Notes
to Condensed Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
condensed balance sheet at December 31, 2015 was derived from audited financial statements but does not include all disclosures
required by accounting principles generally accepted in the United States of America. The other information in these condensed
financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation
of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These
condensed financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities
and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements. These condensed financial statements should be read
in conjunction with the financial statements and additional information as contained in our Annual Report on Form 10-K for the
year ended December 31, 2015.
Nature
of Organization
Kiwibox.Com,
Inc. (the “Company”) was incorporated as a Delaware corporation on April 19, 1988 under the name Fortunistics, Inc.
On November 18, 1998, the Company changed its name to Magnitude Information Systems, Inc. On December 31,
2009, the Company changed its name to Kiwibox.com, Inc.
On
August 16, 2007 the Company acquired all outstanding shares of Kiwibox Media, Inc.
The
Company, Magnitude, Inc. and Kiwibox Media Inc. were separate legal entities until December 31, 2009, with Kiwibox Media, Inc.
being a wholly owned subsidiary. On December 31, 2009, the two subsidiaries, Magnitude, Inc. and Kiwibox Media, Inc. merged into
the Company.
On
September 30, 2011, Kiwibox.com acquired the German based social network Kwick! Community GmbH & Co. KG (“Kwick”),
a wholly-owned subsidiary.
On
September 24, 2013, Kwick Community GmbH & Co. KG signed an equity purchase agreement to acquire Interscholz Internet Services
GmbH and Co KG, a German limited liability company, and all the equity of its general partner, Interscholz 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 Interscholz Internet Services GmbH and Co KG by Kwick was rescinded due to non
compliance with the terms of the addendum to the contract, calling for the full purchase price to have been paid. However, Kwick
did acquire all the equity of the general partner, Interscholz Beteiligungs GmbH, as full payment was not a requirement for transfer
of ownership of that entity.
On
December 10, 2013, the Company signed an Equity Purchase Agreement with Marcus Winkler to sell to him eighty (80%) percent of
the equity of its German subsidiary, KWICK! Community GmbH & Co. KG, a German limited liability company, and Kwick! Beteiligungs
GmbH, its general partner (collectively, “Kwick”). The sale was approved on December 18, 2013. Due to the fact that
the parent company ceased to have a controlling financial interest in Kwick, the subsidiary was deconsolidated from that date
forward. On December 30, 2013 a total of 15% of the remaining 20% of the equity of Kwick was transferred to the Chief Executive
Officer of Kwick (the “Kwick CEO”), in consideration for the Kwick CEO pledging to the bank 5,000 Euros as collateral,
on behalf of Kiwibox, for bank overdrafts incurred by “Kwick’s” wholly-owned subsidiary Interscholz Beteiligungs
GmbH, as general partner (managing partner) for Interscholz Internet Services GmbH & Co KG; as it is the duty of the general/managing
partner to secure liquidity for the partnership. Since Kiwibox owned 20% of Kwick they were required, under German law, as managing
partner of Interscholz Beteiligungs GmbH to secure liquidity for Interscholz Internet Services GmbH & Co KG. Therefore, 15%
of Kiwibox’s 20% of Kwick was given to the Kwick CEO in exchange for the CEO pledging the necessary collateral. In addition
to the collateral given by the Kwick CEO, as new 15% shareholder of Kwick, the Kwick CEO also agreed to keep the Interscholz Beteiligungs
GmbH business going. This transfer was unanimously approved with written consent of the Board of Directors. Since the fair value
of Kiwibox’s interest in Kwick is zero, this transaction had no material impact on the financial statements.
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.
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.
Advertising
Costs
Advertising
costs are charged to operations when incurred. Advertising expense was $4,700 and $7,200 for the three and nine months ended September
30, 2016 and $1,200 and $2,300 for the same periods in 2015, respectively.
Evaluation
of Long Lived Assets
Long-lived
assets are assessed for recoverability on an ongoing basis. In evaluating the fair value and future benefits of long-lived assets,
their carrying value would be reduced by the excess, if any, of the long-lived asset over management’s estimate of the anticipated
undiscounted future net cash flows of the related long-lived asset.
Any
impairment of the Company’s internally-developed software is recognized and measured in accordance with the provisions of
ASC 360-10-35,
Intangibles-Goodwill and Other, Internal-Use Software, Subsequent Measurement,
which requires that assets
be grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other
groups of assets. The guidance is applicable, for example, when one of the following events or changes in circumstances occurs
related to computer software being developed or currently in use indicating that the carrying amount may not be recoverable:
|
a.
|
|
Internal-use
computer software is not expected to provide substantive service potential.
|
|
b.
|
|
A
significant change occurs in the extent or manner in which the software is used or is
expected to be used.
|
|
c.
|
|
A
significant change is made or will be made to the software program.
|
|
d.
|
|
Costs
of developing or modifying internal-use computer software significantly exceed the amount
originally expected to develop or modify the software.
|
Fair
Value Measurements
The
Company adopted the provisions of ASC 820,
Fair Value Measurements and Disclosures
, which is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. Under ASC 820, a framework was established for
measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements.
The Company accounted for certain convertible debentures issued in the year ended December 31, 2014 and the nine months ended
September 30, 2015 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).
Reclassification
of certain securities under ASC 815-15
Pursuant
to ASC 815-15, “Contracts in Entity’s own Equity”, if a company has more than one contract subject to this Issue,
and partial reclassification is required, there may be different methods that could be used to determine which contracts, or portions
of contracts, should be reclassified. The Company's method for reclassification of such contracts is reclassification of contracts
with the latest maturity date first.
Capitalization
of Software /Website development costs
The
Company capitalizes outside-contracted development work in accordance with the guidelines published under ASC 350-50, “Website
Development Costs”. Under ASC 350-50, costs incurred during the planning stage are expensed, while costs relating to software
used to operate a web site or for developing initial graphics should be accounted for under ASC 350-50,
Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use
, unless a plan exists or is being developed to market the
software externally. Under ASC 350-50, internal and external costs incurred to develop internal-use computer software during the
application development stage should be capitalized. Costs to develop or obtain software that allows for access or conversion
of old data by new systems should also be capitalized, excluding training costs.
Fees
incurred for web site hosting, which involve the payment of a specified, periodic fee to an Internet service provider in return
for hosting the web site on its server(s) connected to the Internet, are expensed over the period of benefit, and included in
cost of sales in the accompanying financial statements.
Income
Taxes
The
Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expenses are expected
to be settled in the Company’s income tax return. Certain items of revenue and expense are reported for Federal income tax
purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes
are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses
for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income
taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset. .
Net
Loss Per Share
Net
loss per share, in accordance with the provisions of ASC 260, “Earnings Per Share” is computed by dividing net loss
by the weighted average number of shares of Common Stock outstanding during the period. Common Stock equivalents have not been
included in this computation since the effect would be anti-dilutive. Such common stock equivalents totaled 82,841,799 common
shares at September 30, 2016, comprised of 5,000,000 shares issuable upon exercise of stock purchase warrants, 2,900,000 shares
issuable upon exercise of stock options, 729,537 shares exercisable upon conversion of convertible preferred shares, and 74,212,262
shares potentially issuable upon conversion of convertible debt. Such debt and the related accrued interest with principal totaling
$13,143,700 convertible at the option of four debt holders at a price of 50% of the average closing price for the preceding 10
days, would yield in excess of 43 billion shares if fully converted at September 30, 2016. However, the respective notes, all of
which were issued to these investors, carry a stipulation whereby the number of all shares issued pursuant to a conversion, may
in the aggregate not exceed a number that would increase the total share holdings beneficially owned by such investor to a level
above 9.99%. At the end of the period, this clause limits any conversion to the aforementioned number of shares. All of the aforementioned
conversions or exercises, as the case may be, are at the option of the holders.
Revenue
Recognition
The
Company’s revenue is derived from advertising on the Kiwibox.Com website. Most contracts require the Company to deliver
the customer impressions, click-throughs or new customers, or some combination thereof. Accordingly, advertising revenue is estimated
and recognized for the period in which customer impressions, click through or new customers are delivered. Licensing or hosting
revenue consists of an annual contract with clients to provide web-site hosting and assistance.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2.
GOING CONCERN
The
ability of the Company to continue its operations is dependent on increasing sales and obtaining additional capital and financing.
Our revenues during the foreseeable future are insufficient to finance our business and we are entirely dependent on the willingness
of existing investors to continue supporting the Company with working capital loans and equity investments, and our ability to
find new investors should the financial support from existing investors prove to be insufficient. If we were unable to obtain
a steady flow of new debt or equity-based working capital we would be forced to cease operations. In their report for the fiscal
year ended December 31, 2015, our auditors had expressed an opinion that, as a result of the losses incurred, there was substantial
doubt regarding our ability to continue as a going concern. The accompanying financial statements do not include any adjustments
that might be necessary if the Company were unable to continue as a going concern. Management’s plans are to continue seeking
equity and debt capital until cash flow from operations cover funding needs.
3.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The
Company maintains cash balances in a financial institution which is insured by the Federal Deposit Insurance Corporation up to
$250,000. Balances in these accounts may, at times, exceed the federally insured limits. At September 30, 2016 and December 31,
2015, cash balances in bank accounts did not exceed this limit. The Company provides credit in the normal course of business to
customers located throughout the U.S. and overseas. The Company performs ongoing credit evaluations of its customers and maintains
allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other
information.
4.
PREPAID EXPENSES
Prepaid
expenses consist of the following at:
|
|
|
September
30, 2016
|
|
December
31, 2015
|
|
Consulting
Fees
|
|
$
|
55,000
|
|
|
$
|
220,000
|
|
|
Business
insurance
|
|
|
235
|
|
|
|
9,038
|
|
|
|
|
$
|
55,235
|
|
|
$
|
229,038
|
|
5.
PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at:
|
|
|
September
30, 2016
|
|
December
31, 2015
|
|
Furniture
|
|
$
|
15,040
|
|
|
$
|
15,040
|
|
|
Leasehold
Improvements
|
|
|
24,130
|
|
|
|
24,130
|
|
|
Equipment
|
|
|
81,685
|
|
|
|
78,101
|
|
|
|
|
|
120,855
|
|
|
|
117,271
|
|
|
Less
accumulated depreciation
|
|
|
115,782
|
|
|
|
114,225
|
|
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Total
|
|
$
|
5,073
|
|
|
$
|
3,046
|
|
Depreciation
expense charged to operations was $1,557 and $3,159 in the first nine months of 2016 and 2015, respectively.
6.
INTANGIBLE ASSETS
|
|
|
September
30, 2016
|
|
December
31, 2015
|
|
Website
development costs
|
|
$
|
254,264
|
|
|
$
|
254,264
|
|
|
Less
accumulated amortization
|
|
|
254,264
|
|
|
|
254,264
|
|
|
Total
|
|
$
|
0
|
|
|
$
|
0
|
|
Amortization
expense for the nine months ended September 30, 2016 and 2015 was $0 and $0, respectively.
7.
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
On
December 10, 2013, the company signed an equity purchase agreement with Marcus Winkler to sell to him eighty (80%) percent of
the equity of its German subsidiary, Kwick. Pursuant to the terms of the agreement, the purchaser paid 36,000 Euros as the purchase
price and the company was required to obtain shareholder approval of the sale as required under applicable Delaware Law. The majority
shareholder approval was obtained on December 18, 2013. In addition, the Company and Mr. Winkler signed a Lock-Up and Standstill
Agreement pursuant to the general terms of which the Company agreed not to participate in the management, operations or finances
of Kwick, which shall be exclusively managed and under control of the purchaser. Accordingly, the Company’s minority ownership
position shall be subject, in all respects, to the exclusive control of the purchaser. Mr. Winkler also has investment and voting
control over Kreuzfeld Ltd., a major creditor of the company, which holds a Class AA convertible promissory note with an outstanding
balance (including accrued interest) of $6,200,485 as of September 30, 2016.
7.
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY (continued)
On
December 30, 2013 a total of 15% of the remaining 20% of the equity of Kwick was transferred to the Chief Executive Officer of
Kwick (the “Kwick CEO”), in consideration for the Kwick CEO pledging to the bank 5,000 Euros as collateral, on behalf
of Kiwibox, for bank overdrafts incurred by “Kwick’s” wholly-owned subsidiary Interscholz Beteiligungs GmbH,
as general partner (managing partner) for Interscholz Internet Services GmbH & Co KG: as it is the duty of the general partner/managing
partner to secure liquidity for the partnership. Since Kiwibox owned 20% of Kwick they were required, under German law, as managing
partner of Interscholz Beteiligungs GmbH to secure liquidity for Interscholz Internet Services GmbH & Co KG. Therefore, 15%
of Kiwibox’s 20% was given to the Kwick CEO in exchange for the CEO pledging the necessary collateral. In addition to the
collateral given by the Kwick CEO, as new 15% shareholder of Kwick, the Kwick CEO also agreed to keep the Interscholz Beteiligungs
GmbH business going. This transfer was unanimously approved with written consent of the Board of Directors. Since the fair value
of Kiwibox’s interest in Kwick is zero, this transaction had no material impact on the financial statements.
Due
to the significant reductions in fair value of this reporting unit that were considered other than temporary, and impairment of
the related goodwill, the carrying value of this cost method investment was zero at December 31, 2015 and September 30, 2016.
8.
ACCRUED EXPENSES
Accrued
expenses consisted of the following at:
|
|
|
September
30, 2016
|
|
December
31, 2015
|
|
Accrued
interest
|
|
$
|
5,424,599
|
|
|
$
|
4,443,178
|
|
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Accrued
payroll, payroll taxes and commissions
|
|
|
30,684
|
|
|
|
41,541
|
|
|
Accrued
professional fees
|
|
|
113,548
|
|
|
|
114,900
|
|
|
Accrued
rent/deferred rent obligation
|
|
|
9,637
|
|
|
|
11,209
|
|
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Miscellaneous
accruals
|
|
|
20,935
|
|
|
|
23,935
|
|
|
Total
|
|
$
|
5,599,403
|
|
|
$
|
4,634,763
|
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9.
OBLIGATIONS TO BE SETTLED IN STOCK
Obligations
to be settled in stock consisted of the following at September 30, 2016 and December 31, 2015:
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|
|
September
30, 2016
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
900,000
(2016) and 1,200,000 shares (2015) common
Shares, and 2,900,000 (2016) and 2,900,000 (2015)
Stock
options issuable to two officers of the Company
Pursuant
to their respective employment agreements
|
|
|
57,758
|
|
|
|
58,178
|
|
|
8,600,000
(2016) and 8,100,000 (2015) stock
options
issuable to one director who also serves
as
the Company’s general counsel
|
|
|
85,140
|
|
|
|
80,190
|
|
|
1,000,000
warrants granted on the Pixunity.de asset purchase
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
$
|
288,898
|
|
|
$
|
284,368
|
|
10.
LOANS PAYABLE
The
Company (Formerly Magnitude, Inc.) had borrowings under short term loan agreements with the following terms and conditions at
September 30, 2016:
|
In
July and August, 2016 Mr. Winkler loaned the company funds. These private loans accrue
interest at the rate of 10%.
|
|
$
|
78,320
|
|
|
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
|
|
$
|
153,320
|
|
11.
NOTES PAYABLE
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2016
|
|
2015
|
|
Balance
of non-converted notes outstanding. Attempts to locate the holder of this note, to settle this liability, have been unsuccessful.
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
From
September 2008 through September 2016 five creditors loaned the Company funds under the terms of the convertible notes issued,
as modified in March 2009 and July 2010 and April 2011 and August 2012 (see Note 12).
|
|
|
13,143,700
|
|
|
|
12,353,700
|
|
|
On
June 22, 2015 a Class A Senior Revolving Promissory Note with a principal amount of $340,000 was assigned from Ulrich Schuerch
to Mr. Winkler.
|
|
|
340,000
|
|
|
|
340,000
|
|
|
Total
|
|
$
|
13,508,700
|
|
|
$
|
12,718,700
|
|
12.
LONG-TERM DEBT
Long-term
debt as of September 30, 2016 and December 31, 2015 is comprised of the following:
|
Discounted
present value of a non-interest bearing $70,000 settlement with a former investor of
Magnitude, Inc. to be paid in 24 equal monthly payments commencing July 1, 1997. The
imputed interest rate used to discount the note is 8% per annum. This obligation is in
default.
|
|
|
33,529
|
|
|
Total
|
|
|
33,529
|
|
|
Less
current maturities
|
|
|
33,529
|
|
|
Long-term
debt, net of current maturities
|
|
$
|
—
|
|
13.
DERIVATIVE CONVERSION FEATURES
On
July 27, 2010, the Company issued two Class A Senior Convertible Revolving Promissory Notes (“Class A Notes”), one
to Cambridge Services, Inc., in the principal amount of $683,996 consolidating the series of loans (and related accrued interest)
made to the Company since June 26, 2009, and one to Discover Advisory Company, in the principal amount of $1,160,984, consolidating
the series of loans (and related accrued interest) made to the Company since September 19, 2008 and including advances through
September 30, 2010. Each of these promissory notes are due on demand, accrue interest at the rate of 10%, per annum, are convertible
(including accrued interest) at the option of each lender into Common Stock of the Company at 50% of the averaged ten closing
prices for the Company's Common Stock for the ten (10) trading days immediately preceding the Conversion Date but in no event
less than $0.001 (the "Conversion Price"). Both promissory notes contain conversion caps, limiting conversions under
these notes to a maximum beneficial ownership position of Company common stock to 9.99% for each lender. Each of these notes contains
Company covenants, requiring the lenders’ prior written consent in order for the Company to merge, issue any common or preferred
stock or any convertible debt instruments, declare a stock split or dividends, increase any compensation to its officers or directors
by more than five (5%) during any calendar year. During the three and nine months ended September 30, 2016 no debt was converted.
The
Company renegotiated certain outstanding promissory notes with its four major creditors, Discover Advisory Company of the Bahamas
(“DAC”), Kreuzfeld Ltd. of Switzerland (“Kreuzfeld”), Cambridge Services, Inc. of Panama (“CSI”)
and Vermoegensverwaltungs-Gesellschaft Zurich LTD of Switzerland (“VGZ”). As of August 1, 2012, the Company authorized
the issue of a new series of corporate notes, the Class AA Senior Secured Convertible Revolving Promissory Notes, dated as of
August 1, 2012 (the New Note(s)”) and issued New Notes: (1) to DAC, with a maximum credit facility of $5,000,000 which replaced
the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated July 27, 2010, in the original principal
amount of $1,080,984, now cancelled, which had an outstanding balance due (including accrued interest) of $5,915,726 as of December
31, 2015 and $6,663,217 at September 30, 2016; (2) to Kreuzfeld, with a maximum credit facility of $5,000,000 which replaced the
Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated September 16, 2011, in the original principal
amount of $2,000,000, now cancelled, which had an outstanding balance due (including accrued interest) of $5,490,657 at December
31, 2015 and $6,200,485 at September 30, 2016; (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 $4,040,407 as of December 31, 2015, and $4,269,917
at September 30, 2016 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 $1,109,550 as of December 31, 2015 and $1,167,342
at September 30, 2016. 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.
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 new debentures issued to these holders plus accrued interest during the nine
months ended September 30, 2016 under these terms at the relevant commitment dates to be $1,825,224 utilizing a Black-Scholes
valuation model. The change in fair value of the liability for the conversion feature resulted in income of $119,223 for the nine
months ended September 30, 2016, which is included in Other Income (Expense) in the accompanying financial statements. The fair
value of these derivative conversion features was determined to be $18,302,382 at September 30, 2016.
14.
COMMITMENTS AND CONTINGENCIES
We
maintain offices for our operations at 330 W. 42th Street, New York, New York 10036, for approximately 990 square feet. This lease
requires initial minimum monthly rentals of $3,833 plus tenants’ share of utility/cam/property tax charges which average
approximately $291 per month. The property is subject to a five year lease, with future minimum rentals as follows:
|
|
2016
|
|
|
$
|
12,566
|
|
|
|
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. In December
2013 the lease was extended through May 31, 2015 at a monthly rate of $2,943. In March of 2015 the lease was again extended through
May 31, 2016 at the same terms. In April 2016 the lease was extended through May 31, 2017 at a monthly rate of $3,154.
Our
total rent expenses were $63,488 and $67,814 during the nine months ended September 30, 2016 and 2015, respectively.
The
Company is party to a consulting agreement with its Chief Executive Officer for monthly cash compensation of $18,333, or $220,000
per year. Payment for January 1, 2015 through December 31, 2015 was made on November 20, 2014 in accordance with the terms of
this new agreement. Payment for the period January 1, 2016 through December 31, 2016 was made December 31, 2015 in accordance
with the terms of this extended agreement. In the nine months ended September 30, 2016 and September 30, 2015 this officer was
also granted 900,000 shares.
15.
RELATED PARTY TRANSACTIONS
During
the nine months ended September 30, 2016, the Company sold advertising space on its Kiwibox.com website to Kwick totaling $8,789,
which is included in the Accounts Receivable balance due from Kwick of $60,687 at September, 2016. Kwick is majority-owned by
Mr. Winkler, who in turn is a related party of the Company (see Note 7).
During
the nine months ended September 30, 2016 and 2015 one outside director of the Company who also serves as the Company’s general
and securities counsel, was paid an aggregate $22,795 and $37,125 respectively, for legal services. The director also received
100,000 common stock options per month, ending in May 2016, as this outside director is no longer a director of the company effective
July 31,2016 and, as part of his resignation as director, he cancelled his rights to continue to receive options effective June
1, 2016. Therefore, during the three and nine month periods ended September 30, 2016, the common options were valued at $0 and
$4,950 respectively and during the three and nine month period ended September 30, 2015, the common stock options were valued
at $2,970 and $8,910.This resignation was not prompted by any disagreement with the company with regard to any of its policies,
operations or practices.
During
the three and nine months ended September 30, 2016 and 2015 we incurred aggregate expenses of $156,309 and $375,453 and $23,856
and $218,620 respectively, to companies controlled by the Chief Executive Officer, 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 nine months ended September 30, 2016 and 2015 under a consulting agreement valued at $600 and $990 respectively.
The officer also received $220,000 in December 2015 for prepaid consulting fees toward 2016 under the terms of a consulting agreement.
Through
September 30, 2016, approximately 10% of the voting stock was beneficially held by Discovery Advisory Company, located in the
Bahamas, and Cambridge Services Inc., Kreuzfeld, LTD and Vermoegensverwaltungs-Gesellschaft Zurich LTD. (VGZ) of Switzerland.
Discovery Advisory Company, Cambridge Services Inc., Kreuzfeld, LTD and VGZ are major creditors, having advanced operating capital
against issuance by the Company of convertible promissory notes during 2016 and 2015. During the three months and nine months
ended September 30, 2016 Discovery Advisory Company advanced an additional $90,000 and $400,000. During the three months and nine
months ended September 30, 2016 Kreuzfeld, LTD advanced an additional $160,000 and $390,000. At September 30, 2016, $4,851,722
and $3,080,060 of such notes were outstanding and owed to Discovery Advisory Company and Cambridge Services Inc, respectively
and $4,439,959 and $771,958 owed to Kreuzfeld, Ltd. and VGZ, respectively.
16.
FAIR VALUE
Some
of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that
approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, receivables and payables.
Effective
July 1 2009, the Company adopted ASC 820,
Fair Value Measurements and Disclosures
. This topic defines fair value for certain
financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This guidance supersedes all other accounting pronouncements that
require or permit fair value measurements. The Company accounted for the conversion features underlying certain convertible debentures
in accordance with ASC 815-40,
Contracts in Entity’s Own Equity
, as the conversion feature embedded in the convertible
debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s
common shares.
Effective
July 1 2009, the Company adopted ASC 820-10-55-23A,
Scope Application to Certain Non-Financial Assets and Certain Non-Financial
Liabilities
, delaying application for non-financial assets and non-financial liabilities as permitted. ASC 820 establishes
a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level
1 — quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange- 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.
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 tables reconciles, for the nine months ended September 30, 2016, the beginning and ending balances for financial instruments
that are recognized at fair value in the consolidated financial statements (all Level 4):
|
Conversion
Liability at January 1, 2016
|
$
|
16,596,381
|
|
|
Value
of beneficial conversion features of new debentures
|
|
1,825,224
|
|
|
Change
in value of beneficial conversion features during period
|
|
(119,223
|
)
|
|
Reductions
in fair value due to principal conversions
|
|
—
|
|
|
Conversion
Liability at September 30, 2016
|
$
|
18,302,382
|
|
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.
For
2016, the fair value of the embedded conversion liabilities was determined using the Black-Scholes model calculating fair value
based on the conversion discount as well as the term and short-term bond rate. During the nine months ended September 30, 2016
the following assumptions were used: (1) conversion discounts of 50%; (2) a look back period of 10 days (3) bond rates of 0.17%
to 0.28% and (4) volatility range of 55% to 574%.
Fluctuation
in value is largely based on the change in the daily share price accompanied by the conversion discount. The change in volatility
has the greater effect on the conversion liability during each reporting period, as higher volatility levels will yield larger
values.
17.
SUBSEQUENT EVENTS
During
October 2016 and through November 7, 2016 we received $80,000 of working capital from accredited investors, which are covered
by convertible promissory notes.
18 .
RECENTLY ISSUED AND NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”),
which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.
The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred
to obtain or fulfill a contract. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to the first
quarter of 2018 to provide companies sufficient time to implement the standards. Early adoption will be permitted, but not before
the first quarter of 2017. Adoption can occur using one of two prescribed transition methods. In March and April 2016, the FASB
issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross
versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing”
which provide supplemental adoption guidance and clarification to ASC 2014-09. ASU 2016-08 and ASU 2016-10 must be adopted concurrently
with the adoption of ASU 2014-09. The Company is currently evaluating the impact of these new standards.
In
June 2014, FASB issued Accounting Standards Update (ASU) No. 2014-12 Compensation - Stock Compensation (Topic 718), Accounting
for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service
Period. A performance target in a share-based payment that affects vesting and that could be achieved after the requisite service
period should be accounted for as a performance condition under Accounting Standards Codification (ASC) 718, Compensation - Stock
Compensation. As a result, the target is not reflected in the estimation of the award’s grant date fair value. Compensation
cost would be recognized over the required service period, if it is probable that the performance condition will be achieved.
The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods.
Early adoption is permitted. The Company adopted the provisions of this standard, but it did not have a material effect on its
results of operations.
On
August 2014, FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concerns (Subtopic
205-40): Disclosures of Uncertainties about an Entity’s Ability to continue as a Going Concern. The amendments require management
to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that
are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt,
(2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating
effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration
of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated,
and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to
be issued). The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods
and interim periods thereafter. Early application is permitted. The adoption of ASU 2014-15 is not expected to have a material
impact on our financial position or results of operations.
In
April 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-05, “Customer’s Accounting for Fees Paid
in a Cloud Computing Arrangement.” This ASU provides clarification on whether a cloud computing arrangement includes a software
license. If a software license is included, the customer should account for the license consistent with its accounting of other
software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. This
ASU is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those years. The Company
adopted the provisions of this standard, but it did not have a material effect on its results of operations.
During
February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). The standard requires lessees
to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months
on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02
is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company
is currently evaluating the impact of the new standard.
In
March 2016, FASB issued ASU No. 2016-09, “Improvements to Employee Share-based Payment Accounting” (“ASU 2016-09”).
ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic
entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification
in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods
within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the
standard and the impact on its consolidated financial statements and footnote disclosures.
In
August 2016, the FASB issued Accounting Standards Update 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments – a consensus of the FASB Emerging Issues Task Force
, (“ASU 2016-15”). The
purpose of ASU 2016-15 is to reduce the diversity in practice regarding how certain
cash receipts
and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning
after December 15, 2017, including interim periods within that year. A retrospective transition method should be used in
the application of the amendments within ASU 2016-15. If retrospective application is considered impracticable, retrospective
application may be used as of the earliest date practicable. Early adoption is permitted. The Company is currently evaluating
the impact of ASU 2016-15 on its condensed consolidated financial statements
.
We
have reviewed all FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof
that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new
pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles
will have a material impact on the corporation’s reported financial position or operations in the near term. The applicability
of any standard is subject to the formal review of our financial management and certain standards are under consideration.
Management
does not believe there would have been a material effect on the accompanying consolidated financial statements had any other recently
issued, but not yet effective, accounting standards been adopted in the current period.
