11.
NOTES PAYABLE
|
|
|
March
31,
2017
|
|
December
31,
2016
|
|
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 March 2017 seven 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).On November 25, 2016, the Company issued a Class A
Senior Convertible Revolving Promissory Note (“Class A Note”) to Marcus Winkler
in the amount of $636,725 consolidating the series of loans (and related accrued interest)
made to the company since February 2011 and including all advances made during the current
year. On February, 27, 2017 a class AA Senior Secured Convertible Revolving Promissory
Note with a principal amount of $1,130,398 was assigned from Cambridge Services, Inc
to Tanja Greilinger. Each of these promissory notes is due on demand, and accrues interest
at the rate of 10%, per annum. The conversion features applicable to the other creditors’
notes do not apply to Mr. Winkler’s notes as his notes have a fixed conversion
price of $0.001.
|
|
|
14,212,019
|
|
|
|
14,017,019
|
|
|
Total
|
|
$
|
14,237,019
|
|
|
$
|
14,042,019
|
|
12.
LONG-TERM DEBT
Long-term
debt as of March 31, 2017 and December 31, 2016 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. On November 25, 2016, the Company issued a Class A Senior Convertible Revolving Promissory Note (“Class
A Note”) to Marcus Winkler in the amount of $636,725 consolidating the series of loans (and related accrued interest) made
to the company since February 2011 and including all advances made during the current year. Each of these promissory notes are
due on demand, accrue interest at the rate of 10%, per annum. All 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. Each of the notes, with the exception of Mr. Winkler’s notes
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"). The conversion feature applicable to the other creditors’
notes does not apply to Mr. Winkler’s notes as his notes have a fixed conversion price of $0.001. During the three months
ended March 31, 2017 and March 31, 2016, there were no note conversions.
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 $6,860,911 as of December
31, 2016 and $7,113,698 at March 31, 2017; (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 $6,475,261 at December 31, 2016
and $6,654,258 at March 31, 2017; (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 $4,347,340 as of December 31, 2016; and $3,114,551
at March 31, 2017; On February, 27, 2017 a class AA Senior Secured Convertible Revolving Promissory Note with a principal amount
of $1,130,398 was assigned from Cambridge Services, Inc to Tanja Greilinger which has an outstanding balance due (including accrued
interest) of $1,308,734 at March 31, 2017 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 $1,186,746 as of December 31, 2016
and $1,205,781 at March 31, 2017. The Company also converted a private loan and a demand note with Mr. Winkler into a Class AA
Senior Convertible Revolving Promissory note, dated November 25, 2016, with an outstanding balance due (including accrued interest)
of $852,961 as of December 31, 2016 and $868,661 at March 31, 2017. 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. The above conversion feature does not apply to Mr. Winkler’s notes as his notes have a fixed conversion price of
$0.001. 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 three
months ended March 31, 2017 under these terms at the relevant commitment dates to be $542,670 utilizing a Black-Scholes valuation
model. The change in fair value of the liability for the conversion feature resulted in income of $14,901 for the three months
ended March 31, 2017, which is included in Other Income (Expense) in the accompanying financial statements. The fair value of
these derivative conversion features was determined to be $19,417,264 at March 31, 2017.
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:
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 to
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 $22,464 and $18,400 during the three months ended March 31, 2017 and 2016, 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. This agreement was extended through December 31, 2017. Payment for the period January 1, 2016 through December 31, 2016
was made on December 1, 2015 in accordance with the terms of this extended agreement. During 2016, the officer received $220,000
fees towards 2017 under terms of a consulting agreement; the agreement calls for the total payment of $220,000 to be payable in
advance and as soon as practicable. There were no changes to the stock compensation portion of any earlier agreement.
In
the three months ended March 31, 2017 and March 31, 2016 this officer was granted 300,000 shares.
15.
RELATED PARTY TRANSACTIONS
During
the three months ended March 31, 2017, the Company sold advertising space on its Kiwibox.com website to Kwick totaling $2,785,
which is included in the $66,500 balance due from Kwick at March 31, 2017. Kwick is Majority-owned by Mr. Winkler, who in turn
is a related party of the Company (see Note 7).
During
the three months ended March 31, 2017 and 2016 one outside director of the Company who also serves as the Company’s general
and securities counsel, was paid an aggregate $1,997 and $15,375 respectively, for legal services.
The
director also received 0 common stock options during the three month period ending March 31, 2017 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. The director received 300,000 common stock options during the three month
period ending March 31, 2016, valued at $2,970. This resignation was not prompted by any disagreement with the company with regard
to any of its policies, operations or practices.
During
the three months ended March 31, 2017 and 2016 we incurred aggregate expenses of $108,751 and $117,445, 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 three
months ended March 31, 2017 and 2016 under a consulting agreement, valued at $270 and $300 respectively. The officer also received
$220,000 during 2016 for prepaid consulting fees toward 2017 under the terms of a consulting agreement.
Through
March 31, 2017, approximately 10% of the voting stock was beneficially held by Discovery Advisory Company, located in the Bahamas,
and Cambridge Services Inc., Kreuzfeld, LTD,Vermoegensverwaltungs-Gesellschaft Zurich LTD. (VGZ) of Switzerland, Mr. Winkler,
and Tanja Greilinger. Discovery Advisory Company, Cambridge Services Inc., Kreuzfeld, LTD, VGZ, Mr. Winkler, and Tanja Greilinger
are major creditors, having advanced operating capital against issuance by the Company of convertible promissory notes during
2017 and 2016.
During
the three months ended March 31, 2017, Kreuzfeld, LTD and Discovery Advisory Company advanced an additional $65,000 and $130,000
respectively. At March 31, 2017, $5,056,722 and $1,949,622 of such notes were outstanding and owed to Discovery Advisory Company
and Cambridge Services Inc, respectively and $4,666,554, $771,958, $636,725 and $1,130,398 owed to Kreuzfeld, Ltd., VGZ , Mr.
Winkler and, Tanja Greilinger 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.
16
FAIR VALUE (Continued)
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.
For
the three months ending March 31, 2017 and 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 three months ending March 31, 2017 the following assumptions were used: (1) conversion discounts of 50%; (2) a look back period
of 10 days (3) bond rates of 0.46% to 0.75% and (4) volatility range of 75% to 177%.
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 affect on the conversion liability during each reporting period, as higher volatility levels will yield larger
values.
The
following table reconciles, for the three months ended March 31, 2017, the beginning and ending balances for financial instruments
that are recognized at fair value in the consolidated financial statements:
|
Conversion Liability at January
1, 2017
|
|
|
18,889,495
|
|
|
Value of beneficial
conversion features of new debentures
|
|
|
542,670
|
|
|
Change
in value of beneficial conversion features during period
|
|
|
(14,901
|
)
|
|
Conversion Liability
at March 31, 2017
|
|
$
|
19,417,264
|
|
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.
17.
SUBSEQUENT EVENTS
During
April 2017 and through May 16, 2017 we received $60,000 of working capital from accredited investors, which are covered by convertible
promissory notes.
On May
16, 2017 Andre Scholz, the company’s President, CEO and CFO passed away. The interim President CEO and CFO is Michael Zaroff
effective as of May 18, 2017.
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 has evaluated the impact of these new standards and feels that this will not have
a material impact.
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. This was adopted by the company for the current period and the
period ending December 31,2016. The adoption of ASU 2014-15 does not have a material impact on our financial position or results
of operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company were
unable to continue as a going concern.
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.
In
April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs, or ASU No. 2015-03. The amendments of ASU No. 2015-03 were issued to reduce complexity in the balance
sheet presentation of debt issuance costs. ASU No. 2015-03 requires that debt issuance costs be presented in the balance sheet
as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition
and measurement guidance for debt issuance costs are not affected by the amendments in this standard. Additionally, in August
2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement
of Debt Issuance Costs Associated with Line-of-Credit Arrangements, or ASU No. 2015-15, as ASU No. 2015-03 did not specifically
address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU No. 2015-15
allows an entity to continue to defer and present debt issuance costs ratably over the term of the line-of-credit arrangement,
regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance in ASU No. 2015-03
and ASU No. 2015-15 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim
periods within those fiscal years. The Company adopted this standard for the current period and the year ended December 31, 2016,
which did not have a material effect on the Company’s 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.
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY
STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934
The
information in this annual report contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such Act provides a “safe harbor” for forward-looking statements to encourage companies to provide
prospective information about their businesses so long as they identify these statements as forward looking and provide meaningful
cautionary statements identifying important factors that could cause actual results to differ from the projected results. All
statements other than those statements of historical fact made in this report are forward looking. In particular, the statements
herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking
statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly
from management’s expectations.
The
following discussion and analysis should be read in conjunction with the consolidated financial statements of Kiwibox.Com, Inc.,
contained herein and in the Company’s annual report for the year ended December 31, 2016 as filed on Form 10-K. This discussion
should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion
reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best
present assessment of our management.
Description
of Business
Overview
On
December 31, 2009 Magnitude Information Systems, Inc. changed its name to Kiwibox.Com, Inc.
We
own and operate “Kiwibox.com”, a social networking website. Initially launched in 1999, Kiwibox.com is a social network.
Kiwibox
Operations
Kiwibox.com
is a social network for young adults all around the world for web and mobile usage, a community to find new friends and to meet
new people online and in the real world. Unlike traditional social networking sites such as Facebook, Kiwibox combines its own
"magazine" content and social networking technology in its website, creating attractive topics for its membership to
peruse and enjoy.
Our
operating expenses, not including stock-based compensation, are at a level of approximately $78,000 per month. (see sections “Loans
and Notes Payable”).
Potential
Revenue Streams and Marketing Strategy
Currently
we generate all 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 that
we incorporated during the last 5 years now permit our mobile devices to accept and receive direct advertising. 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.
Our
continuing membership growth is fueled by infiltrating our users into local event venues where they participate and simultaneously
communicate with our social network via the regular deployment of our cutting-edge App updates. As a result, the Kiwibox network
enjoys continuing user sign-ups and continuing loyalty of users to our social network.
Community
means social network – and thrives on membership networking. Our website is based on the latest web technology which makes
it easier for users to stay connected and to interact with each other.
The
results of our year-long marketing efforts clearly show the following positive trends in the growth of our community at March
31, 2017:
|
•
|
|
Active
Members – Our Kiwibox.com website has 5.03 Million Active Members as of March 31, 2017, an increase of approximately
1.47 % over the fourth quarter, 2016. Active users are those which have logged in to Kiwibox.com during the last 90 days.
|
|
•
|
|
Unique
Visitors – For the quarter ended March 31, 2017, we had 7.74 Million Unique Visitors to our Kiwibox.com website, an
increase of approximately .52% over the fourth quarter 2016 results. Unique Visitors refers to the number of distinct individuals
requesting pages from our Kiwibox.com website during a specific period, regardless of how often they visit. Visits refer to
the number of times our Kiwibox.com website is visited, no matter how many visitors make up those visits.
|
|
•
|
|
Page
Impressions – We had 211.9 Million Page Impressions during the first quarter of 2017, a decrease of approximately 3.81
% over the fourth quarter 2016. Generally, Page Views refer to a number of pages which are viewed or clicked on our Kiwibox.com
website during the quarter.
|
|
•
|
|
Guestbook
Entries – For the quarter ended March 31, 2017, Kiwibox.com had 168.9 Million Guestbook Entries, an increase of approximately
1.9% from the fourth quarter 2016. A Guestbook is a logging system that permits visitors to our Kiwibox.com website to leave
a public comment.
|
|
•
|
|
Blog
Entries – Our Kiwibox.com website members and visitors entered 121.0 Million Blog Entries during the first quarter
of 2017, an approximate 3.6% increase over the fourth quarter 2016. A Blog Entry is a message entered in our Kiwibox.com.
|
|
•
|
|
Unique
Mobile Visitors – For the quarter ended March 31, 2017 Kiwibox.com had 1.26 million Unique Mobile Visitors, an increase
of approximately 24.75% over the fourth quarter 2016.
|
Market
Position
Our
social media’s market penetration continues to rely upon our innovations where we strive to enhance our member’s experiences
with our community. Our members enjoy our interactive platforms where we blog, play games, chat and share pictures.
The
Kiwibox Network is in a unique position because it combines the excitement of a dating community with the benefits and accessibility
of a real social network. The Kiwibox Group encourages members to explore local events in their area, connect with other members
and enjoy the additional member exclusive benefits the social network is offering, such as games, blogging, chatting, picture-sharing
and online-flirting. This community behavior binds users to the platform and is the base for our viral marketing.
Market
Position-What’s New
Kiwibox
is using its growing community to establish its brand throughout social media outlets. We continue to expand our membership and
community events, highlighting our active presence in the marketplace.
Kiwibox
attracts more young adventurers who seek friendship and community involvement every day.
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.
Safety-What’s
New
Content
analysis and security:
We
have integrated our own new content detection system which analyses content for real/fake contents. This has reduced the page
impressions; but high quality content is more important for us. Our spamming mechanism has been extremely modified to give our
users a security protection. We integrated new teen own developed protection mechanism and our whole content and customer connections
are now server based encrypted.
Competition
Our
primary competitors are other online social networks, including Facebook, Instagram, Tinder and Tumbler. Facebook is widely considered
as the industry leaders; however, recent statistics and strategic announcements have 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.
Technology
Development
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
Kiwibox Network is focusing on the fast growing mobile usage phenomenon, being online with friends’ all the time and everywhere.
At present, more than 960,000 company Apps are installed worldwide.
During
the third quarter of 2016 we focused further on mobile development and released an additional Mobile App for the Android 6 and
7 Platform- the Kiwibox Go! App.
New
Kiwibox “Meet and Date” App
In
addition to our free platform, Kiwibox introduced, and is to release; a membership based flirting/dating platform in the next
few months. This development is now in its last steps. We are also integrating useful features for our users, like a regional
based database for jobs and apartments.
Intellectual
Property
The
Kiwibox.com web and mobile software and other related intellectual property rights are important assets. Most of our software
is unique and individual and developed internally.
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.
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.
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 2 employees.
Results of Operations for the Three Months Ended
March 31, 2017 Compared to the Three Months Ended March 31, 2016
Our website
presence is not yet supported by a volume of active members-users that would provide a basis for significant growth in advertising
revenue. For the quarter ended March 31, 2017, total revenues amounted to $2,785 compared to $2,337 recorded in the first quarter
in 2016 All revenue was received from our affiliate company Kwick.
Gross profit
(loss) for the quarter ended March 31, 2017 amounted to $(1,865) as compared to $687 for the corresponding interim period in 2016.
After deducting
selling and general and administrative expenses of $233,162 for the first quarter ended March 31, 2017 compared to $311,587 recorded
in the same period in 2016, the Company realized an operating loss of $235,027 for the first quarter of 2017 as compared to an
operating loss of $310,900 for the same period in 2016. These operating expenses went down primarily due to two reasons. Two major
investors have not committed to future financing and the other investors have given the order to reduce costs by 5-10% on the
employee side. Therefore some of the growing services (support) were outsourced. Receiving less money had the effect of not being
able to spend more. Additionally, the hardware costs became cheaper by merging pixunity into Kiwibox and optimizing hardware.
Based on newer technology, more features could be used with less hardware and therefore the associated management costs and development
costs decreased. For the year 2017 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 quarter
concluded with a net loss of $1,110,261. After accounting for dividends accrued on outstanding preferred stock, which totaled
$12,816, the net loss applicable to common shareholders was $1,123,077 or $0.002 per share compared to a net loss applicable to
common shareholders of $1,268,552 or $0.002 per share for the first quarter in the previous year.
Liquidity
and Capital Resources
We
have financed our business with new debt since our cash flow is insufficient to provide the working capital necessary to fund
our operations. We received $195,000 in cash from short-term loans from accredited private investors during the quarter.
We
have an ongoing and urgent need for working capital to fund our operations. If we are unable to continue to receive new equity
investments or obtain loans, we will not be able to fund our operations and we will be required to close our business.
Our
deficit in working capital amounted to $41,306,364 at March 31, 2017, as compared to $40,184,035 at December 31, 2016. Stockholders’
equity showed an impairment of $41,290,780 at the end of the period, compared to an impairment of $40,167,703 at the beginning
of the year. The negative cash flow from operations during the three months totaled $182,415 and was financed by new debt.
The
Company has $0 of bank debt as of March 31, 2017. Aside from trade payables and accruals, our remaining indebtedness at March
31, 2017 consisted of certain notes and loans aggregating $14,345,548 and the following obligations. Amounts due to related parties
were $85,371. The liabilities from derivative conversion features were $19,417,264. The position “Obligations to be settled
in stock” of $289,468 accounts for common shares due under consulting agreements, and for services to be settled in common
stock options and warrants, where the underlying securities had not yet been issued. Current liabilities also include $850,998
accrued unpaid dividends on outstanding preferred stock. Such dividends will be paid only if and when capital surplus and cash-flow
from operations are sufficient to cover the outstanding amounts without thereby unduly impacting the Company’s ability to
continue operating and growing its business.
Our
current cash reserves and net cash flow from operations expected during the near future will be insufficient to fund our operations
and website development and marketing plan over the next twelve months. We expect to fund these requirements with further investments
in form of debt or equity capital and are in ongoing discussions with existing investors to secure funding. There can be no assurance,
however, that we will be able to secure needed financing in the future and identify a financing source or sources, and if we do,
whether the terms of such financing will be acceptable or commercially reasonable.
Absent
the receipt of
needed equity investment or loans, we will be compelled to severely curtail operations and possibly, close
our business operations. 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
3. Quantitative and Qualitative Disclosures about Market Risk
A
smaller reporting company is not required to provide the information required by this Item.
Item
4T. CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures.
The
Company’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the fiscal period ended March
31, 2017 covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial
Officer has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective
as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
As
of March 31, 2017, management assessed, with the participation of the Chief Executive Officer and Chief Financial Officer, the
effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control – Integrated
Framework for effective internal control over financial reporting established in
Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting
such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal
controls and procedures were not effective as more fully described below. Based on management’s assessment over
financial reporting, management believes as of March 31, 2017, the Company’s internal control over financial reporting was
not effective due to the following deficiencies:
1.
The Company’s control environment did not have adequate segregation of duties and lacked adequate accounting resources to
address non routine and complex transactions and financial reporting matters on a timely basis.
The
Company had only a part time chief financial officer performing all accounting related duties on site, presenting the risk that
the reporting of these non routine and complex transactions during the preparation of our future financial statements and disclosures
may not be accomplished in a timely manner. Additionally in September 2012 the Company hired a comptroller to assist the Chief
Financial Officer. Effective May 31, 2015 the chief financial officer resigned and the CEO Andre Scholz took over the position
as chief financial officer while comptroller that was assisting the previous part time chief financial officer assumed the day
to day transactional activity.
Company
management believes that notwithstanding the above identified deficiencies that constitute our material weakness, that the financial
statements fairly present, in all material respects, the Company’s consolidated balance sheets as of March 31, 2017 and
December 31, 2016 and the related statements of operations, and cash flows for the three months ended March 31, 2017 and 2016, in
conformity with generally accepted accounting principles.
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:
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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;
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We
will continue to institute a more stringent approval process for financial transactions, and
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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.
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Changes
in Internal Controls over Financial Reporting
Other
than as stated above, during the quarter ended March 31, 2017, there have been no changes in the Company’s internal control
over financial reporting that have materially affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. LEGAL PROCEEDING
S
At
the time of this report, the Company is not a party in any pending material legal proceedings.
Item
1A. RISK FACTORS
A
smaller reporting company is not required to provide the information required by this Item.
Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
a)
Issuance of unregistered securities
During
the first quarter in 2017 the Company did not sell any unregistered securities.
(b)
Not applicable
(c)
None
Item
3. DEFAULTS UPON SENIOR SECURITIES
The
Company, as of the date of this filing, is in arrears on the payment of certain dividends on its Series A, C, and D Senior Convertible
Preferred Stock. Such arrears total approximately $850,998. These dividends have been accrued, however, the Company’s management
has refrained from making payments at this time because of the absence of positive equity and/or surplus funds.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
None
Item
5. OTHER INFORMATION
None
Item
6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
Exhibits
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31.01
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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 15, 2013.
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31.02
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Certification of
Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated May 16, 2013.
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32.01
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Certification of
Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, dated May 16, 2013.
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(b)
Reports on Form 8-K:
On
May 2, 2017, the company filed a report on 8K disclosing first quarter 2017 operational highlights.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed
on its behalf by the undersigned, thereunto duly authorized.
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Kiwibox.Com, Inx.
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Date: May 22, 2017
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By:
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/s/ Michael Zaroff
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Interim Chief Financial Officer
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(Interim Principal Financial Officer and Principal Accounting Officer)
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