by reference are set forth in the Exhibit Index attached hereto.
(b) Reports on Form 8-K
During the fourth quarter in 2013, the Company filed the following reports on Form 8-K:
On September 24, 2013, the Company filed a current report on Form 8-K, announcing the signing of an Equity Purchase Agreement to acquire Interscholz Internet Services GmbH and Co. KG, a German limited liability company, and all of the equity of its general partner, Interscholz Beteilgungs GmbH (collectively, “Interscholz”) from Andre Scholz, the president and chief executive officer of the Company. On September 30, 2013, the company announced that Kwick had closed the Equity Purchase Agreement and acquired Interscholz . Kwick issued a promissory note to Interscholz Internet Services GmbH and Co KG for $1,352,000 for the equity purchase agreement. On October 8, 2013, the German register court recognized the transfer of ownership of Interscholz GmbH to Kwick! Interscholz provides website hosting, website development, server farm installations and technical advisory services. As of the balance sheet date, only $516,037 was paid to Andre Scholz towards the purchase price of Intersholz Internet Services GmbH and Co. KG and according to the contract, the ownership in Interscholz Internet Services GmbH and Co. KG does not pass to Kwick until full payment is made. On December 9,2013 the acquisition of Intersholz Internet Services GmbH and Co KG by Kwick was rescinded due to non compliance with the terms of the addendum to the contract, calling for the full purchase price to have been paid.. However, full ownership of Interscholz Beteilgungs GmbH has been transferred to Kwick as of October 8, 2013 based on the purchase price of $33,990.The full purchase price of Interscholz Beteilgungs GmbH did not need to be satisfied for ownership of that entity to transfer to Kwick.
On October 1, 2013 the Company filed a current report on form 8-K announcing cost reductions and new apps across its social networking platforms.
On December 30, 2013, the Company filed a current report on Form 8-K, announcing that on December 10,2013, the company signed an equity purchase agreement with Marcus Winkler to sell to him eighty (80%) percent of the equity of its German subsidiary, Kwick! Community GmbH & Co. KG, a German limited liability company, and Kwick! Beteiligungs GmbH, its general partner (collectively, “KWICK!”). Pursuant to the terms of the agreement, the purchaser paid 36,000 Euros as the purchase price and the company was required to obtain shareholder approval of the sale as required under applicable Delaware Law. In addition, the Company and Mr. Winkler signed a Lock-Up and Standstill Agreement pursuant to the general terms of which the Company agreed not to participate in the management, operations or finances of KWICK!, which shall be exclusively managed and under control of the purchaser. Accordingly, the Company’s minority ownership position shall be subject, in all respects, to the exclusive control of the purchaser. Kreuzfeld Ltd., a Swiss entity over which the purchaser has investment and voting control, beneficially owns 67,826,580 common shares of the Company, representing approximately 9.9%% of the Company’s outstanding voting shares. In addition, Kreuzfeld Ltd. is a creditor of the company and holds a Class AA convertible promissory note with an outstanding balance (including accrued interest) of $4,267,834 as of December 31, 2013.
Consummation of the Equity Purchase Agreement was conditioned upon shareholder approval. On December 18, 2013, the Company received majority shareholder written consent, approving the Equity Purchase Agreement, by nine shareholders who beneficially own over 50% of the outstanding 675,358,925 voting common shares as of the record date of December 2, 2013. The Company intends to prepare and file with the U.S Securities and Exchange a Schedule 14C Information Statement for distribution to all shareholders.
| 26 |
On December 18, 2013, the Board of Directors approved a new consulting agreement for its President and CEO, Andre Scholz, covering the 12-month period, commencing January 1, 2014. Under the terms of the new agreement, Mr. Scholz shall receive an annual salary of $220,000, half of which is payable in advance, and he will continue to earn 100,000 restricted common shares for each month of service rendered to the Company. The agreement contains all of the customary terms and provisions found in contracts of this type, including confidentiality and termination provisions.
| 27 |
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
KIWIBOX.COM, INC.
| By: | /s/ Andre Scholz | Date: | May 20, 2014 |
| Andre Scholz | |||
| President and Chief Executive Officer | |||
| (Principal Executive Officer), | |||
| Director | |||
| By: | /s/ Craig Cody | Date: | May 20, 2014 |
| Craig S. Cody | |||
| Secretary, Chief Financial Officer | |||
| (Principal Financial Officer) | |||
In accordance with the requirements of the Securities Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Name | Date | |
| /s/ Joseph J. Tomasek | May 20, 2014 | |
| Joseph J. Tomasek, Director | ||
| /s/ Andre Scholz | May 20, 2014 | |
| Andre Scholz, Director |
| 28 |
EXHIBIT INDEX
| (A) | Financial Statements and Notes to Financial Statements |
| (3) (i) | Articles of Incorporation and Amendments thereto, incorporated herein by reference to Exhibits of previous filings with the Commission. |
| (3) (ii) | Bylaws of the Company, incorporated herein by reference to Exhibits of previous filings with the Commission. |
| 10.25* | Copy of Agreement and Plan of Reorganization, Dated February 19, 2007, between the Company, Kiwibox Media, Inc. and the Kiwibox Shareholders, and Form of Employment Agreement for the Three Kiwibox Shareholders, |
| 10.27* | Amendment No. 3 to Agreement and Plan of Reorganization, dated July 31, 2007 and Effective August 2, 2007. |
| 10.28* | Preliminary Employment Agreement with Paul Farris, Dated September 19, 2007 |
| 10.29* | Amendment No. 4 to Agreement and Plan of Reorganization, dated as of December 3, 2007. |
| 10.30* | Amendment No. 5 to Agreement and Plan of Reorganization, dated as of December 31, 2007. |
| 10.31* | Standstill Letter Agreement, dated as of January 30, 2008. |
| 10.32* | Standstill Letter Agreement, dated as of February 11, 2008. |
| 10.33* | Amendment No. 6 to Agreement and Plan of Reorganization, dated as of February 28, 2008. |
| 10.34* | Engagement Agreement, Dated June 27, 2008, between Tell Capital AG and the Company. |
| 10.35* | Resignation Agreement, Dated August 19, 2008, between Ivan Tumanov and the Company. |
| 10.36* | Form of Demand Notes issued by the Company to Lender, Discover Advisory Company. |
| 10.36-1* | Form of corrected Demand Notes issued by the Company to Lender, Discover Advisory Company. |
| 10.36-2 | Form of Registrant’s Master Corporate Promissory Note, dated June 4, 2009, delivered and accepted by Discover Advisory Company, attached as an exhibit to Registrant’s Form 8-K filed with the Commission on June 12, 2009. |
| 10.37 | Copy of Stock Pledge Agreement, dated June 4, 2009, by and between Registrant and Discover Advisory Company- attached as an exhibit to Registrant’s Form 8-K filed with the Commission on June 12, 2009. |
| 10.38 | Copy of Consulting Agreement, dated June 1, 2009, between the Registrant, Kiwibox Media, Inc. and Andre Scholz attached as an exhibit to Registrant’s Form 8-K filed with the Commission on June 12, 2009. |
| 10.39 | Form of Registrant’s Securities Purchase Agreement, with Warrant as an Exhibit: attached as an exhibit to Registrant’s Form 8-K filed with the Commission on December 31, 2009. |
| 10.40 | Certificate of Ownership and Merger of Kiwibox Media, Inc. with and into Magnitude Information Systems, Inc., including Corporate Name Change, dated December 15, 2009 and as filed with the Secretary of State of Delaware on December 17, 2009. attached as an exhibit to Registrant’s Form 8-K filed with the Commission on December 31, 2009 |
| 29 |
| 10.41 | Form of Class AA Senior Secured Convertible Revolving Promissory Note issued to Discover Advisory Company, Cambridge Services, Inc., VGZ and Kreuzfeld Ltd. On August 1, 2012. |
| 31.01A. | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 20, 2014. |
| 31.02A. | Certification of Acting Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 20, 2014. |
| 32.01A. | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 20, 2014. |
| 32.02A. | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 20, 2014. |
| * | Documents filed as exhibits to Registrant’s current reports, quarterly reports, annual reports and registration statements and amendments thereto with the U.S. Securities and Exchange Commission. |
OTHER DOCUMENTS INCORPORATED HEREIN BY REFERENCE
| (a) | The Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2013, June 30, 2013, and September 30, 2013. |
| (b) | All other reports filed by the Company pursuant to Section 13(a) or 15(d) of the Exchange Act since the Company’s fiscal year ended December 31, 2010 |
| 30 |
Kiwibox.Com, Inc.
Financial Statements
December 31, 2013 and 2012
| F-1 |
Kiwibox.Com, Inc.
Index to the Financial Statements
December 31, 2013 and 2012
| Page | ||
| Report of Independent Registered Public Accounting Firm | ||
| Financial Statements | F-1 | |
| Balance Sheets | F-4 | |
| Statements of Operations | F-5 | |
| Statements of Stockholders Equity (Impairment) | F-6 - F-7 | |
| Statements of Cash Flows | F-8 - F-9 | |
| Notes to the Financial Statements | F-10 - F-34 |
| F-2 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Kiwibox.com, Inc.
We have audited the accompanying balance sheets of Kiwibox.com, Inc. as of December 31, 2013 and 2012, and the related statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2013. Kiwibox.com, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kiwibox.com, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2 to the financial statements, the Company’s revenues are insufficient to finance the business, and the Company is entirely dependent on the continuation of funding from outside investors. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
[s] Rosenberg Rich Baker Berman & Company
Somerset, New Jersey
May 20, 2014
| F-3 |
Kiwibox.Com, Inc. and Subsidiary
Consolidated Balance Sheets
| December 31, 2013 | December 31, 2012 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 3,659 | $ | 56,751 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $0 and $0, respectively | - | 230,691 | ||||||
| Due from related parties | - | 15,468 | ||||||
| Other receivables | 5,248 | 2,469 | ||||||
| Income taxes receivable | - | - | ||||||
| Prepaid expenses and other current assets | 121,168 | 129,010 | ||||||
| Total Current Assets | 130,075 | 434,389 | ||||||
| Property and equipment, net of accumulated depreciation of $105,795 and $621,876 | 5,795 | 120,556 | ||||||
| Website development costs, net of accumulated amortization of $251,688 and $284,121 | 2,576 | 108,539 | ||||||
| Goodwill | - | 6,169,426 | ||||||
| Deferred tax Asset | - | - | ||||||
| Other assets | 18,920 | 44,213 | ||||||
| Total Assets | 157,366 | 6,877,123 | ||||||
| Liabilities and Stockholders’ Equity (Impairment) | ||||||||
| Current Liabilities | ||||||||
| Bank overdraft | - | 176,013 | ||||||
| Accounts payable | 253,347 | 230,691 | ||||||
| Accrued expenses | 2,326,283 | 1,442,177 | ||||||
| Due to related parties | 33,612 | 30,710 | ||||||
| Obligations to be settled in stock | 259,288 | 270,658 | ||||||
| Dividends payable | 684,392 | 633,129 | ||||||
| Loans and notes payable - other | 100,000 | 140,000 | ||||||
| Loans and notes payable – related parties | 340,000 | 340,000 | ||||||
| Convertible notes payable-related parties | 9,918,699 | 8,773,699 | ||||||
| Convertible notes payable – other, net of discount | - | 41,667 | ||||||
| Current maturities of long-term debt | 33,529 | 33,529 | ||||||
| Liability for derivative conversion feature –related parties | 12,068,233 | 13,797,679 | ||||||
| Total Current Liabilities | 26,017,383 | 25,910,042 | ||||||
| Stockholders’ Equity (Impairment) | ||||||||
| Preferred Stock, $0.001 par value, non-voting, 3,000,000 shares authorized; 85,890 shares issued and outstanding | 86 | 86 | ||||||
| Common Stock, $0.0001 par value, 1,400,000,000 shares authorized; issued and outstanding 683,693,060 and 679,393,060 shares respectively | 68,367 | 67,937 | ||||||
| Additional paid-in capital | 52,726,105 | 52,658,185 | ||||||
| Accumulated deficit | (78,654,575 | ) | (71,649,780 | ) | ||||
| Accumulated other comprehensive loss | - | (109,347 | ) | |||||
| Total Stockholders’ Equity (Impairment) | (25,860,017 | ) | (19,032,919 | ) | ||||
| Total Liabilities and Equity (Impairment) | $ | 157,366 | $ | 6,877,123 | ||||
The accompanying notes are an integral part of the financial statements.
| F-4 |
Kiwibox.Com, Inc. and Subsidiary
Consolidated Statements of Operations
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Net Sales | ||||||||
| Advertising | $ | 833,296 | $ | 1,363,508 | ||||
| Other | 100,923 | 106,197 | ||||||
| Total Net Sales | 934,219 | 1,469,705 | ||||||
| Cost of Goods Sold | ||||||||
| Website hosting expenses | 592,323 | 1,292,171 | ||||||
| Total Cost of Goods Sold | 592,323 | 1,292,171 | ||||||
| Gross Profit (Loss) | 341,896 | 177,534 | ||||||
| Selling expenses | 529,932 | 389,209 | ||||||
| Impairment-Goodwill | 6,138,210 | - | ||||||
| Stock-based compensation (see below) | 7,750 | 9,300 | ||||||
| General and administrative expenses | 1,070,938 | 1,450,181 | ||||||
| Loss From Operations | (7,404,934 | ) | (1,671,156 | ) | ||||
| Other Income (Expense) | ||||||||
| Miscellaneous income | 12,454 | 50,489 | ||||||
| Interest expense | (992,131 | ) | (758,540 | ) | ||||
| Interest expense-derivative conversion features | (2,307,402 | ) | (7,663,872 | ) | ||||
| Loss on deconsolidation of subsidiary | (253,557 | ) | - | |||||
| Amortization of debt discount | (8,333 | ) | (41,667 | ) | ||||
| Loss on extinguishment of debt | (29,310 | ) | - | |||||
| Foreign Currency Transaction (Loss)/Gain | - | 50,052 | ||||||
| Change in fair value – derivative liabilities | 4,036,848 | (2,895,203 | ) | |||||
| Total Other Income (Expense) | 458,569 | (11,258,741 | ) | |||||
| Loss Before Benefit (Provision) for Income Taxes | (6,946,365 | ) | (12,929,897 | ) | ||||
| Benefit (Provision) for Income Taxes | (7,167 | ) | (1,080,435 | ) | ||||
| Net Loss | $ | (6,953,532 | ) | $ | (14,010,332 | ) | ||
| Dividends on Preferred Shares | (51,263 | ) | (51,263 | ) | ||||
| Net Loss Applicable to Common Shareholders, basic and diluted | $ | (7,004,795 | ) | $ | (14,061,595 | ) | ||
| Net Loss Per Common Share, basic and diluted | (0.01 | ) | (0.022 | ) | ||||
| Weighted Average of Common Shares Outstanding | 680,961,142 | 650,715,901 | ||||||
| Comprehensive Income (Loss): | ||||||||
| Net Income (Loss) | $ | (6,953,532 | ) | $ | (14,010,332 | ) | ||
| Foreign currency translation adjustment | (1,709 | ) | 273,603 | |||||
| OCI gains on deconsolidation of subsidiary | 111,056 | - | ||||||
| Total Comprehensive Income (Loss) | $ | (6,844,185 | ) | $ | (13,736,729 | ) | ||
The accompanying notes are an integral part of the financial statements
| F-5 |
Kiwibox.Com, Inc. and Subsidiary
Statement of Stockholders’ Equity (Deficit)
Year Ended December 31, 2012
| Convertible Preferred | Cumulative Preferred | Additional | Accumulated Other | |||||||||||||||||||||||||||||||||||||
| Shares | Shares | Common Stock | Paid in | Accumulated | Comprehensive | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Equity (Deficit) | |||||||||||||||||||||||||||||||
| Balances, January 1, 2012 | 85,890 | $ | 86 | 1 | $ | - | 586,168,060 | 58,618 | 49,700,653 | (57,588,185 | ) | (382,950 | ) | (8,211,778 | ) | |||||||||||||||||||||||||
| Shares issued upon conversions of debt | - | - | - | 92,000,000 | 9,200 | 1,400,370 | 1,409,570 | |||||||||||||||||||||||||||||||||
| Recognition of capital from conversion of derivative liabilities | - | - | - | - | - | - | 1,529,883 | - | 1,529,883 | |||||||||||||||||||||||||||||||
| Partial settlements of obligation to be settled in stock | - | - | - | - | 1,225,000 | 119 | 27,279 | - | 27,398 | |||||||||||||||||||||||||||||||
| Dividends on conv. preferred stock | - | - | - | - | - | - | - | (51,263 | ) | (51,263 | ) | |||||||||||||||||||||||||||||
| Net loss, year ended December 31, 2012 | (14,010,332 | ) | (14,010,332 | ) | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation loss | - | - | - | - | - | - | - | - | 273,603 | 273,603 | ||||||||||||||||||||||||||||||
| Balances, December 31, 2012 | 85,890 | $ | 86 | 1 | $ | - | 679,393,060 | $ | 67,937 | $ | 52,658,185 | $ | (71,649,780 | ) | $ | (109,347 | ) | (19,032,919 | ) | |||||||||||||||||||||
The accompanying notes are an integral part of the financial statements.
| F-6 |
Kiwibox.Com, Inc. and Subsidiary
Statement of Stockholders’ Equity (Deficit)
Year Ended December 31, 2013
| Convertible Preferred | Cumulative Preferred | Additional | Accumulated Other | |||||||||||||||||||||||||||||||||||||
| Shares | Shares | Common Stock | Paid in | Accumulated | Comprehensive | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Equity (Deficit) | |||||||||||||||||||||||||||||||
| Balances, January 1, 2013 | 85,890 | $ | 86 | 1 | $ | - | 679,393,060 | 67,937 | 52,658,185 | (71,649,780 | ) | (109,347 | ) | (19,032,919 | ) | |||||||||||||||||||||||||
| Shares issued for services | - | - | - | 1,550,000 | 155 | 7,595 | 7,750 | |||||||||||||||||||||||||||||||||
| Settlements of obligations to be settled in stock | - | - | - | - | 2,750,000 | 275 | 60,325 | - | 60,600 | |||||||||||||||||||||||||||||||
| Dividends on conv. preferred stock | - | - | - | - | - | - | - | (51,263 | ) | (51,263 | ) | |||||||||||||||||||||||||||||
| Net loss, year ended December 31, 2013 | (6,953,532 | ) | (6,953,532 | ) | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | - | - | - | - | (1,709 | ) | (1,709 | ) | ||||||||||||||||||||||||||||
| OCI gains on deconsolidation | 111,056 | 111,056 | ||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2013 | 85,890 | $ | 86 | 1 | $ | - | 683,693,060 | $ | 68,367 | $ | 52,726,105 | $ | (78,654,575 | ) | $ | - | (25,860,017 | ) | ||||||||||||||||||||||
The accompanying notes are an integral part of the financial statements.
| F-7 |
Kiwibox.Com, Inc. and Subsidiary
Statements of Cash Flows
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net Loss | $ | (6,953,532 | ) | $ | (14,010,332 | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash Used in Operations: | ||||||||
| Depreciation and amortization | 138,094 | 305,478 | ||||||
| Securities issued for services | 7,750 | 9,300 | ||||||
| Intrinsic value of beneficial conversion feature | 2,307,402 | 7,663,873 | ||||||
| Change in fair value – conversion features | (4,036,848 | ) | 2,895,203 | |||||
| Impairment of goodwill | 6,138,210 | - | ||||||
| Bad debt expense | 8,257 | - | ||||||
| Loss on deconsolidation of subsidiary | 253,557 | - | ||||||
| Loss on extinguishment of debt | 29,310 | - | ||||||
| Change in deferred taxes | - | 1,052,454 | ||||||
| Foreign transaction (gain) loss | - | (50,052 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 27,058 | 153,051 | ||||||
| Income taxes receivable | - | 90,138 | ||||||
| Other receivables | (2,779 | ) | 88,974 | |||||
| Prepaid expenses | (27,913 | ) | (86,769 | ) | ||||
| Bank overdraft | (176,103 | ) | 176,103 | |||||
| Obligations to be settled in stock | 19,920 | 52,980 | ||||||
| Accounts payable | 55,387 | 1,413 | ||||||
| Accrued expenses | 1,032,298 | 688,868 | ||||||
| Net Cash Used by Operating Activities | (1,179,932 | ) | (969,318 | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Proceeds from sale of assets | - | 666 | ||||||
| Cash outlay – website development costs | - | (65,834 | ) | |||||
| Advances and deposits with affiliate | (767,265 | ) | - | |||||
| Cash abandoned upon deconsolidation of subsidiary | (81,001 | ) | - | |||||
| Cash refund (outlay) – other assets | 899 | (398 | ) | |||||
| Purchases of property and equipment | (3,644 | ) | (3,165 | ) | ||||
| Net Cash Used by Investing Activities | (851,011 | ) | (68,731 | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from loans payable | 919,643 | - | ||||||
| Proceeds from convertible notes payable | 1,145,000 | 1,055,000 | ||||||
| Repayments on convertible notes payable | (90,000 | ) | - | |||||
| Net proceeds from (repayments to) related parties | 2,902 | (154,440 | ) | |||||
| Net Cash Provided by Financing Activities | 1,977,545 | 900,560 | ||||||
| Net Increase (Decrease) in Cash | (53,398 | ) | (137,490 | ) | ||||
| Effect of exchange rates on cash | 306 | (1,372 | )) | |||||
| Cash at beginning of period | 56,751 | 195,613 | ||||||
| Cash at end of period | $ | 3,659 | 56,751 | |||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Interest Paid | $ | 37,780 | $ | 16,637 | ||||
The accompanying notes are an integral part of the financial statements.
| F-8 |
Kiwibox.Com, Inc. and Subsidiary
Statements of Cash Flows
Year Ended December 31, 2013
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Year Ended December 31, 2013
| Settlement of obligations with common stock | $ | 60,600 | ||
| Year to date dividend accruals | $ | 51,263 | ||
| Settlement of bank debt with short term loan | $ | 115,344 |
Year Ended December 31, 2012
| Settlement of obligations with common stock | $ | 31,597 | ||
| Acquisition of subsidiary via acquisition indebtedness and affiliate debentures | $ | 5,170,318 | ||
| Conversion of debt | $ | 1,490,570 | ||
| Year to date dividend accruals | $ | 51,263 | ||
| Reduction of derivatives from conversion of debt | $ | 1,516,384 |
The accompanying notes are an integral part of the financial statements.
| F-9 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Organization
Kiwibox.Com, Inc. (the “Company”) was incorporated as a Delaware corporation on April 19, 1988 under the name Fortunistics, Inc. On November 18, 1998, the Company changed its name to Magnitude Information Systems, Inc. On December 31, 2009, the Company changed its name to Kiwibox.com, Inc.
On August 16, 2007 the Company acquired all outstanding shares of Kiwibox Media, Inc.
The Company, Magnitude, Inc. and Kiwibox Media Inc. were separate legal entities until December 31, 2009, with Kiwibox Media, Inc. being a wholly owned subsidiary. On December 31, 2009, the two subsidiaries, Magnitude, Inc. and Kiwibox Media, Inc. merged into the Company.
On September 30, 2011, Kiwibox.com acquired the German based social network Kwick!! Community GmbH & Co. KG, a wholly-owned subsidiary.
On September 24, 2013, Kwick Community GmbH & Co. KG signed an equity purchase agreement to acquire Interscholtz Internet Services GmbH and Co KG, a German limited liability company, and all the equity of its general partner, Interscholtz Beteiligungs GmbH. As of the balance sheet date, and pursuant to the terms of the contract, since full payment was not made for the purchase price of Interscholz Internet Services GmbH & Co KG, ownership does not transfer to Kwick Community GmbH & Co KG. Full payment must be made for ownership to transfer to Kwick. As of December 31, 2013 only $515,037 of the total purchase price of $1,352,000 was made. On December 9,2013 the acquisition of Intersholz Internet Services GmbH and Co KG by Kwick was rescinded due to non compliance with the terms of the addendum to the contract, calling for the full purchase price to have been paid.. However, Kwick did acquire all the equity of the general partner, Interscholz Beteiligungs GmbH, as full payment was not a requirement for transfer of ownership of that entity.
On December 10, 2013, the Company signed an Equity Purchase Agreement with Marcus Winkler to sell to him eighty (80%) percent of the equity of its German subsidiary, KWICK! Community GmbH & Co. KG, a German limited liability company, and Kwick! Beteiligungs GmbH, its general partner (collectively, “Kwick”).
Cash and Cash Equivalents
The Company accounts for cash and other highly liquid investments with original maturities of three months or less as cash and cash equivalents.
Principles of Consolidation
The consolidated financial statements for the year ended December 31, 2013 include the accounts of Kiwibox.com, Inc. and the activities of its former subsidiary, KWICK! Community GmbH & Co. KG (“Kwick”) through December 18, 2013 (the date of deconsolidation of the subsidiary). Any significant inter-company balances and transactions were eliminated prior to deconsolidation.
| F-10 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Goodwill and Intangible Assets
In 2012, the Company adopted the provisions of ASU 2011-08, Intangibles-Goodwill or Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. Under the amendments in ASU 2011-08, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The Company has assessed the qualitative factors in all periods since adoption (see Note 22).
In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill or Other (Topic 350): Testing Indefinite-Living Tangible Assets for Impairment. ASU 2012-02 simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill by allowing an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is "more likely than not" that the asset is impaired. The amendments in this Update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of ASU 2012-02 did not have a material impact on our results of operations or our financial position.
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. Software costs are amortized using the straight line method and amortized over their estimated useful lives. Amortization begins when the related software is ready for its intended use in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software, Subsequent Measurement.
| F-11 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued |
Foreign Currency Translation
Assets and liabilities of foreign operations are translated into U.S. dollars at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted average exchange rates prevailing during each period presented. Gains and losses resulting from foreign currency transactions are included in the results of operations. Gains and losses resulting from translation of financial statements of our foreign subsidiary operating in a non-hyperinflationary economy are recorded as a component of accumulated other comprehensive loss until either sale or upon complete or substantially complete liquidation by the Company of its investment in the foreign entity. The accumulated gain or (loss) on foreign currency translation adjustment was eliminated on December 18, 2013 due to the deconsolidation of the Company’s foreign subsidiary.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising expense was $82,727 and $82,573 for the years ended December 31, 2013 and 2012, respectively. Revenue and expense from advertising barter transactions was $41,876 for the twelve months ended December 31, 2013.
Evaluation of Long Lived Assets
Long-lived assets are assessed for recoverability on an ongoing basis. In evaluating the fair value and future benefits of long-lived assets, their carrying value would be reduced by the excess, if any, of the long-lived asset over management’s estimate of the anticipated undiscounted future net cash flows of the related long-lived asset.
Fair Value Measurements
The Company adopted the provisions of ASC 820,Fair Value Measurements and Disclosures, which is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Under ASC 820, a framework was established for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Company accounted for certain convertible debentures modified in the years ended December 31, 2013 and 2012 as derivative liabilities required to be bifurcated from the host contract in accordance with ASC 815-40,Contracts in Entity’s Own Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares (see Note 13).
Securities Issued for Services
The Company accounts for stock, stock options and stock warrants issued for services and compensation by employees under the fair value method. For non-employees, the fair market value of the Company’s stock on the date of stock issuance or option/grant is used. The Company has determined the fair market value of the warrants/options issued under the Black-Scholes Pricing Model. The Company has adopted the provisions of ASC 718, “Compensation – Stock Compensation”, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant).
| F-12 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued |
Reclassification of Certain Securities Under ASC 815-15
Pursuant to ASC 815-15, “Contracts in Entity’s own Equity”, if a company has more than one contract subject to this Issue, and partial reclassification is required, there may be different methods that could be used to determine which contracts, or portions of contracts, should be reclassified. The Company's method for reclassification of such contracts is reclassification of contracts with the latest maturity date first.
Capitalization of Software /Website Development Costs
The Company capitalizes outside-contracted development work in accordance with the guidelines published under ASC 350-50, “Website Development Costs”. Under ASC 350-50, costs incurred during the planning stage are expensed, whilecosts relating to software used to operate a web site or for developing initial graphics should be accounted for under ASC 350-50,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, unless a plan exists or is being developed to market the software externally. Under ASC 350-50, internal and external costs incurred to develop internal-use computer software during the application development stage should be capitalized. Costs to develop or obtain software that allows for access or conversion of old data by new systems should also be capitalized, excluding training costs.
Fees incurred for web site hosting, which involve the payment of a specified, periodic fee to an Internet service provider in return for hosting the web site on its server(s) connected to the Internet, are expensed over the period of benefit, and included in cost of sales in the accompanying financial statements.
A total of $0 and $60,321 was capitalized for web-site development work during the years ended December 31, 2013 and 2012, respectively.
Income Taxes
The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expenses are expected to be settled in the Company’s income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset.
| F-13 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued |
Net Loss Per Share
Net loss per share, in accordance with the provisions of ASC 260, “Earnings Per Share” is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period. Common Stock equivalents have not been included in this computation since the effect would be anti-dilutive. Such common stock equivalents totaled 104,903,240 common shares at December 31, 2013, comprised of 26,500,000 shares issuable upon exercise of stock purchase warrants, 4,900,000 shares issuable upon exercise of stock options, 729,537 shares exercisable upon conversion of convertible preferred shares, and 72,773,703 shares potentially issuable upon conversion of convertible debt. Such debt and the related accrued interest, is presently convertible at the option of four holders at a conversion price of 50% of the ten day trailing market price. The total principal due under these notes of $9,918,699 would yield in excess of 3.5 billion shares if fully converted, however, the respective notes, all of which were issued to these four investors, carry a stipulation whereby the number of all shares issued pursuant to a conversion, may in the aggregate not exceed a number that would increase the total share holdings beneficially owned by such investor to a level above 9.99%. At the end of the quarter, this clause limits any conversion to the aforementioned number of shares. All of the aforementioned conversions or exercises, as the case may be, are at the option of the holders.
Revenue Recognition
The Company’s revenue is derived from advertising on the Kiwibox.Com or Kwick websites. Most contracts require the Company to deliver the customer impressions, click-throughs or new customers, or some combination thereof. Accordingly, advertising revenue is estimated and recognized for the period in which customer impressions, click through or new customers are delivered. Licensing or hosting revenue consists of an annual contract with clients to provide web-site hosting and assistance.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| 2. | GOING CONCERN |
The ability of the Company to continue its operations is dependent on increasing sales and obtaining additional capital and financing. Our revenues during the foreseeable future are insufficient to finance our business and we are entirely dependent on the willingness of existing investors to continue supporting the Company with working capital loans and equity investments, and our ability to find new investors should the financial support from existing investors prove to be insufficient. If we were unable to obtain a steady flow of new debt or equity-based working capital we would be forced to cease operations. In their report for the fiscal year ended December 31, 2013, our auditors have expressed an opinion that, as a result of the losses incurred, there is 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 December 31, 2013, cash balances in bank accounts did not exceed this limit. The Company provides credit in the normal course of business to customers located throughout the U.S. and overseas. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
| 4. | PREPAID EXPENSES |
| Prepaid expenses consist of the following at: | December 31, 2013 | December 31, 2012 | ||||||
| Rent | $ | - | $ | 11,427 | ||||
| Promotional supplies inventory | - | 6,866 | ||||||
| Business insurance | 10,620 | 5,250 | ||||||
| Consulting | 110,000 | 100,000 | ||||||
| Other | 548 | 5,467 | ||||||
| 121,168 | 129,010 | |||||||
| 5. | PROPERTY AND EQUIPMENT |
| Property and equipment consist of the following at: | December 31, 2013 | December 31, 2012 | ||||||
| Furniture | $ | 14,322 | $ | 14,322 | ||||
| Leasehold Improvements | 24,130 | 24,130 | ||||||
| Computer Equipment | - | 620,842 | ||||||
| Office Equipment | 73,138 | 73,138 | ||||||
| 111,590 | 742,432 | |||||||
| Less accumulated depreciation | 105,795 | 621,876 | ||||||
| Total | $ | 5,795 | $ | 120,556 | ||||
Depreciation expense charged to operations was $65,567 and $166,274 for the years ended December 31, 2013 and 2012, respectively.
| F-14 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 6. | INTANGIBLE ASSETS |
Intangible assets consisted of software for website development costs is as follows:
| December 31, 2013 | December 31, 2012 | |||||||
| Website development costs | $ | 254,264 | $ | 392,660 | ||||
| Less accumulated amortization | 251,688 | 284,121 | ||||||
| Total | $ | 2,576 | $ | 108,539 | ||||
Amortization expense for the years ended December 31, 2013 and 2012 was $64,194 and $96,993, respectively. Additional amortization over the next 2 years is estimated to be as follows:
| Amortization expense | ||||
| December 31, 2014 | $ | 2,576 | ||
| 7. | INVESTMENT IN UNCONSOLIDATED SUBSIDIARY |
On December 10, 2013, the company signed an equity purchase agreement with Marcus Winkler to sell to him eighty (80%) percent of the equity of its German subsidiary, Kwick. Pursuant to the terms of the agreement, the purchaser paid 36,000 Euros as the purchase price and the company was required to obtain shareholder approval of the sale as required under applicable Delaware Law. The majority shareholder approval was obtained on December 18, 2013. In addition, the Company and Mr. Winkler signed a Lock-Up and Standstill Agreement pursuant to the general terms of which the Company agreed not to participate in the management, operations or finances of Kwick, which shall be exclusively managed and under control of the purchaser. Accordingly, the Company’s minority ownership position shall be subject, in all respects, to the exclusive control of the purchaser. Mr, Winkler also has investment and voting control over Kreuzfeld Ltd., a major creditor of the company, which holds a Class AA convertible promissory note with an outstanding balance (including accrued interest) of $4,267,834 as of December 31, 2013.
Due to the significant reduction in the Company’s percentage of controlling interest in Kwick (down to 20%), coupled with the contract restrictions over voting rights and management of the operations of Kwick subsequent to December 18, 2013, the Company recognized the deconsolidation of Kwick as of that date, resulting in a loss on deconsolidation of $253,557, and now carries the investment in Kwick under the cost method of accounting. Due to the significant reductions in fair value of this reporting unit that are considered other than temporary, and impairment of the related goodwill, the carrying value of this cost method investment was zero at December 31, 2013.
| 8. | ACCRUED EXPENSES |
Accrued expenses consisted of the following at:
| December 31, 2013 | December 31, 2012 | |||||||
| Accrued interest | $ | 2,158,274 | $ | 1,203,923 | ||||
| Accrued payroll, payroll taxes and commissions | 18,585 | 51,944 | ||||||
| Accrued professional fees | 116,900 | 150,598 | ||||||
| Accrued rent / deferred rental obligation | 11,789 | 12,158 | ||||||
| Miscellaneous accruals | 20,735 | 23,554 | ||||||
| Total | $ | 2,326,283 | $ | 1,442,177 | ||||
| F-15 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 9. | OBLIGATIONS TO BE SETTLED IN STOCK |
Obligations to be settled in stock consisted of the following at
| December 31, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Obligation for warrants granted for compensation | $ | 100,000 | $ | 100,000 | ||||
| 600,000 common shares issuable to a consultant who was a director of the company, for services rendered. | 36,000 | 36,000 | ||||||
| 0 (2013) and 500,000 (2012) common shares, and 2,900,000 (2013) and 2,900,000 (2012) stock options issuable to two officers of the Company pursuant to their respective employment Agreements | 56,858 | 69,608 | ||||||
| 5,400,000 (2013) and 4,200,000 (2012) stock options issuable to one director who also serves as the Company’s general counsel | 56,430 | 44,550 | ||||||
| 1,000,000 warrants granted on the Pixunity.de asset Purchase | 10,000 | 10,000 | ||||||
| 1,050,000 shares issuable under stock grants | - | 10,500 | ||||||
| $ | 259,288 | $ | 270,658 | |||||
| 10. | LOANS PAYABLE |
The Company (Formerly Magnitude, Inc.) had borrowings under short term loan agreements with the following terms and conditions at December 31, 2010 and 2009:
| On December 4, 1996, The company (Formerly Magnitude, Inc.) repurchased 500,000 shares of its common stock and retired same against issuance of a promissory note maturing twelve months thereafter accruing interest at 5% per annum and due December 4, 1998. This note is overdue as of September 30, 2005 and no demand for payment has been made. | $ | 75,000 | ||
| Total | $ | 75,000 |
| F-16 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 11. | NOTES PAYABLE |
| December 31, | December 31, | |||||||
| 2013 | 2012 | |||||||
| 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. | -0- | 40,000 | ||||||
| From September 2008 through December 2013 five creditors loaned the Company funds under the terms of the convertible notes issued, as modified in March 2009 and July 2010 and April 2011 and August 2012 (see Note 13). | 9,918,699 | 8,773,699 | ||||||
| During March 2012,an individual loaned the Company funds under the terms of a convertible promissory note at interest of 5% per year (see Note 13) | -0- | 50,000 | ||||||
| Less: debt discount on above note | -0- | (8,333 | ) | |||||
| In January 2011 and again in February 2011, a shareholder loaned the Company $50,000 under a demand note at 10%. In 2010, this shareholder loaned the Company $240,000 under a demand note at 10%. | 340,000 | 340,000 | ||||||
| Total | $ | 10,283,699 | $ | 9,220,366 | ||||
| 12. | LONG-TERM DEBT |
Long-term debt as of December 31, 2012 and 2011 is comprised of the following:
| Discounted present value of a non-interest bearing $70,000 settlement with a former investor of Magnitude, Inc. to be paid in 24 equal monthly payments commencing July 1, 1997. The imputed interest rate used to discount the note is 8% per annum. This obligation is in default. | $ | 33,529 | ||
| Total | 33,529 | |||
| Less current maturities | 33,529 | |||
| Long-term debt, net of current maturities | $ | - |
| F-17 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 13. | DERIVATIVE CONVERSION FEATURES |
On July 27, 2010, the Company issued two Class A Senior Convertible Revolving Promissory Notes (“Class A Notes”), one to Cambridge Services, Inc., in the principal amount of $683,996, consolidating the series of loans (and related accrued interest) made to the Company since June 26, 2009, and one to Discover Advisory Company, in the principal amount of $1,160,984, consolidating the series of loans (and related accrued interest) made to the Company since September 19, 2008 and including advances through September 30, 2010. Each of these promissory notes are due on demand, accrue interest at the rate of 10%, per annum, are convertible (including accrued interest) at the option of each lender into Common Stock of the Company at 50% of the averaged ten closing prices for the Company's Common Stock for the ten (10) trading days immediately preceding the Conversion Date but in no event less than $0.001 (the "Conversion Price"). Both promissory notes contain conversion caps, limiting conversions under these notes to a maximum beneficial ownership position of Company common stock to 9.99% for each lender. Each of these notes contains Company covenants, requiring the lenders’ prior written consent in order for the Company to merge, issue any common or preferred stock or any convertible debt instruments, declare a stock split or dividends, increase any compensation to its officers or directors by more than five (5%) during any calendar year. During the year ended December 31, 2013, there were no notes converted. During 2012, to settle the obligation for indebtedness from the acquisition of Kwick!, Cambridge Services, Inc., Discovery Advisory Services, Kreuzfeld, Ltd and VGZ advanced $298,913, $2,436,588, $2,069,479 and $365,388, respectively.
The Company renegotiated certain outstanding promissory notes with its four major creditors, Discover Advisory Company of the Bahamas (“DAC”), Kreuzfeld Ltd. of Switzerland (“Kreuzfeld”), Cambridge Services, Inc. of Panama (“CSI”) and Vermoegensverwaltungs-Gesellschaft Zurich LTD of Switzerland (“VGZ”). As of August 1, 2012, the Company authorized the issue of a new series of corporate notes, the Class AA Senior Secured Convertible Revolving Promissory Notes, dated as of August 1, 2012 (the New Note(s)”) and issued New Notes: (1) to DAC, with a maximum credit facility of $5,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated July 27, 2010, in the original principal amount of $1,080,984, now cancelled, which has an outstanding balance due (including accrued interest) of $3,952,008 as of December 31, 2013; (2) to Kreuzfeld, with a maximum credit facility of $5,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated September 16, 2011, in the original principal amount of $2,000,000, now cancelled, which has an outstanding balance due (including accrued interest) of $4,267,834 as of December 31, 2013; (3) to CSI, with a maximum credit facility of $2,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated August 1, 2011, in the original principal amount of $1,303,996, now cancelled, with an outstanding balance due (including accrued interest) of $2,729,435 as of December 31, 2013, and; (4) to VGZ, with a maximum credit facility of $2,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated September 30, 2010, in the original principal amount of $2,000,000, now cancelled, with an outstanding balance due (including accrued interest) of $955,159 as of December 31, 2013. All of the New Notes accrue interest at the rate of 10%, are convertible into common shares at the conversion rate equal to 50% of the averaged ten closing prices for the Company's Common Stock for the ten (10) trading days immediately preceding the Conversion Date but in no event less than $0.001, and are due on demand.. Pursuant to an Equity and Stock Pledge Agreement, also negotiated and executed as of August 1, 2012, the repayment of the outstanding indebtedness of the New Notes is secured by all of the limited partnership interests of the Company’s partly-owned (now deconsolidated) German subsidiary, KWICK! Community GmbH & Co. KG, a private German limited partnership (“KG”), and all of its shares of the sole general partner of KG, KWICK! Community Beteiligungs GmbH.
On February 28, 2012 the Company signed a convertible note with Michael Pisani. This is a 1 year note that is convertible at $0.025 per share in the amount of $50,000. In the event that any portion of any outstanding Company promissory note, preferred share, warrant or stock option held of record by a non-affiliate of the Company is converted, exercised or exchanged for common shares of the Company at a conversion price or conversion rate less than $0.025 per one (1) common share anytime any part of the outstanding principal amount of this note is outstanding, the conversion rate of this note shall automatically be adjusted to such lower conversion rate. The Company evaluated this conversion contingency under the guidance at ASC 815-40-15 and determined that this conversion feature should be bifurcated from the host contract and measures at fair value. The Company valued this conversion feature utilizing a Black-Scholes valuation model and a probability analysis with regard to the reset provision of the conversion price. The Company determined the initial value to be $55,241, with $50,000 recorded as a debt discount and the remainder as interest expense-derivative conversion features. The discount is being amortized over the life of the note. A total of $8,333 in amortization expense was recorded during the twelve months ended December 31, 2013. As of December 31, 2013 this debt plus accrued interest was paid in full.
| F-18 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 13. | DERIVATIVE CONVERSION FEATURES (continued) |
The Company accounted for the conversion features underlying these convertible debentures in accordance with ASC 815-40,Contract in Entity’s Own Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares. The Company determined the value of the derivate conversion features of these debentures under these terms at the relevant commitment dates to be $2,307,402 utilizing a Black-Scholes valuation model, with $50,000 recorded as a debt discount as indicated above. The fair value of the derivative conversion features was determined to be $12,068,233 at December 31, 2013. The change in fair value of the liability for the conversion feature resulted in income of $4,036,848 for the year ended December 31, 2013, which is included in Other Income (Expense) in the accompanying financial statements.
| 14. | COMMITMENTS AND CONTINGENCIES |
We maintain offices for our operations at 330 W. 42th Street, New York, New York 10036, for approximately 990 square feet. This lease requires initial minimum monthly rentals of $3,833 plus tenants’ share of utility/cam/property tax charges which average approximately $291 per month. During 2013 the Company successfully negotiated a 5 year lease, with future minimum rentals as follows:
| 2014 | $ | 46,460 | ||
| 2015 | 47,854 | |||
| 2016 | 49,289 | |||
| 2017 | 50,768 | |||
| 2018 | 47,847 |
In May 2010 the Company negotiated a lease of an apartment in New York City for the CEO in order to reduce travel costs. The lease was for 12 months at $2,775 per month through May 31, 2011. In May 2011 the lease was extended through August 31, 2011 at the rate of $2,837. In August 2011 the lease was extended through December 31, 2011 at the rate of $2,837 per month. In December 2011 the lease was again extended through May 31, 2012 with no change in the base rent. In May 2012 the lease was extended through December 31, 2012 at a monthly rate of $2,943, this lease was then extended through December 31, 2013 at the same terms.
Kwick! has operating leases related to office space in Weinstadt, Germany along with vehicle leases. The office lease is renewable quarterly at a rate of $2,000 per month plus utilities. Kwick also has a vehicle lease which will be terminated January 31, 2014 at a rate of $1,077 per month. Kwick has a sublease arrangement with Jaumo GmBh a related party (see Note 15). Kwick’s operating leases relate to leases of land and vehicles with lease terms of between 3 and 5 years. All operating lease contracts over 5 years contain clauses for yearly market rental reviews. The Company does not have an option to purchase the leased office at the expiration of the lease period.
Our total rent expenses were $113,364 and $138,821 during the year ended December 31, 2013 and 2012, respectively.
| F-19 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 14. | COMMITMENTS AND CONTINGENCIES (continued) |
During the third quarter of 2010 the Chief Technology Officer took over the position of Chief Executive Officer with no changes to the above terms, running through July 30, 2011. On October 6, 2010, the terms of the consulting agreement were modified. The new terms called for a reduced monthly consulting fee of $16,667, and for $100,000 to be prepaid on January 1, 2011 thru June 30, 2011. During the fourth quarter of 2011 this agreement was extended through December 31, 2012. During the fourth quarter of 2012 this agreement was again extended through December 31, 2013 with the same prepayment provision. During the fourth quarter of 2013 the terms of this agreement were modified. The new terms called for an increased monthly consulting fee to $18,333 effective January 1, 2014 through December 31, 2014. There were no changes to the stock compensation portion of any earlier agreement.
In the year ended December 31, 2013 and December 31, 2012 this officer was granted 1,200,000 shares.
On March 7, 2011 the Company announced its acquisition of the assets of Pixunity.DE a German photo book community. We purchased the internet domain name, the software codes for capturing, uploading and sharing images and the list of its approximate 15,000 members. The principal reason for this purchase was to acquire the source code and technology for image sharing which could have cost us up to $100,000 to develop this technology in house. We are currently integrating the image sharing software into our Kiwibox website and do not intend to market or rely upon the pixunity brand for our business.
| 15. | FAIR VALUE |
Some of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, receivables and payables.
Effective July 1 2009, the Company adopted ASC 820,Fair Value Measurements and Disclosures. This topic defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance supersedes all other accounting pronouncements that require or permit fair value measurements. The Company accounted for the conversion features underlying certain convertible debentures in accordance with ASC 815-40,Contracts in Entity’s Own Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares.
Effective July 1 2009, the Company adopted ASC 820-10-55-23A,Scope Application to Certain Non-Financial Assets and Certain Non-Financial Liabilities, delaying application for non-financial assets and non-financial liabilities as permitted. ASC 820 establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange- traded securities and exchange-based derivatives.
Level 2 — inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges.
| F-20 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 15. | FAIR VALUE (continued) |
Level 3 — unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently- traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models. The company values the conversion liabilities using the Black-Scholes model and the assumptions are updated using independent data such as the risk free rate, volatility and expected life for each valuation date based on changes over time.
The following table reconciles, for the years ended December 31, 2012 and 2013, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements:
| Conversion Liability at January 1, 2012 | $ | 4,704,987 | ||
| Value of beneficial conversion features of new debentures | 7,713,872 | |||
| Change in value of beneficial conversion features during period | 2,895,203 | |||
| Reductions in fair value due to principal conversions | (1,516,383 | ) | ||
| Conversion Liability at December 31,2012 | 13,797,679 | |||
| Value of beneficial conversion features of new debentures | 2,307,402 | |||
| Change in value of beneficial conversion features during period | (4,036,848 | ) | ||
| Conversion Liability at December 31, 2013 | $ | 12,068,233 |
The fair value of the conversion features are calculated at the time of issuance and the Company records a conversion liability for the calculated value. The Company recognizes interest expense for the recognition of the conversion liability.
| 16. | PREFERRED STOCK |
Preferred stock is non-voting, $.001 par value per share with 3,000,000 shares authorized.
Cumulative Preferred Stock has 2,500 shares designated of which 1 share is issued and outstanding. The total Cumulative Preferred Stock at December 31, 2006 is $0 with a liquidation price of $100,000. As of December 31, 2013, there was $9,000 of cumulative preferred dividends in arrears representing $9,000 per cumulative preferred share.
Series A of the Senior Convertible Preferred Stock series which was issued in 2000 has 300,000 shares designated, 22,000 shares issued and outstanding. The total outstanding Series A Senior Convertible Preferred Stock at December 31, 2013 is $22 with a liquidation price of $120,000. The following is a description of the Series A convertible preferred stock:
| (1) | The holders of said shares of Series A Senior Preferred shall be entitledto receive cumulative dividends at the rate of seven percent (7%) per annum during the first annual period after issuance, increasing by increments of one half of one percent for every year thereafter until the rate reaches ten percent (10%) per annum at which time it will remain at 10% payable semi-annually when declared by the Board of Directors, before any dividend shall be declared, set apart for, or paid upon the Common Stock of the Company. The Dividend Rate shall accrue on the Liquidation Price of each share of the Series A Senior Preferred. The dividends on the Series A Senior Preferred, payable in cash, shall be cumulative, so that if the Company fails in any fiscal year to pay such dividends on all the issued and outstanding Series A Senior Preferred, such deficiency in the dividends shall be fully paid, but without interest, before any dividends shall be paid on or set apart for the Cumulative Preferred Stock or the Common Stock. |
| F-21 |
Kiwibox.Com, Inc. and Subsidiary
Notes to Financial Statements
| 16. | PREFERRED STOCK (continued) |
| (2) | The Series A Senior Preferred shall with respect to dividend rights and liquidation rights rank prior to all classes and series of Common Stock and the Cumulative Preferred Stock, and on a par with the Series B, C and D Senior Convertible Preferred Stock. |
| (3) | In the event of any liquidation, of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series A Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, the amount of Five ($5.00) dollars for each share of Series A Senior Preferred (the "Liquidation Price") held of record by such holder, payable in cash or in shares of stock, securities or other consideration, the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends in arrears on each such share up to the date fixed for distribution, provided, however, that such remaining net assets are sufficient to cover all the before mentioned payments and also like payments to holders of Series B and C Senior Preferred, before any distribution shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B, C and D Senior Preferred, the holders of these series shall receive payments on a pro rata basis. |
| (4) | The Company shall have the right to redeem pro rata any or all of its Series A Senior Preferred issued and outstanding at any time, with the Board of Directors of the Company in its sole discretion deciding how many shares to redeem, provided, however, that any such shares called for redemption have been issued and outstanding for a minimum of three (3) years at the time of notice of redemption to the holders of such shares, by paying to the holders thereof the Liquidation Price for each share of Series A Senior Preferred held by such holder plus a "call premium" of 15% of the Liquidation Price, together with the amount of any accrued and unpaid dividends as may have accumulated thereon at the time of redemption (the "Redemption Price"). |
| (5) | Each share of Series A Senior Preferred shall be convertible at any time prior to the Redemption Date, at the holder’s option, into such number (the "Conversion Ratio") of shares of the Common Stock of the Company as arrived at by dividing the Liquidation Price by one hundred fifty (150) percent of the market price of the Common Stock of the Corporation ("Market Price") on the earlier of the dates such share of Series A Senior Preferred is subscribed for or issued (the "Effective Date"). |
As of December 31, 2013 there were $143,664 Series A Senior Convertible Preferred share dividends accrued and unpaid representing $6.53 per share.
Series B of the Senior Convertible Preferred Stock series which was issued in 2000 has 350,000 shares designated, no shares issued and outstanding. The total outstanding Series B Senior Convertible Preferred Stock at December 31, 2013 is $0. The following is a description of the Series B Senior Convertible Stock:
| (1) | The holders of said shares of Series B Senior Preferred shall be entitled to receive cumulative dividends thereon at the rate of seven percent (7%) per annum, payable semi-annually when declared by the Board of Directors, before any dividend shall be declared, set apart for, or paid upon the Common Stock of the Company. The Dividend Rate shall accrue on the Liquidation Price of each share of the Series B Senior Preferred. The dividends on the Series B Senior Preferred, payable in cash, shall be cumulative, so that if the Company fails in any fiscal year to pay such dividends on all the issued and outstanding Series B Senior Preferred, such deficiency in the dividends shall be fully paid, but without interest, before any dividends shall be paid on or set apart for the Cumulative Preferred Stock or the Common Stock. |
| (2) | The Series B Senior Preferred shall, with respect to dividend rights and liquidation rights, rank prior to all classes and series of Common Stock and the Cumulative Preferred Stock, and on a par with the Series A, C and D Senior Convertible Preferred Stock. |
| F-22 |
Kiwibox.Com, Inc. and Subsidiary
Notes to the Financial Statements
| 16. | PREFERRED STOCK - (Continued) |
| (3) | In the event of any liquidation of the Company, whether voluntary or otherwise, after payment or providing for payment of the debts and other liabilities of the Company, the holders of the Series B Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, the amount of nine ($9.00) dollars for each share of Series B Senior Preferred (the "Liquidation Price") held of record by such holder, payable in cash or in shares of stock, securities or other consideration, the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends in arrears on each such share up to the date fixed for distribution, provided however, that such remaining net assets are sufficient to cover all the before mentioned payments and also like payments to holders of Series A and C Senior Preferred, before any distribution shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B, C and D Senior Preferred, the holders of these series shall receive payments on a pro rata basis. |
| (4) | The Company shall have the right to redeem pro rata any or all of its Series B Senior Preferred issued and outstanding at any time, with the Board of Directors of the Company in its sole discretion deciding how many shares to redeem, provided, however, that any such shares called for redemption have been issued and outstanding for a minimum of three (3) years at the time of notice of redemption of the holders of such shares, by paying to the holders thereof the Liquidation Price for each share of Series B Senior Preferred held by such holder plus a "call premium" of 10% of the Liquidation Price, together with the amount of any accrued and unpaid dividends as may have accumulated thereon at the time of redemption (the "Redemption Price"). |
| (5) | Each share of Series B Senior Preferred shall be convertible at any time prior to the Redemption Date, at the holder’s option, into shares of Common Stock of the Company on the basis of ten (10) shares of Common Stock for 1 share of Series B Senior Preferred. |
As of December 31, 2013 there were no Series B Senior Convertible Preferred share dividends accrued and unpaid.
Series C of the Senior Convertible Preferred Stock series which was issued in 2000 has 120,000 shares designated. There were no shares of Series C Senior Convertible Preferred Stock outstanding at December 31, 2013. The following is a description of the Series C Senior Convertible Stock:
| (1) | The holders of said shares of Series C Senior Preferred shall be entitled to receive cumulative dividends thereon at the rate of seven percent (7%) per annum, payable monthly, before any dividend shall be declared, set apart for, or paid upon the Common Stock of the Company. The Dividend Rate shall accrue on the Liquidation Price (as hereinafter defined) of each share of the Series C Senior Preferred. The dividends on the Series C Senior Preferred, payable in cash, shall be cumulative, so that if the Company fails in any fiscal year to pay such dividends on all the issued and outstanding Series C Senior Preferred, such deficiency in the dividends shall be fully paid, but without interest, before any dividends shall be paid on or set apart for the Cumulative Preferred Stock or the Common Stock. |
| (2) | The Series C Senior Preferred shall with respect to dividend rights and liquidation rights rank prior to all classes and series of Common Stock and the Cumulative Preferred Stock, and on a par with the Series A, B and D Senior Convertible Preferred Stock. |
| F-23 |
Kiwibox.Com, Inc. and Subsidiary
Notes to the Financial Statements
| 16. | PREFERRED STOCK - (Continued) |
| (3) | In the event of any liquidation of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series C Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, the amount of nine ($9.00) dollars for each share of Series C Senior Preferred (the "Liquidation Price") held of record by such holder, payable in cash or in shares of stock, securities or other consideration, the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends in arrears on each such share up to the date fixed for distribution, provided, however, that such remaining net assets are sufficient to cover all the before mentioned payments and also like payments to holders of Series A and B Senior Preferred, before any distribution shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B, C and D Senior Preferred, the holders of these series shall receive payments on a pro rata basis. |
| (4) | The Company shall have the right to redeem pro rata any or all of its Series C Senior Preferred issued and outstanding at any time, with the Board of Directors of the Company in its sole discretion deciding how many shares to redeem, provided, however, that any such shares called for redemption have been issued and outstanding for a minimum of three (3) years at the time of notice of redemption to the holders of such shares, by paying to the holders thereof the Liquidation Price for each share of Series C Senior Preferred held by such holder plus a "call premium" of 10% of the Liquidation Price together with the amount of any accrued and unpaid dividends as may have accumulated thereon at the time of redemption (the "Redemption Price"). |
| (5) | Each share of Series C Senior Preferred shall be convertible at any time prior to the Redemption Date, at the holder’s option, into shares of Common Stock of the Company on the basis of ten (10) shares of Common Stock for 1 share of Series C Senior Preferred. |
As of December 31, 2013 there were no Series C Senior Convertible Preferred share dividends accrued and unpaid.
Series D of the Senior Convertible Preferred Stock series which was issued in 2000 has 500,000 shares designated, 63,890 shares issued and outstanding. The total outstanding Series D Senior Convertible Preferred Stock at December 31, 2013 is $64 with a liquidation price of $575,010. The following is a description of the Series D Senior Convertible Stock:
| (1) | The holders of said shares of Series D Senior Preferred shall be entitled to receive cumulative dividends thereon at the rate of seven percent (7%) per annum, payable semi-annually when declared by the Board of Directors before any dividend shall be declared, set apart for, or paid upon the Common Stock of the Company. The Dividend Rate shall accrue on the Stated Value (the "Stated Value"), which Stated Value shall be noted on the certificate issued to the holder, of each share of the Series D Senior Preferred. The dividends on the Series D Senior Preferred, payable in cash, shall be cumulative, so that if the Company fails in any fiscal year to pay such dividends on all the issued and outstanding Series D Senior Preferred, such deficiency in the dividends shall be fully paid, but without interest, before any dividends shall be paid on or set apart for the Cumulative Preferred Stock or the Common Stock. |
| (2) | The Series D Senior Preferred shall with respect to dividend rights and liquidation rights rank prior to all classes and series of Common Stock and the Cumulative Preferred Stock, and on a par with the Series A, B and C Senior Convertible Preferred Stock. |
| (3) | In the event of any liquidation of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series D Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, an amount equal to the Stated Value of each share of Series D Senior Preferred held of record by such holder, payable in cash or in shares of stock, securities or other consideration, the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends in arrears on each such share up to the date fixed for distribution, provided, however, that such remaining net assets are sufficient to cover all the before mentioned payments and also like payments to holders of Series A, B and C Senior Preferred, before any distribution shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B, C and D Senior Preferred, the holders of these series shall receive payments on a pro rata basis. |
| F-24 |
Kiwibox.Com, Inc. and Subsidiary
Notes to the Financial Statements
| 16. | PREFERRED STOCK - (Continued) |
| (4) | The Company shall have the right to redeem pro rata any or all of its Series D Senior Preferred issued and outstanding at anytime, with the Board of Directors of the Company in its sole discretion deciding how many shares to redeem, provided, however, that any such shares called for redemption have been outstanding for a minimum of three (3) years at the time of notice of redemption to the holders of such shares, by paying to the holders thereof the Stated Value for each share of Series D Senior Preferred held by such holder plus a "call premium" of 10% of the Stated Value, together with the amount of any accrued and unpaid dividends as may have accumulated thereon at the time of redemption (the "Redemption Price"). |
| (5) | Each share of Series D Senior Preferred shall be convertible at any time prior to the Redemption Date, at the holder’s option, into shares of Common Stock of the corporation on the basis of ten (10) shares of Common Stock for 1 share of Series D Senior Preferred. |
As of December 31, 2013 there were $531,728 Series D Senior Convertible Preferred share dividends accrued and unpaid representing $8.32 per share.
Series E of the Senior Convertible Preferred Stock series which was issued in 2005 has 500,000 shares designated, with no shares issued and outstanding.
| (1) | The holders of said shares of Series E Senior Preferred shall be entitled to receive cumulative dividends at the rate of six percent (6%) per annum, payable at the time said shares are converted into shares of common stock of the Company and when declared by the board of Directors, before any dividend shall be declared, set apart for, or paid upon the Common Stock and any other Preferred Stock of the Company. The Dividend Rate shall accrue on the Stated Value, which Stated Value shall be noted on the certificate issued to the holder of each share of the Series E Senior Preferred. The dividends on the Series E Senior Preferred, payable in cash, shall be cumulative, so that if the company fails in any fiscal year to pay such dividends on all the issued and outstanding Series E Senior Preferred, such deficiency in the dividends shall be fully paid, but without interest, before any dividends shall be paid on or set apart for any other class of Preferred Stock or the Common Stock. The holders of the currently outstanding shares of Series E Senior Convertible Stock have waived their right for dividends, consequently, no dividends have been accrued on this stock. |
| (2) | The Series E Senior Preferred shall with respect to dividend rights rank prior to all classes and series of Common Stock, Cumulative Preferred Stock, and the Series A, B, C, and D Senior Convertible Preferred Stock and, with respect to liquidation rights rank prior to all classes and series of Common Stock, the Cumulative Preferred Stock, and be on a par with the Series A, B, C and D Senior Convertible Preferred Stock. |
| (3) | In the event of any liquidation, dissolution, or winding up of the affairs of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series E Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, an amount equal to the Stated Value of each share of Series E Senior Preferred held of record by such holder, payable in cash or in shares of stock, securities or other consideration, the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends in arrears on each such share up to the date fixed for distribution, provided, however, that such remaining net assets are sufficient to cover all the before mentioned payments and also like payments to holders of Series A, B, C and D Senior Preferred, before any distribution shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B, C, D and E Senior Preferred, the holders of these series shall receive payments on a pro rata basis. |
| F-25 |
Kiwibox.Com, Inc. and Subsidiary
Notes to the Financial Statements
| 16. | PREFERRED STOCK - (Continued) |
| (4) | The holders of said shares of Series E Senior Preferred shall not be entitled to any voting rights. |
| (5) | Shares of Series E Senior Preferred which have been issued and reacquired in any manner, including shares purchased or converted into Common Stock exchanged or redeemed, shall be canceled on the books of the Company and shall not be considered outstanding for any purpose. |
| (6) | During such time as there exist unpaid cumulative dividends due on the Series E Senior Preferred, no reclassification of the shares of the Company or capital reorganization of the Company in any manner provided by law shall be valid unless (a) the holders of a majority of all the Series E Senior Preferred approve, and (b) provision is made for the payment of the aggregate unpaid cumulative dividends then in arrears. |
| (7) | Each share of Series E Senior Preferred shall automatically convert, on the date six months after the date of issuance (the “Conversion Date”) which Conversion Date shall be noted on the certificate issued to the holder of each share of the Series E Senior Preferred, into shares of Common Stock of the Company on the basis of one hundred (100) shares of Common Stock for 1 share of Series E Senior Preferred. The holder of any shares of Series E Senior Preferred shall surrender, as soon as practicable on or after the Conversion Date, at the principal office of the Company or at such other office or agency maintained by the Company for that purpose, the certificate or certificates representing the shares of Series E Senior Preferred due for conversion. As promptly as practicable, and in any event within ten business days after surrender of such certificates, the Company shall deliver or cause to be delivered certificates representing the number of validly issued, fully paid and non-assessable shares of Common Stock of the Company to which such holder of Series E Senior Preferred so converted shall be entitled. Such conversion shall be deemed to have been made at the close of business on the Conversion Date, so that the rights of the holders of the Series E Senior Preferred shall thereafter cease except for the right to receive Common Stock of the Company in accordance herewith, and such converting holder of Series E Senior Preferred shall be treated for all purposes as having become the record holder of such Common Stock of the Company at such time. |
| (8) | In the event that, prior to the conversion of the Series E Senior Preferred Stock by the holder thereof into Common Stock of the company, there shall occur any change in the outstanding shares of Common Stock of the Company by reason of the declaration of stock dividends, or through a re-capitalization resulting from stock splits or combinations, without the receipt by the Company of fair consideration therefore in the form of cash, services or property, the conversion ratio of the Series E Senior Preferred Stock into Common Stock of the Company shall be adjusted such that any holder of Series E Senior Preferred Stock converting such stock into Common Stock subsequent to such change in the outstanding shares of Common Stock of the Company be entitled to receive, upon such conversion, a number of shares of Common Stock of the Company representing the same percentage of common shares outstanding as presented by the shares that he would have received had he converted his Series E Senior Preferred Stock to Common Stock prior to such change in the outstanding shares of Common Stock of the Company. |
As of December 31, 2013 there were no Series E Senior Convertible Preferred share dividends accrued.
| F-26 |
Kiwibox.Com, Inc. and Subsidiary
Notes to the Financial Statements
| 16. | PREFERRED STOCK - (Continued) |
Series G of the Senior Convertible Preferred Stock series which was issued in 2007 has 43,610 shares designated. All such shares were issued and outstanding at December 31, 2008. In February 2009, these shares automatically converted into 17,857,142 common shares, leaving no Series G preferred shares outstanding at December 31, 2013.
| (1) | The holders of said shares of Series G Senior Convertible Preferred shall not be entitled to receive dividends. |
| (2) | The Series G Senior Preferred shall with respect to dividend rights rank junior to all classes and series of Common Stock, Cumulative Preferred Stock, and the Series A, B, C, D, E and F Senior Convertible Preferred Stock and, with respect to liquidation rights rank prior to all classes and series of Common Stock, the Cumulative Preferred Stock, and be on a par with the Series A, B, C, D, E and F Senior Convertible Preferred Stock. |
| (3) | In the event of any liquidation, dissolution, or winding up of the affairs of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series E Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, an amount equal to the Stated Value of $11.46526 for each share of Series G Senior Preferred held of record by such holder, payable in cash or in shares of stock, securities or other consideration, the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends in arrears on each such share up to the date fixed for distribution, provided, however, that such remaining net assets are sufficient to cover all the before mentioned payments and also like payments to holders of Series A, B, C, D, E and F Senior Preferred, before any distribution shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B, C, D, E and F Senior Preferred, the holders of these series shall receive payments on a pro rata basis. |
| (4) | The holders of said shares of Series G Senior Preferred shall not be entitled to any voting rights. |
| (5) | Shares of Series G Senior Preferred which have been issued and reacquired in any manner, including shares purchased or converted into Common Stock exchanged or redeemed, shall be canceled on the books of the Company and shall not be considered outstanding for any purpose. |
| (6) | No cumulative dividends shall be payable on Series G Senior Preferred. |
| (7) | Upon the second anniversary of the Agreement and Plan of Reorganization, dated February 19, 2007, all the issued and outstanding shares of Series G Senior Preferred automatically converted into shares of common stock based on the “Market Price”, which was determined by dividing the conversion value of $500,000 by the average sales price of a common share for the twenty successive trading days preceding the second anniversary date of the agreement, subject to a minimum of 10 million common shares. The outstanding 43,610 preferred shares converted into 17,857,142 common shares on February 19, 2009: based the average sales price for our common shares during the twenty trading days period immediately preceding February 19, 2009, of $.028. Stock certificates for the new common shares were issued upon surrender of the original preferred stock certificates. |
| F-27 |
Kiwibox.Com, Inc. and Subsidiary
Notes to the Financial Statements
| 16. | PREFERRED STOCK - (Continued) |
| (8) | In the event that, prior to the conversion of the Series G Senior Preferred Stock by the holder thereof into Common Stock of the company, there shall occur any change in the outstanding shares of Common Stock of the Company by reason of the declaration of stock dividends, or through a re-capitalization resulting from stock splits or combinations, without the receipt by the Company of fair consideration therefore in the form of cash, services or property, the conversion ratio of the Series G Senior Preferred Stock into Common Stock of the Company shall be adjusted such that any holder of Series G Senior Preferred Stock converting such stock into Common Stock subsequent to such change in the outstanding shares of Common Stock of the Company be entitled to receive, upon such conversion, a number of shares of Common Stock of the Company representing the same percentage of common shares outstanding as presented by the shares that he would have received had he converted his Series G Senior Preferred Stock to Common Stock prior to such change in the outstanding shares of Common Stock of the Company. |
| 17. | INCOME TAXES |
The income tax provision (benefit) is comprised of the following:
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| State current provision (benefit) | $ | 7,167 | $ | 650 | ||||
| Foreign (German) deferred provision (benefit) | 0 | 1,079,785 | ||||||
| $ | 7,167 | $ | 1,080,435 | |||||
The Company’s total deferred tax asset and valuation allowance are as follows:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Total deferred tax asset, noncurrent | $ | 15,265,000 | $ | 15,300,000 | ||||
| Less valuation allowance | (15,265,000 | ) | (15,300,000 | ) | ||||
| Net deferred tax asset, noncurrent | $ | 0 | $ | 0 | ||||
The differences between income tax benefits in the financial statements and the tax benefit computed at the combined state and U.S. Federal statutory rate of 40% are as follows:
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Tax benefit | 40 | % | 40 | % | ||||
| Valuation allowance | (40 | )% | (40 | )% | ||||
| Effective tax rate | - | - | ||||||
At December 31, 2013, the Company has available approximately $37,000,000 of net operating losses to carry-forward and which may be used to reduce future federal taxable income and expire between December 31, 2014 and 2033.
At December 31, 2013, the Company has available approximately $13,500,000f net operating losses to carry-forward and which may be used to reduce future state taxable income which expire between December 31, 2014 and 2020.
| F-28 |
Kiwibox.Com, Inc. and Subsidiary
Notes to the Financial Statements
| 17. | INCOME TAXES (Continued) |
The Company believes that all of its positions taken in tax filings are more likely than not to be sustained upon examination by tax authorities. The Company is subject to examination by the tax authorities for the period January 1, 2010 and forward.
| 18. | STOCK BASED COMPENSATION |
During 2013 and 2012 the Company issued the following securities to officers, directors, and non-employees as part of their compensation.
Andre Scholz (president and Chief Executive Officer): During 2013 and 2012 earned 1,200,000 restricted shares (100,000 per month) valued at $8,040 and $30,600, respectively, based on the commitment date fair value of the shares granted. 1,200,000 and 1,200,000 of these shares were issued in 2013 and 2012, respectively.
Joseph J. Tomasek (Director): In each of the years ended December 31, 2013 and 2012 Mr. Tomasek earned options for 1,200,000 restricted shares, valued at $11,880. In addition, as additional compensation, Mr. Tomasek was granted 500,000 warrants exercisable at $0.025 during 5 years, with a cashless exercise option, such warrants are valued at $5,000 pursuant to the Black-Scholes valuation formula.
At December 1, 2013 the board of directors of the company authorized the issuance of 1,550,000 stock grants of restricted common stock to five individuals (employees and consultants), valued at $0.005 per restricted common share, the public market price of the Company’s common shares traded in the over-the-counter market on the commitment date. The consultants and the respective stock grants to these individuals were as follows:
Andre Scholz: 400,000 restricted common shares
Joseph J. Tomasek: 250,000 restricted common shares
At December 21, 2012 we granted 1,050,000 of restricted common stock to five individuals (employees and consultants) valued at $0.01 per restricted common share, the public market price of the Company’s common shares traded in the over-the-counter market on December 21,2012. These shares were issued during 2013.
| 19. | STOCK OPTION PLANS |
In April 1996, Magnitude, Inc. adopted its 1996 Stock Incentive Plan (“the 1996 Plan”). The 1996 Plan provides that certain options granted thereunder are intended to qualify as “incentive stock options” (ISO) within the meaning of Section 422A of the United States Internal Revenue Code of 1986, while non-qualified options may also be granted under the Plan. The initial plan and subsequent amendments provided for authorization of up to 480,000 shares. Pursuant to the above described stock exchange offer on July 2, 1997, all options under the 1996 Plan were converted into shares of the Company at a rate of 3.4676 shares of Magnitude, Inc. to 1 share of the Company.
| F-29 |
Kiwibox.Com, Inc. and Subsidiary
Notes to the Financial Statements
| 19. | STOCK OPTION PLANS (continued) |
In September 1997, the Company adopted its 1997 Stock Incentive Plan (“the 1997 Plan”). The 1997 Plan provides that certain options granted thereunder are intended to qualify as “incentive stock options” (ISO) within the meaning of Section 422A of the United States Internal Revenue Code of 1986, while non-qualified options may also be granted under the Plan. The initial plan and subsequent amendments provided for the grant of options for up to 1,000,000 shares. The purchase price per share of common stock deliverable upon exercise of each ISO shall not be less than 100% of the fair market value of the common stock on the date such option is granted. If an ISO is issued to an individual who owns, at the time of grant, more than 10% of the total combined voting power of all classes of the Company’s common stock, the exercise price of such option shall be at least 110% of the fair market value of the common stock on the date of grant and the term of the option shall not exceed five years from the date of grant. The purchase price of shares subject to non-qualified stock options shall be determined by a committee established by the Board of Directors with the condition that such prices shall not be less than 85% of the fair market value of the common stock at the time of grant.
In May 2000 the Company adopted its 2000 Stock Incentive Plan (“the 2000 Plan”). The 2000 Plan provides that certain options granted thereunder are intended to qualify as “incentive stock options” (ISO) within the meaning of Section 422A of the United States Internal Revenue Code of 1986, while nonqualified options may also be granted under the Plan. The initial Plan provides for the grant of options for up to 5,000,000 shares. The purchase price per share of common stock deliverable upon exercise of each ISO shall not be less than 100% of the fair market value of the common stock on the date such option is granted. If an ISO is issued to an individual who owns, at the time of grant, more than 10% of the total combined voting power of all classes of the Company’s common stock, the exercise price of such option shall be at least 110% of the fair market value of the common stock on the date of the grant, and the term of the option shall not exceed five years from the date of grant. The purchase price of shares subject to non-qualified stock options shall be determined by a compensation committee established by the Board of Directors.
| Qualified and Non-Qualified Shares Under Option Pursuant to the 1997 Plan December 31, | ||||
| 2013 | 2012 | |||
| Outstanding, beginning of year | - | - | ||
| Granted during the year | - | - | ||
| Expired during the year | - | - | ||
| Surrendered during the year | - | - | ||
| Outstanding, end of year | - | - | ||
| Eligible, end of year for exercise | - | - | ||
At December 31, 2013 and 2012, no options were outstanding.
At December 31, 2013, there were 1,000,000 shares reserved for future option grants.
| F-30 |
Kiwibox.Com, Inc. and Subsidiary
Notes to the Financial Statements
STOCK OPTION PLANS - (Continued)
| Qualified and Non-Qualified Shares Under Option Pursuant to the 2000 Plan December 31, | ||||
| 2013 | 2012 | |||
| Outstanding, beginning of year | - | - | ||
| Granted during the year | - | - | ||
| Exercised during the year | - | - | ||
| Surrendered during the year | - | - | ||
| Expired during the year | - | - | ||
| Outstanding, end of year | - | - | ||
| Eligible, end of year for exercise | - | - | ||
At December 31, 2013 and 2012, no options were outstanding.
At December 31, 2013, there were 5,000,000 shares reserved for future option grants.
At December 31, 2013 the company has two stock-based employee compensation plans, which are described more fully above. The company accounts for those plans under the recognition and measurement principles of the Financial Accounting Standards Board Accounting Standards Codification (ASC) 718,Compensation-Stock Compensation. The Company has not granted any options under these plans to employees during 2013 or 2012.
The Company also issues options outside of the Stock Incentive Plans which are comprised as follows:
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Outstanding, beginning of year | 8,850,000 | 8,650,000 | ||||||
| Granted during the year | 1,200,000 | 1,200,000 | ||||||
| Exercised during the year | - | - | ||||||
| Surrendered or cancelled during the year | - | |||||||
| Expired during the year | (5,150,000 | ) | (1,000,000 | ) | ||||
| Outstanding, end of year (at prices ranging from $0.05 to $0.10) | 4,900,000 | 8,850,000 | ||||||
| Eligible for exercise, end of year (at prices ranging from $0.05 to $0.10) | 4,900,000 | 8,850,000 | ||||||
At December 31, 2013 and 2012 the weighted average exercise price and weighted average remaining contractual life were $0.05 and $0.05 per share, and 2 years 10 months and 1 year 3 months, respectively.
The weighted average exercise price for options granted during the years ended December 31, 2013 and 2012 were $0.05 and $0.05, respectively. The weighted average exercise price for options expired during the years ended December 31, 2013 and 2012 were $0.05 and $0.09, respectively. The weighted average grant date fair value of options granted during the years ended December 31, 2013 and 2012 was $0.04 and $0.04, respectively.
| F-31 |
Kiwibox.Com, Inc. and Subsidiary
Notes to the Financial Statements
| 20. | WARRANTS |
| The Company granted common stock purchase warrants between January 1, 2012 and December 31, 2013 which are comprised as follows: |
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Outstanding, beginning of year | 127,231,315 | 157,731,315 | ||||||
| Granted during the year | - | - | ||||||
| Exercised during the year | - | - | ||||||
| Surrendered /cancelled during the year | - | - | ||||||
| Expired during the year | (100,731,315 | ) | (30,500,000 | ) | ||||
| Outstanding, end of year (at prices ranging from $.025 to $.075) | 127,231,315 | 127,231,315 | ||||||
| Eligible, end of year (at prices ranging from $.025 to $.075) | 127,231,315 | 127,231,315 | ||||||
At December 31, 2013 and 2012, the weighted average exercise price and weighted average remaining contractual life is $0.04 and $0.05 per share and 2 years 7 months and 10 months, respectively.
| 21. | RELATED PARTY TRANSACTIONS |
During the year ended December 31, 2013 and 2012 one outside director of the Company who also serves as the Company’s general and securities counsel, incurred an aggregate $33,708 and $60,000, respectively, for each period for legal services. The director also received 100,000 common stock options per month during the year ended December 31, 2013, valued at $11,880, and a stock grant of 250,000 common shares, valued at $1,250. The director also received 100,000 common stock options per month during the year ended December 31, 2012, valued at $11,880. The balance due to this director at December 31, 2013 and 2012 was $9,620 and $0, respectively.
For the year ended December 31, 2013 and 2012 we incurred an aggregate $513,591 and $437,952, respectively, to companies controlled by the Chief Executive Officer of the Company, for website hosting, website development and technical advisory services, server farm installations and IT equipment purchases. The officer also earned 100,000 common shares per month during the year ended December 31, 2013 under a consulting agreement, valued at $8,040. During 2013, the officer received 500,000 shares for prior year share obligations, 1,200,000 shares from the current year obligation, and a stock grant of 400,000 common shares, valued at $2,000. The officer also received $110,000 in December 2013 for prepaid consulting fees towards 2014 under the terms of a consulting agreement. The balance due to this officer and/or his affiliated companies at December 31, 2013 and 2012 was $23,992 and $6,998, respectively. On September 24, 2013, Kwick Community GmbH & Co. KG signed an equity purchase agreement to acquire Interscholtz Internet Services GmbH and Co KG, a German limited liability company, and all the equity of its general partner, Interscholtz Beteiligungs GmbH. As of the balance sheet date, and pursuant to the terms of the contract, since full payment was not made for the purchase price of Interscholz Internet Services GmbH & Co KG, ownership does not transfer to Kwick Community GmbH & Co KG. Full payment must be made for ownership to transfer to Kwick. As of December 31, 2013 only $515,037 of the total purchase price of $1,352,000 was made. On December 9,2013 the acquisition of Intersholz Internet Services GmbH and Co KG by Kwick was rescinded due to non compliance with the terms of the addendum to the contract, calling for the full purchase price to have been paid.. However, Kwick did acquire all the equity of the general partner, Interscholz Beteiligungs GmbH, as full payment was not a requirement for transfer of ownership of that entity.
| F-32 |
Kiwibox.Com, Inc. and Subsidiary
Notes to the Financial Statements
During 2013, Kwick entered into a barter agreement with Interscholz GmbH & Co. KG (“Interscholz KG”), whereby Kwick agreed to provide media services (graphics and development) in exchange for server hosting services provided by Interscholz KG. Revenue and expenses from this barter agreement were approximately $99,000 for the year ended December 31, 2013.
During 2011, one former principal of Kwick! advanced the subsidiary 100,000 Euros, which was repaid during 2012.
During 2013 and 2012, approximately 10% of the Company’s voting stock was beneficially held by Discovery Advisory Company, located in the Bahamas, and Cambridge Services Inc., Kreuzfeld, Ltd. and Vermoegensverwaltungs-Gesellschaft Zurich Ltd. (VGZ) of Switzerland. Discovery Advisory Company, Cambridge Services Inc., Kreuzfeld, Ltd. and VGZ are major creditors, having advanced operating capital against issuance by the Company of convertible promissory notes during 2012 and 2013. During the year ended December 31, 2012, Cambridge Services converted $581,269 of debt. Kreuzefeld, Ltd converted $419,100 and VGZ converted $409,200 of debt.
During the year ended December 31, 2013, Cambridge Services Inc.advanced an additional $1,145,000. During the year ended December 31, 2012, Cambridge Services Inc.advanced $1,303,913, Discovery Advisory Company advanced $2,436,588, Kreuzfeld, Ltd. advanced $2,069,479 and VGZ advanced $365,338. At December 31, 2013, $3,221,722 and $2,360,060 of such notes were outstanding and owed to Discovery Advisory Company and Cambridge Services Inc, respectively and $3,564,959 and $771,958 owed to Kreuzfeld, Ltd. and VGZ, respectively. During 2012 To complete the acquisition of Kwick!, Cambridge Services, Inc.,Discovery Advisory Services, Kreuzfeld, Ltd and VGZ advanced $298,913, $2,436,588, $2,069,479 and $365,388, respectively.
The Company, through its subsidiary, Kwick, was formally a party to a service agreement with JAUMO GmbH, Germany, a company partially owned by the former officers of Kwick. The subsidiary recognized approximately $93,174 in service revenue from this entity in the year ended December 31, 2012.
During 2013, a shareholder loaned Kwick $899,794 plus accrued interest of $19,849. These loans carry an interest rate of 6% and are payable on demand. A portion of this loan was used to pay off a bank line of credit. The balance was eliminated upon deconsolidation of the Company’s Kwick subsidiary.
| 22. | GOODWILL FROM THE ACQUISITION OF KWICK! |
The excess of purchase price over tangible net assets acquired from Kwick at September 30, 2011 was initially allocated to goodwill in the amount of $6,138,210. During 2013, management determined based on qualitative and quantitative factors that there was an impairment to goodwill.
The goodwill was tested by the management of the Company in qualitative assessments throughout 2013. These assessments lead management to identify impairment indicators related to goodwill. Management therefore performed the two-step impairment test for goodwill, utilizing a market approach to the valuation. In estimating the fair value of the reporting unit, Kwick, management considered comparable per user values from recent acquisitions in the industry, as well as the effect of the economic recession and continuing deterioration of the use of social networks in Germany. After applying the estimated fair value of the reporting unit of $2,660,000 to the net assets of Kwick at June 30, 2013, an implied fair value of goodwill of $2,452,812 was calculated. Based on the impairment test, during the three months ended June 30, 2013, goodwill of $3,685,398 was determined to be impaired and was written off. Management considered additional qualitative factors during the three months ended September 30, 2013, and after consideration of failures by comparable social networks, continuing operational losses and negative cash flow, the estimated value of the reporting unit created an implied fair value of goodwill of $-0-. Based on the impairment test, during the three months ended September 30, 2013, goodwill of $2,452,812 was determined to be impaired and was written off.
| F-33 |
Kiwibox.Com, Inc. and Subsidiary
Notes to the Financial Statements
| 23. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
Cash, accounts receivable, accounts payable, accrued expenses, notes payable, long-term debt and capitalized lease obligations: The carrying amount approximates fair value because of the short term maturity of these instruments.
Limitations
Fair value estimates are made at a specific point in time, based on relevant information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates
| 24. | FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS |
In March 2013, the FASB issued ASU 2013-05, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity , which provides guidance on releasing cumulative translation adjustments out of accumulated comprehensive income into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. This guidance is effective prospectively for interim and annual periods beginning on January 1, 2014. The Company recognized the effects of releasing cumulative translation adjustments our of accumulated comprehensive income during the year ended December 31, 2013 based on the fact that the Company no longer holds a controlling financial interest in Kwick.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
| 25. | LITIGATION |
At the time of this report, the Company is not a party in any legal proceedings.
| 26. | BUSINESS SEGMENTS |
The Company operates in only one business segment - youth targeted online social networks - through its dedicated proprietary internet website.
| 27. | SUBSEQUENT EVENTS |
During January, February, March, April and May 2014 we received an aggregate $305,000 working capital loans from one accredited investor, which is covered by convertible promissory notes carrying interest at 10% per year.
| F-34 |